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Form 10-SB
U.S. Securities and Exchange Commission
Washington, D.C. 20549
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL
BUSINESS ISSUERS.
Under Section 12(b) or (g) of the Securities Exchange Act of 1934
NEWLANDS OIL & GAS INC.
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(Name of Small Business Issuer in its charter)
NEVADA
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(state or other jurisdiction of
incorporation or organization)
98-0197707
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(I.R.S. Employer I.D. No.)
#300 - 750 WEST PENDER STREET
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VANCOUVER, BRITISH COLUMBIA
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V6C 2T8
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(Address of principal executive offices and zip code)
(604) 689-1180
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(Issuer's telephone number)
Securities to be registered pursuant to Section 12(b) of the Act:
None
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Securities to be registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
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Title of each class to be so registered
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CONTENTS
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PART I
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Item 1. Description of Business..................................................3
Item 2. Management's Discussion and Analysis or Plan of Operation................9
Item 3. Description of Property.................................................10
Item 4. Security Ownership of Certain Beneficial Owners and Management..........13
Item 5. Directors, Executive Officers, Promoters and Control Persons............15
Item 6. Executive Compensation..................................................17
Item 7. Certain Relationships and Related Transactions..........................18
Item 8. Description of Securities...............................................18
PART II
Item 1. Market Price of and Dividends on the Registrant's Common
Equity and Other Shareholder Matters....................................19
Item 2. Legal Proceedings.......................................................19
Item 3. Changes in and Disagreements with Accountants...........................20
Item 4. Recent Sales of Unregistered Securities.................................20
Item 5. Indemnification of Directors and Officers...............................20
PART F/S ........................................................................25
PART III
Item 1. Index to Exhibits.......................................................44
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FORWARD LOOKING STATEMENTS
Newlands Oil & Gas Inc. (the "Company") cautions readers that certain important
factors (including without limitation those set forth in this Form 10-SB) may
affect the Company's actual results and could cause such results to differ
materially from any forward-looking statements that may be deemed to have been
made in this Form 10-SB registration statement, or that are otherwise made by or
on behalf of the Company. For this purpose, any statements contained in the
registration statement that are not statements of historical fact may be deemed
to be forward-looking statements. Without limiting the generality of the
foregoing, words such as "may," "expect," "believe," "anticipate,"
"intend,""could," "estimate," or "continue," or the negative or other variations
therefor comparable terminology, are intended to identify forward-looking
statements.
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PART I
Item 1: DESCRIPTION OF BUSINESS
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History and Organization:
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Newlands Oil & Gas Inc. (the "Company") is a corporation organized under the
laws of the State of Nevada on June 17, 1998, to explore for, and, if possible,
develop oil and gas properties in California.
Expansion Strategy
The Company intends to continue its acquisition of properties and leases with
the intent of participating in the exploration for oil and gas primarily in, but
not limited to, California. The Company anticipates that it will fund the costs
of these acquisitions and developments through purchases of common stock in the
Company by private investors. If funds become available from revenues from
producing oil and gas wells (which is not currently the case) then those funds
will be made available for expansion and for increasing production facilities.
Employees
The Company currently has two employees, neither of whom work full time for the
Company. Each employee currently receives $3,000 per month from the Company.
None of the Company's employees is represented by a labor union. The Company has
experienced no work stoppages and believes that its employee relations are good.
Risk Factors
Limited Operating History; Development Stage Company. The Company was
incorporated under the laws of Nevada on June 17, 1998, and therefore has a
limited operating history. Through December 31, 1998 the Company incurred a net
loss of $29,916. The Company faces all of the risks inherent in a new business.
In addition, the Company can only provide limited historical information and
financial data about its operations upon which a prospective investor can make
an informed judgment as to the future prospects of the Company. Estimations with
respect to the proved reserves and level of future production attributable to
wells in which the Company may participate are difficult to determine and there
can be no assurance as to the volume of recoverable reserves that will be
realized from such wells. The Company's prospects must be considered in light of
the risks, expenses and difficulties frequently encountered by companies in the
early stages of their development. The Company's future financial results will
depend primarily on its ability to economically locate and produce hydrocarbons
in commercial quantities and on the market prices for oil and natural gas. There
can be no assurance that the Company will achieve or sustain profitability or
positive cash flows from operating activities in the future.
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Competition. The search for viable oil and gas prospects and leases is intensely
competitive. It is likely that in seeking future acquisitions, the company will
compete with firms which have substantially greater financial and management
resources than the Company. The Company may acquire interests in mineral leases
and lease acquisition opportunities in known, proven, producing fields, or on
unknown, unproven territories or leases with no contiguous producing well sites.
The Company's competition is widely diverse, and comes primarily from three
sources: (1) those competitors that are seeking oil and gas fields for
expansion, further drilling, or increasing production through improved
engineering techniques (2) income-seeking entities purchasing a predictable
stream of earnings based upon historic production from the field being acquired,
and (3) junior companies seeking exploration opportunities in unknown, unproven
territories.
Affiliate Transactions. The Company has entered into a Participation Agreement
with Brothers Oil & Gas Inc. ("Brothers"). Mr. Allen Sewell, President and a
director of the Company, is the President and a director of Brothers. Brothers
is controlled by several members of the Sewell family. Graeme Sewell is a
director of the Company and his children are shareholders of Brothers. As such,
the Company's execution of the Participation Agreement with Brothers was not an
arm's-length transaction with a non-affiliate. While Mr. Allen Sewell and Mr.
Graeme Sewell have a fiduciary duty to deal fairly with the Company and its
shareholders, there are no guarantees that the terms of the transaction were
similar to what the Company would have received in an arm's-length transaction
with a non-affiliate.
No Assurance of Success or Profitability. There can be no assurance that the
Company will be able to generate profits or otherwise operate successfully based
on its participation in an oil and gas project and 3D seismic survey.
No Assurance of Dividends. There can be no assurance that the Company will pay
dividends on its capital stock in the foreseeable future. Investors who
anticipate the need for immediate income from their investment in the Company's
securities should refrain from the purchase of the Company's securities.
Authorization of Preferred Stock. The Company is authorized to issue up to
1,000,000 shares of Preferred Stock, $0.01 par value. As of the date of this
Form 10-SB, no shares of Preferred Stock have been issued. The Company's
Preferred Stock may bear such rights and preferences, including dividend and
liquidation preferences, as the Board of Directors may fix and determine from
time to time. Any such preferences may operate to the detriment of the rights of
the holders of Common Stock.
"Penny Stock" Rules. Should a market for the Shares develop, the Shares will be
subject to rules promulgated by the Securities and Exchange Commission relating
to "penny stocks," which apply to non-NASDAQ companies whose stock trades at
less than $5.00 per share or whose tangible net worth is less than $2,000,000.
These rules require brokers who sell "penny stocks" to persons other than
established customers and "accredited investors" to complete certain
documentation, make suitability inquiries of investors, and provide investors
with certain information concerning the risks of trading
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in the security. These rules may restrict the ability of brokers to sell the
Company's Common Stock and may affect the ability of purchasers in this offering
to sell such Common Stock in the secondary market.
Conflicts of Interest. Certain of the directors of the Company are directors,
officers and/or shareholders of other companies that are engaged in the business
of acquiring, developing and exploiting natural resource properties. Such
associations may give rise to conflicts of interest from time to time. These
directors of the Company are required by law to act honestly and in good faith
with a view to the best interest of the Company and to disclose any interest
which they may have in any project or opportunity of the Company.
Certain Anti-takeover Effects. The Company's Articles of Incorporation authorize
the Board of Directors to set the terms of and issue Preferred Stock without
shareholder approval. The Board of Directors could use the Preferred Stock as a
means to delay, defer or prevent a takeover attempt that a shareholder might
consider to be in the Company's best interest.
General Risks of the Oil and Gas Industry
Dependence on Exploratory Drilling Activities. The success of the Company will
be materially dependent upon the success of its 3D seismic survey and
exploratory drilling program. Exploratory drilling involves numerous risks,
including the risk that no commercially productive oil or natural gas reservoirs
will be encountered. The cost of drilling, completing and operating wells is
often uncertain, and drilling operations may be curtailed, delayed or canceled
as a result of a variety of factors, including unexpected drilling conditions,
pressure or irregularities in formations, equipment failures or accidents,
adverse weather conditions, compliance with governmental requirements and
shortages or delays in the availability of drilling rigs and the delivery of
equipment. Although the Company believes that its use of 3D seismic data and
other advanced technologies should increase the probability of success of its
exploratory wells and should reduce average finding costs through elimination of
prospects that might otherwise be drilled solely on the basis of two dimensional
("2D") seismic data, exploratory drilling remains a speculative activity. Even
when fully utilized and properly interpreted, 3D seismic data and other advanced
technologies only assist geoscientists in identifying subsurface structures and
do not enable the interpreter to know whether hydrocarbons are in fact present
in such structures. In addition, the use of 3D seismic data and other advanced
technologies requires greater predrilling expenditures than traditional drilling
strategies and the Company could incur losses as a result of such expenditures.
The Company's future drilling activities may not be successful, and if
unsuccessful, such failure will have a material adverse effect on the Company's
results of operations and financial condition. There can be no assurance that
the Company's overall drilling success rate or its drilling success rate for
activity within a particular project area will not decline. The Company may
choose not to acquire option and lease rights prior to acquiring seismic data
and, in many cases, the Company may identify a prospect or drilling location
before seeking option or lease rights in the prospect or location.
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Although the Company has identified or budgeted for a 3D seismic survey and the
drilling of three test wells, there can be no assurance that such wells will
ever be leased or drilled (or drilled within the scheduled or budgeted time
frame) or that oil or natural gas will be produced from any such prospects or
any other prospects. In addition, prospects may initially be identified through
a number of methods, some of which do not include interpretation of 3D or other
seismic data. Wells that are currently included in the Company's capital budget
may be based upon statistical results of drilling activities in other 3D project
areas that the Company believes are geologically similar, rather than on
analysis of seismic or other data. Actual drilling and results are likely to
vary from such statistical results and such variance may be material. Similarly,
the Company's drilling schedule may vary from its capital budget.
Volatility of Oil And Natural Gas Prices. The Company's revenues, future rate of
growth, results of operations, financial condition and ability to borrow funds
or obtain additional capital, as well as the carrying value of its properties,
are substantially dependent upon prevailing prices of oil and natural gas.
Historically, the markets for oil and natural gas have been volatile, and such
markets are likely to continue to be volatile in the future. Prices for oil and
natural gas are subject to wide fluctuation in response to relatively minor
changes in the supply of and demand for oil and natural gas, market uncertainty
and a variety of additional factors that are beyond the control of the Company.
These factors include the level of consumer product demand, weather conditions,
domestic and foreign governmental regulations, the price and availability of
alternative fuels, political conditions in the Middle East, the foreign supply
of oil and natural gas, the price of foreign imports and overall economic
conditions. It is impossible to predict future oil and natural gas price
movements with certainty. Declines in oil and natural gas prices may materially
adversely affect the Company's financial condition, liquidity, ability to
finance planned capital expenditures and results of operations. Lower oil and
natural gas prices also may reduce the amount of oil and natural gas that the
Company can produce economically.
In order to reduce its exposure to short-term fluctuations in the price of oil
and natural gas, the Company may periodically enter into hedging arrangements.
The Company's hedging arrangements may apply to all or to only a portion of its
production and provide only partial price protection against declines in oil and
natural gas prices. Such hedging arrangements may expose the Company to risk of
financial loss in certain circumstances, including instances where production is
less than expected, the Company's customers fail to purchase contracted
quantities of oil or natural gas or a sudden, unexpected event materially
impacts oil or natural gas prices. In addition, the Company's hedging
arrangements, if any, may limit the benefit to the Company of increases in the
price of oil and natural gas. As of the date of this document the Company had
not engaged in hedging.
Reserve Replacement Risk. In general, the volume of production from oil and
natural gas properties declines as reserves are depleted, with the rate of
decline depending on reservoir characteristics. Except to the extent the Company
conducts successful exploration and development activities or acquires
properties containing proved reserves,
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or both, the proved reserves of the Company will decline as reserves are
produced. The Company's future oil and natural gas production is, therefore,
highly dependent upon its level of success in finding or acquiring additional
reserves. The business of exploring for, developing or acquiring reserves is
capital intensive. To the extent cash flow from operations is reduced and
external sources of capital become limited or unavailable, the Company's ability
to make the necessary capital investment to maintain or expand its asset base of
oil and natural gas reserves would be impaired. The failure of an operator of
the Company's wells to adequately perform operations, or such operator's breach
of the applicable agreements, could adversely impact the Company. In addition,
there can be no assurance that the Company's future exploration, development and
acquisition activities will result in additional proved reserves or that the
Company will be able to drill productive wells at acceptable costs. Furthermore,
although the Company's revenues could increase if prevailing prices for oil and
natural gas increase significantly, the Company's funding and development costs
could also increase.
Operating Risks of Oil And Natural Gas Operations. The oil and natural gas
business involves certain operating hazards such as well blowouts, craterings,
explosions, uncontrollable flows of oil, natural gas or well fluids, fires,
formations with abnormal pressures, pipeline ruptures or spills, pollution,
releases of toxic gas and other environmental hazards and risks, any of which
could result in substantial losses to the Company. The availability of a ready
market for the Company's oil and natural gas production also depends on the
proximity of reserves to, and the capacity of oil and natural gas gathering
systems, pipelines and trucking or terminal facilities. The Company may deliver
natural gas through gas gathering systems and gas pipelines that it does not
own. Federal and state regulation of natural gas and oil production and
transportation, tax and energy policies, changes in supply and demand and
general economic conditions all could adversely affect the Company's ability to
produce and market its oil and natural gas. In addition, the Company may be
liable for environmental damages caused by previous owners of property purchased
and leased by the Company. As a result, substantial liabilities to third parties
or governmental entities may be incurred, the payment of which could reduce or
eliminate the funds available for exploration, development or acquisitions or
result in the loss of the Company's properties. In accordance with customary
industry practices, the Company's contractors may elect to obtain insurance
against some, but not all, of such risks and losses. The Company does not carry
business interruption insurance. The Company may elect to self-insure if
management believes that the cost of insurance is not excessive relative to the
risks presented. In addition, pollution and environmental risks generally are
not fully insurable. The occurrence of an event not fully covered by insurance
could have a material adverse effect on the financial condition and results of
operations of the Company. The Company anticipates participating in a
substantial percentage of its interest in oil and gas properties on a
non-operated basis, which may limit the Company's ability to control the risks
associated with oil and natural gas operations.
Technological Changes. The oil and gas industry is characterized by rapid and
significant technological advancements and introductions of new products and
services utilizing new technologies. As others use or develop new technologies,
the Company may
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be placed at a competitive disadvantage, and competitive pressures may force the
Company to implement such new technologies at substantial cost. In addition,
other oil and gas companies may have greater financial, technical and personnel
resources that allow them to enjoy technological advantages and may in the
future allow them to implement new technologies before the Company. There can be
no assurance that the Company will be able to respond to such competitive
pressures and implement such technologies on a timely basis or at an acceptable
cost. One or more of the technologies currently utilized by the Company or
implemented in the future may become obsolete. In such case, the Company's
business, financial condition and results of operations could be materially
adversely affected. If the Company is unable to utilize the most advanced
commercially available technology, the Company's business, financial condition
and results of operations could he materially and adversely affected.
Government Regulation and Environmental Matters. Oil and natural gas operations
are subject to various federal, state and local government regulations which may
be changed from time to time in response to economic or political conditions.
Matters subject to regulation include discharge permits for drilling operations,
drilling bonds, reports concerning operations, unitization and pooling of
properties and taxation. 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. The Company is also subject to changing and
extensive tax laws, the effects of which cannot be predicted. Legal requirements
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. No assurance can be given that existing 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. The development, production, handling,
storage, transportation and disposal of oil and natural gas, by-products thereof
and other substances and materials produced or used in connection with oil and
natural gas operations are subject to federal, state and local laws and
regulations primarily relating to protection of human health and the
environment. The discharge of oil, natural gas, or 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.
Acquisition Risks. The successful acquisition of producing properties requires
an assessment of recoverable reserves, future oil and natural gas prices,
operating costs, potential environmental and other liabilities and other
factors. Such assessments are necessarily inexact and their accuracy inherently
uncertain. In connection with such an assessment, the Company performs a review
of the subject properties that it believes to be generally consistent with
industry practices, which generally includes obtaining a report from an
independent geologist. 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 fully assess their deficiencies and capabilities.
Inspections may not always be performed on every well, and structural and
environmental problems are not necessarily observable even when an inspection is
undertaken. Even when problems are
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identified, the seller may be unwilling or unable to provide effective
contractual protection against all or part of such problems. There can be no
assurances that any acquisition of property interests by the Company will be
successful and, if unsuccessful, that such failure will not have an adverse
effect on the Company's future results of operations and financial condition.
Shortage of Equipment Services, Supplies and Personnel. There is often
competition for scarce drilling and completion equipment, services and supplies.
There can be no assurance that sufficient drilling and completion equipment,
services and supplies will be available when needed. Any such shortages could
delay the proposed exploration, development, and sales activities of the Company
and could cause a material adverse affect to the financial condition of the
Company.
If the demand for, and wage rates of, qualified rig crews rise in the drilling
industry then the oil and gas industry may experience shortages of qualified
personnel to operate drilling rigs. This could delay the Company's drilling
operations and adversely affect its financial condition and results of
operations.
Item 2: MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
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The Company was organized for the purpose of engaging in oil and gas exploration
and is currently engaged in oil and gas exploration in California. The Company
currently has a working capital of approximately $18,000. The Company intends to
raise additional funds in order to drill or participate in the drilling of oil
and gas wells, make option payments, and to generally meet its future corporate
obligations. The Company anticipates that it has sufficient funds for a period
of 90 days at which time it will require additional financing. There can be no
assurance that the Company will obtain such additional financing on a timely
basis.
The Company conducted an initial private offering of 10,047,167 shares of Common
Stock at $0.015 per share, pursuant to Rule 504 of Regulation D, promulgated
under the Securities Act of 1933, as amended (the "Act"). The Company received
gross proceeds of $150,708 from the initial private offering. Management
believes that the Company has sufficient working capital to fund the Company's
operations until it obtains additional financing.
The Company has executed an engagement agreement with Procrass Corp., P.O. Box
1792 Anderson Square, Grand Cayman, British West Indies ("Procrass"). Procrass
has agreed to assist the Company with the negotiation of a joint venture and/or
an additional placement of the Company's securities with gross proceeds of up to
$1,500,000. Procrass' fee for its services is $45,000, which was paid by the
Company from proceeds received from purchasers in the Company's prior 504
offering. There are no assurances that Procrass will be able to assist the
Company with raising any additional funds.
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Estimates with respect to the proved reserves and level of future production
attributable to wells in which the Company may participate are difficult to
determine and there can be no assurance as to the volume of recoverable reserves
that will be realized from such wells. The Company's prospects must be
considered in light of the risks, expenses and difficulties frequently
encountered by companies in the early stages of their development. The Company's
future financial results will depend primarily on its ability to economically
locate and produce hydrocarbons in commercial quantities and on the market
prices for oil and natural gas. There can be no assurance that the Company will
achieve or sustain profitability or positive cash flows from operating
activities in the future.
The year 2000 issue arises with respect to the Company's operations because many
computerized systems use two digits rather than four to identify a year. Date
sensitive systems may recognize the year 2000 as 1900 or some other date,
resulting in errors when information is processed using the year 2000 date. In
addition, similar problems may arise in some systems which use certain dates in
1999 to represent something other than a date. The effects of the year 2000
issue may be experienced before, on, or after January 2, 2,000 and if not
addressed, the impact on operations and financial reporting may range from minor
errors to significant system failure which could affect the Company's ability to
conduct normal business operations. It is not possible to be certain that all
aspects of the year 2000 issue affecting the Company including those related to
the efforts of customers, suppliers or other third parties, will be fully
resolved.
Item 3: DESCRIPTION OF PROPERTY
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The Company leases a 500 square foot office at #300 - 750 West Pender Street for
$500 per month.
By agreement (the "Agreement") dated March 1, 1999 between the Company and
Brothers, the Company has an option to earn 70% of Brothers' 10% working
interest in certain oil and gas leases, options to lease and seismic options
located on the Travis 3D Seismic Project located in Solano County California
(the "Lands"). The Company has paid $73,000 (U.S.) to Brothers pursuant to the
Agreement which amount is equal to Brothers total land and seismic acquisition
costs associated with the Lands. The estimated land and seismic costs were
US$83,000 at the time the Agreement was entered into. However, cost savings have
been realized and the total land and seismic costs are in fact, US$73,000.
Under the terms of the Agreement, the Company is required to pay 10% of the cost
of each test well drilled. If the Company elects not to pay this amount within
15 days of a cash call, then the Company will not have rights to any test wells
or development wells drilled on that prospect. The Company can only participate
in development wells on a prospect by contributing 10% of the costs of drilling
an initial test well on that prospect.
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In addition to any royalties owed to land owners (ranging from 16.67% to 20%),
the Lands are subject to a 2.5% overriding royalty interest in any wells drilled
on the Property.
Underlying the Agreement is a joint operating agreement (the "Operating
Agreement") dated December 1, 1998 between Production Specialties Company as
operator, Brothers, Celcius Energy Company, Sunset Exploration Inc., Bobsac, LLC
and Vaughan Production Company as non operators (collectively, the
"Particiapants") whereby the Participants agree to acquire hydrocarbon leasehold
interests on the Lands and to conduct a 3D siesmic survey of same. In addition
to any royalties owed to land owners (ranging from 16.67% to 20%), the Lands are
subject to a 2.5% overriding royalty interest in any wells drilled on the
Property.
Upon completion of the acquisition of the Lands and a 3D Seismic survey on the
Lands, a formal report (the "Survey Report") will be prepared detailing the
results of the survey. The Company anticipates that the 3D Seismic survey will
be completed by June 30, 1999 with drilling decisions to be made by September,
1999. At that time, the Company will receive a request for payment for drilling
a particular well on the Lands. If the Company wishes to exercise its option and
participate in the drilling of any wells on the Lands, then the Company intends
to complete an additional offering of shares in order to fund the Company's
portion of the drilling costs.
The following description of the Property is a summary of and is based upon a
report (the "Report") dated June, 1998, prepared for Vaughan Exploration, Inc.
("Vaughan") by Jeffrey K. Vaughan, President of Vaughan, its sole shareholder
and a Certified Petroleum Geologist. Vaughan Production Company is a party to an
operating agreement with respect to the Lands. Vaughan Production Company is
owned by Richard Vaughan, Jeffrey K. Vaughan's father. As a result of these
relationships the Report was reviewed and endorsed on June 10, 1998, by David E.
Olson, a California Registered Geologist, who has no direct or indirect interest
in the property which is the subject of the report (a complete copy of the
Report is available from the Company at their offices upon request):
The following is only a summary of the Report and therefore is incomplete.
Interested persons are advised to read the full report.
Abstract
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This is a prospect for participation in acquiring a 3D seismic survey and
subsequent drilling of exploratory natural gas wells on lands hereafter
described and referred to as the Travis 3D Prospect. The Travis 3D Prospect is
located in Solano County, California, and received its name from Travis Air
Force Base which lies on the southwest corner of the area. The land block is
being put together at the time of this report and encompasses approximately
24,000 acres or 37 square miles.
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Introduction
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Three dimensional seismic surveying was first used in northern California in
1988 as an in-field development project by a major company. There were less than
half a dozen other 3D surveys shot prior to 1994 as the industry viewed 3D as an
expensive development tool. Costs per square mile in the last 10 years have
dropped from over $250,000/mile to approximately $42,000/mile.
Geology
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The Travis 3D area was targeted by the Participants as an extremely attractive
geologic target, due to the proximity to some of the largest gas fields in
California. The Travis area has had very light drilling exploration over the
years, even with the adjacent 1980's developments of Denverton Creek and the
Winters pool at Bunker. Both of these fields had existing 2D seismic data
coverage, but were too difficult to image and/or overlooked by the industry. The
Company confirms that it has no interest in Denverton Creek or Bunkers and that
any reference herein is not to be construed as an interest therein.
The Travis area sits largely within the Southern Sacramento Valley basinal
synclinal axis as defined by early 2D seismic data and exploratory well control.
Denverton Creek is positioned within the center of this basin syncline and the
geological concept for drilling there was believed to be related to truncation
of potential reservoir sands by the east-west trending Martinez Gorge. The
Martinez Gorge does truncate some of the reservoirs, but a greater percentage of
the traps there are due to the interaction of several intersecting fault systems
combined with regional geologic unconformities which set up fairly complex
combination traps.
Truncation traps are simple in concept when a dipping reservoir is eroded or
"truncated" by an impermeable formation creating an up-dip seal which may trap
hydrocarbons. If a 2D seismic line happens to intersect these two surfaces at
right angles it has a fair chance of imaging a gas pool and creating a bright
spot. If the 2D line is not at right angles the picture becomes very confusing.
Truncation traps begin to get even more complicated when the erosion edge is not
a straight line, the dips of the reservoir beds vary, and there is abundant
faulting. Travis appears to have all of these in addition to several regional,
geologic unconformities, which also truncate underlying reservoir rocks making
traditional geologic interpretation even harder. Three dimensional seismic can
be used as a tool in unraveling these geologic complexities and at imaging gas
in these types of environments.
The Travis 3D area is also unique in the Southern Sacramento Valley as it has
four different, major geologic play concepts. Many 3D areas are targeted for
just one particular formation or trapping style and others just target economic
development drilling of small pools of gas missed by dense well control. In
addition, there are a number of secondary objectives which is a significant
by-product of exploring this area.
Vaughan is currently leasing the acreage block with some competition on the
southern
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boundary from several small operators who plan two to three mile 3D shoots in an
attempt to extend their production in the Denverton Creek field. The southern
portion of the shoot will image the same trapping style as these wells. Vaughan
is aware of several large 3D shoots (40+ square miles) planned south, east and
north of Travis.
Most of the mineral acreage parcels are fairly large which is beneficial in
terms of the time it takes in putting together this size of land block. The
surface usage of the land is largely grazing and pastures with seasonal, row
crops such as tomatoes, alfalfa and corn on parcels in the northeastern area.
The town of Vacaville forms the effective northwestern boundary of the shoot
while Travis Air Force Base is on the southwestern boundary. The surface is
fairly flat in topography with several small, seasonal creeks that run through
the area.
As is the case with many large 3D areas, the lease acquisition process is a
dynamic one. Some leases are impossible to reasonably acquire and other leases
are slightly outside the proposed boundary. It is usually desirable to add
adjacent parcels to the original proposed boundaries if they become available
and still fit into the geological framework of the shoot.
Drilling
- --------
The Travis area does not appear to present any severe drilling problems in the
depth ranges that will be targeted. Immediately south and west of Denverton
Creek there are high pressures due to the Kirby Hills uplift, but they should
not exist on the target area. Well costs will vary considerably from south to
north as the depth of the main objectives range from 4,500 feet (approximately
$250,000 completed) to 12,000 feet (approximately $600,000 completed).
The distance to commercial pipelines varies from less than 1 mile on the
southern and northern ends of the shoot, to 6 miles in the middle of the shoot.
End of Summary of Report
- ------------------------
The Company currently has no productive wells and no productive acreage. All of
the Lands are undeveloped. No wells have been drilled on the Lands to date.
There are no proved hydrocarbon reserve volumes in the Lands. As of May 31, 1999
there are no wells being drilled, no waterfloods in process of installation, no
pressure maintenance operations and there are no other related operations of
material importance by appropriate geographic areas. The Company has no delivery
commitments of any kind.
Item 4: SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
- ------
The following table sets forth certain information concerning the ownership of
common stock of the Company as of May 31, 1999 of (i) each person who is known
to the Company to be the beneficial owner of more than 5 percent of the Common
Stock; (ii)
13
<PAGE>
all directors and executive officers; and (iii) directors and
executive officers of the Company as a group:
<TABLE>
<CAPTION>
===============================================================================================================
<S> <C> <C> <C>
Title of Class Name and Address of Amount and Nature of Percent of Class
Beneficial Owner Beneficial Ownership (total outstanding
[1] is 10,047,167)
===============================================================================================================
Common Shares Allen Sewell [2]700,000 6.83%
(President, Director) Common
Box 31 Saturna Island
V0N 2Y0 Canada
- ---------------------------------------------------------------------------------------------------------------
Common Shares Graeme Sewell (Director) [2]200,500 1.96%
153 - 3300 Capilano Rd. Common
North Vancouver, B.C.
V7R 4H8 Canada
- ---------------------------------------------------------------------------------------------------------------
Common Shares Negar Towfigh (Director) [2]248,000 2.42%
1403 Chippendale Road Common
West Vancouver, B.C.
V7S 2N7 Canada
- ---------------------------------------------------------------------------------------------------------------
Common Shares Fraser River Bridge Holdings Ltd. 600,000 5.97%
2566 Westhill Drive Common
West Vancouver, B.C.
V7S 3B7 Canada
- ---------------------------------------------------------------------------------------------------------------
Common Shares Monica Clemiss 666,667 6.64%
2238 West Keith Road Common
North Vancouver, B.C.
V7P 1Z3 Canada
- ---------------------------------------------------------------------------------------------------------------
Common Shares Tom Doyle 668,167 6.65%
4534 West 15th Avenue Common
Vancouver, B.C.
V6R 3B4 Canada
- ---------------------------------------------------------------------------------------------------------------
Common Shares CC Investments Ltd. 800,000 7.96%
P.O. Box 1792 G 5th Floor Common
Anderson Squared Building
Grand Cayman Islands
West Indies
- ---------------------------------------------------------------------------------------------------------------
Common Shares Latour Trustees (Jersey) Limited 995,000 9.90%
P.O. Box 344 Common
5 Old Street
St Helier JE4 8UZ
Jersey Channel Islands
- ---------------------------------------------------------------------------------------------------------------
</TABLE>
14
<PAGE>
<TABLE>
<CAPTION>
===============================================================================================================
<S> <C> <C> <C>
Title of Class Name and Address of Amount and Nature of Percent of Class
Beneficial Owner Beneficial Ownership (total outstanding
[1] is 10,047,167)
===============================================================================================================
Common Shares Phoenix International Holding Corp. 995,000 9.90%
303 - 1080 Howe Street Common
Vancouver, B.C.
V6T 2T6 Canada
- ---------------------------------------------------------------------------------------------------------------
Common Shares Prism Holdings 995,000 9.90%
P.O. Box 150 Common
Providnciales
Turks & Caicos Isles
- ---------------------------------------------------------------------------------------------------------------
Common Shares Steve Fabbro 995,000 9.90%
806 Roschester Avenue Coquitlam, B.C. Common
V6R 3B4 Canada
- ---------------------------------------------------------------------------------------------------------------
Common Shares Greg Burnett [2]200,000 1.95%
#903 - 456 Moberly Road Common
Vancouver, B.C.
V5Z 4L7 Canada
- ---------------------------------------------------------------------------------------------------------------
Common Shares Alan Crawford [2]200,000 1.95%
#6 - 1609 Balsam Street Common
Vancouver, B.C.
V6V 3L9 Canada
- ---------------------------------------------------------------------------------------------------------------
Common Shares Directors and Officers as a [3]1,548,500 14.02%
Group (five persons) Common
===============================================================================================================
</TABLE>
[1] Unless otherwise indicated, this column reflects amounts as to which the
beneficial owner has sole voting power and sole investment power.
[2] This number includes options to purchase 200,000 shares at $0.25 per share.
[3] This number includes options to purchase 1,000,000 shares at $0.25 per
share.
Item 5: DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
- ------
The following table sets forth as of May 31, 1999, the name, age, and position
of the executive officers and directors of the Company. The directors were
appointed until the Company's next annual general meeting or until a successor
is elected and qualifies to be a director of the Company:
15
<PAGE>
<TABLE>
<CAPTION>
====================================================================================================================
Name Age Position/Office held with the Company Appointed to Office
====================================================================================================================
<S> <C> <C> <C>
Allen Sewell 60 Director, Secretary, Treasurer and President June 17, 1998
- --------------------------------------------------------------------------------------------------------------------
Graeme Sewell 31 Director January 18, 1999
- --------------------------------------------------------------------------------------------------------------------
Negar Towfigh 26 Director February 16, 1999
- --------------------------------------------------------------------------------------------------------------------
Alan Crawford 45 Director March 10, 1999
- --------------------------------------------------------------------------------------------------------------------
Greg Burnett 37 Director March 10, 1999
====================================================================================================================
</TABLE>
Allen Sewell is Graeme Sewell's father.
ALLEN SEWELL holds a Bachelor of Commerce from the University of British
Columbia and is a member of the Institute of Chartered Accountants. He has held
the following positions:
- a director and president of the Company since 1998
- a director and president of Elk Slough Pipeline Co. since April 1981
which company has built and operates four gas wells and two oil wells
in Kern, Yolo, and Solana Counties, California.
- a director and president of Brothers since May, 1997
- the manager of a real estate company (379112 B.C. Ltd.) from December,
1989 to December 1995.
- a director of Goldwater Resources Ltd. (a company listed on the
Vancouver Stock Exchange) from May 26, 1998 to October 22, 1998
GRAEME SEWELL was an investment advisor at Canaccord Capital Corporation
from February 1, 1996 until November 1998. Mr. Sewell was employed in the area
of sales at Canaccord Capital Corporation from August 1, 1994 to January 1996
and worked as an accountant previous to that at Amisano & Company from June 1,
1991 to August 1994. Mr. Sewell was granted a pardon by the National Parole
Board under the Criminal Records Act on February 19, 1993 for an impaired
driving conviction.
NEGAR TOWFIGH has a Bachelor of Commerce from the University of British
Columbia. She worked as a licensed sales assistant at Canaccord Capital from
March 1998 to February 1999. She was previously a sales assistant at Nesbitt
Burns, RBC Dominion and Pacific International Securities Inc. from May 1995 to
March 1998.
ALAN CRAWFORD holds a MBA from the University of Edinburgh and is a
Chartered Financial Planner. He has been a Director and President of Camflo
Resources Ltd. (a company listed on the Alberta Stock Exchange) since August
1997. Formerly, he directed corporate finance activities for International
Panorama Resource Corp. (a company listed on the Vancouver Stock Exchange and
trading on the NASD bulletin board) from August 1996 to April 1997. He was the
Director of Corporate Finance for
16
<PAGE>
Techeven Finance Group from July 1991 to July 1996. In 1996 Mr. Crawford made a
voluntary proposal with respect to the settlement of a debt relating to a
guarantee given by Mr. Crawford to a bank creditor. This proposal was accepted
and discharged in full. In addition to the foregoing, Mr Crawford has held the
following directorships:
- director of Ona Energy Corp. (listed on the Alberta Stock Exchange)
from July 1998 to present
- director of 8 Crown Capital Corp. (listed on the Vancouver Stock
Exchange) from December 1998 to present
GREG BURNETT holds a MBA and Bachelor or Applied Sciences in Civil
Engineering from the University of British Columbia. He has been the president
and director of Carob Management Ltd., which is a private company, since
November 1986. In addition to the foregoing, he currently holds or has in the
past held the following positions:
- president and a director of Balmoral Capital Corporation (listed on
the Alberta Stock Exchange) from May 1998 to present
- president and director of Orko Gold Corporation (listed on the Alberta
Stock Exchange) from March 1996 to present
- a director of Pender Capital Corporation (listed on the Alberta Stock
Exchange) since November 1993 and president from November 1993 to
February 1996
- a director of Calldirect Capital Corporation (listed on the Alberta
Stock Exchange) from August 1997 to present
- a director of Camflo Resources Ltd. (listed on the Alberta Stock
Exchange) since May 1998
- a director of 8 Crown Capital Corp. (listed on the Vancouver Stock
Exchange) since January 1999
- a director of East Asia Gold Corporation. (listed on the Canadian
Dealing Network) since June 1994
Item 6: EXECUTIVE COMPENSATION
- ------
The following table summarizes the total compensation of the President and the
other most highly compensated executive officers of the Company earning in
excess of $100,000 for the fiscal year ended December 31, 1998:
17
<PAGE>
<TABLE>
<CAPTION>
==================================================================================================================
Summary Compensation Table
(As at the year ended December 31, 1998)
==================================================================================================================
Annual Compensation Long Term
Compensation
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Name and Principal Year Salary ($) Bonus ($) Other Annual Securities
Position Compensation Underlying
($) Options/SARs
Granted (#)
- ------------------------------------------------------------------------------------------------------------------
Allen Sewell 1998 Nil Nil Nil Nil
President
==================================================================================================================
</TABLE>
Item 7: CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
- ------
As discussed in Item 3, the Company has entered into an agreement with Brothers,
whose president is Allen Sewell. Graeme Sewell is Allen Sewell's son and Graeme
Sewell's two children own shares in Brothers, a company owned and controlled by
several members of the Sewell family. The directors of Brothers are Allen Sewell
and Michael Sewell, Graeme Sewell's father and brother, respectively.
Brothers granted to the Company an option to earn 70% of Brothers? 10% working
interest in certain oil and gas leases, options to lease and seismic options
located on the Lands in Solano County California. As discussed, the Company has
paid $73,000 (U.S.) to Brothers pursuant to the Agreement which amount is equal
to Brothers total land and seismic acquisition costs associated with the Lands.
The estimated land and seismic costs were US$83,000 at the time the Agreement
was entered into. However, cost savings have been realized and the total land
and seismic costs are in fact, US$73,000.
Allen Sewell and Graeme Sewell may be considered to be promoters of the Company.
Item 8: DESCRIPTION OF SECURITIES
- ------
The authorized capital stock of the Company consists of 50,000,000 shares of
Common Stock, $0.001 par value and 1,000,000 shares of Preferred Stock, $0.01
par value. The following summary of certain terms of the Preferred Stock and the
Common Stock does not purport to be complete and is subject to and qualified in
its entirety by reference to the Company's Articles of Incorporation and Bylaws.
Common Stock
- ------------
Liquidation Rights Upon liquidation or dissolution, each outstanding Common
- ------------------
Share will entitle the holder to share equally in the assets of the Company
legally available for distribution to shareholders after the payment of all
debts and other liabilities.
Dividend Rights There are no limitations or restrictions upon the rights of the
- ---------------
Board
18
<PAGE>
of Directors to declare dividends out of any funds legally available therefor.
The Company has not paid dividends to date and it is not anticipated that any
dividends will be paid in the foreseeable future. The Board of Directors
initially may follow a policy of retaining earnings, if any, to finance the
future growth of the Company. Accordingly, future dividends, if any, will depend
upon, among other considerations, the Company's need for working capital and its
financial condition at the time.
Voting Rights Holders of Common Shares of the Company are entitled to cast
- -------------
one vote for each share held at all shareholders meetings for all purposes.
Other Rights Common Shares are not redeemable, have no conversion rights
- ------------
and carry no preemptive or other rights to subscribe to or purchase additional
Common Shares in the event of a subsequent offering.
Preferred Stock
- ---------------
The Articles of Incorporation authorized the Board of Directors to issue, by way
of resolution, 1,000,000 shares of Preferred Stock, in classes, having such
designations, powers, preferences, rights, and limitations and on such terms and
conditions as the Board of Directors may from time to time determine, including
the rights, in any, of the holders of such Preferred Stock with respect to
voting, dividends, redemptions, liquidation and conversion. As of the date of
this Form 10SB, no classes of Preferred Stock have been designated and no shares
of Preferred Stock have been issued.
PART II
Item 1: MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
- ------ OTHER SHAREHOLDER MATTERS
There currently is no public trading market for the Company's common stock.
There are currently options granted to the directors of the company to purchase
1,000,000 common shares at $0.25 per share. The Company has 2,515,667 common
shares issued pursuant to Rule 144 pursuant to private transactions.
Since its inception, the Company has not paid any dividends on its common stock
and the Company does not anticipate that it will pay dividends in the
foreseeable future.
As at May 31, 1999 the Company had forty-nine shareholders of record. The
transfer agent for the Company is American Securities Transfer & Trust Inc. at
1825 Lawrence Street, Suite 444, Denver, Colorado, 80202-1817, USA.
Item 2: LEGAL PROCEEDINGS
- ------
No legal proceedings are reportable pursuant to this item.
19
<PAGE>
Item 3: CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
- ------
No change in accountant is reportable pursuant to this item.
Item 4: RECENT SALES OF UNREGISTERED SECURITIES
- ------
The Company issued 10,147,067 common shares on January 5, 1999. These shares
were purchased by directors and officers of the Company and close friends and
relatives of the directors and officers of the Company. The total proceeds of
the offering was $150,708 and all of the securities were sold for cash. The
offering described in this paragraph was accomplished under the exemption from
registration provided by Rule 504 of Regulation D promulgated under the
Securities Act of 1933.
Item 5: INDEMNIFICATION OF DIRECTORS AND OFFICERS
- ------
Section 78.7502 of the Nevada general corporation law provides as follows:
(1) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action, suit or proceeding, whether civil, criminal, administrative or
investigative, except an action by or in the right of the corporation, by
reason of the fact that he is or was a director, officer, employee or agent
of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, or is or
was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust
or other enterprise, against expenses, including attorney's fees,
judgments, fines and amounts paid in settlement actually and reasonably
incurred by him in connection with the action, suit or proceeding if he
acted in good faith and in a manner which he reasonably believed to be in
or not opposed to the best interests of the corporation, and, with respect
to any criminal action or proceeding, had no reasonable cause to believe
his conduct was unlawful. The termination of any action, suit or proceeding
by judgment, order, settlement conviction or upon a plea of nolo contendere
or its equivalent, does not, of itself, create a presumption that the
person did not act in good faith and in a manner which he reasonably
believed to be in or not opposed to the best interests of the corporation,
and that, with respect to any criminal action or proceeding, he had
reasonable cause to believe that his conduct was unlawful.
(2) A corporation may indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed
action or suit by or in the right of the corporation to procure a judgment
in its favor by reason of the fact that he is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise against
expenses, including amounts paid in settlement and attorneys' fees actually
and reasonably incurred by him in connection with the defense or
20
<PAGE>
settlement of the action or suit if he acted in good faith and in a manner
which he reasonably believed to be in or not opposed to the best interests
of the corporation. Indemnification may not be made for any claim, issue or
matter as to which such a person has been adjudged by a court of competent
jurisdiction, after exhaustion of all appeals therefrom, to be liable to
the corporation or for amounts paid in settlement to the corporation,
unless and only to the extent that the court in which the action or suit
was brought or other court of competent jurisdiction determines upon
application that in view of all the circumstances of the case, the person
is fairly and reasonably entitled to indemnity for such expenses as the
court deems proper.
(3) To the extent that a director, officer, employee or agent of a corporation
has been successful on the merits or otherwise in defense of any action,
suit or proceeding referred to in subsections 1 and 2, or in defense of any
claim, issue or matter therein, the corporation shall indemnify him against
expenses, including attorneys' fees, actually and reasonably incurred by
him in connection with the defense.
Section 78.751 of the Nevada general corporation law also provides as follows:
(1) Any discretionary indemnification under NRS 78.7502, unless ordered by a
court or advanced pursuant to subsection 2, may be made by the corporation
only as authorized in the specific case upon a determination that
indemnification of the director, officer, employee or agent is proper in
the circumstances. The determination must be made:
(a) By the stockholders;
(b) By the board of directors by majority vote of a quorum consisting of
directors who were not parties to the action, suit or proceeding;
(c) If a majority vote of a quorum consisting of directors who were not
parties to the action, suit or proceeding so orders, by independent
legal counsel in a written opinion; or
(d) If a quorum consisting of directors who were not parties to the
action, suit or proceeding cannot be obtained, by independent legal
counsel in a written opinion.
(2) The articles of incorporation, the bylaws or an agreement made by the
corporation may provide that the expenses of officers and directors
incurred in defending a civil or criminal action, suit or proceeding must
be paid by the corporation as they are incurred and in advance of the final
disposition of the action, suit or proceeding, upon receipt of an
undertaking by or on behalf of the director or officer to repay the amount
if it is ultimately determined by a court of competent jurisdiction that he
is not entitled to be indemnified by the corporation. The provisions of
this subsection do not affect any rights to advancement of expenses to
which corporate personnel other than directors or officers may be entitled
under any contract or otherwise by law.
21
<PAGE>
(3) The indemnification and advancement of expenses authorized in or ordered by
a court pursuant to this section:
(a) Does not exclude any other rights to which a person seeking
indemnification or advancement of expenses may be entitled under the
articles of incorporation or any bylaw, agreement, vote of
stockholders or disinterested directors or otherwise, for either an
action in his official capacity or an action in another capacity while
holding his office, except that indemnification, unless ordered by a
court pursuant to NRS 78.7502 or for the advancement of expenses made
pursuant to subsection 2, may not be made to or on behalf of any
director or officer if a final adjudication establishes that his acts
or omissions involved intentional misconduct, fraud or a knowing
violation of the law and was material to the cause of action.
(b) Continues for a person who has ceased to be a director, officer,
employee or agent and inures to the benefit of the heirs, executors
and administrators of such a person.
Section 78.752 of the Nevada general corporation statutes also provides as
follows:
(1) A corporation may purchase and maintain insurance or make other financial
arrangements on behalf of any person who is or was a director, officer,
employee or agent of the corporation, or is or was serving at the request
of the corporation as a director, officer, employee or agent of another
corporation, partnership, joint venture, trust or other enterprise for any
liability asserted against him and liability and expenses incurred by him
in his capacity as a director, officer, employee or agent, or arising out
of his status as such, whether or not the corporation has the authority to
indemnify him against such liability and expenses.
(2) The other financial arrangements made by the corporation pursuant to
subsection 1 may include the following:
(a) The creation of a trust fund.
(b) The establishment of a program of self-insurance.
(c) The securing of its obligation of indemnification by granting a
security interest or other lien on any assets of the corporation.
(d) The establishment of a letter of credit, guaranty or surety.
No financial arrangement made pursuant to this subsection may provide
protection for a person adjudged by a court of competent jurisdiction,
after exhaustion of all appeals therefrom, to be liable for intentional
misconduct, fraud or a knowing violation of law, except with respect to the
advancement of expenses or indemnification ordered by a court.
(3) Any insurance or other financial arrangement made on behalf of a person
pursuant to this section may be provided by the corporation or any other
person
22
<PAGE>
approved by the board of directors, even if all or part of the other
person's stock or other securities is owned by the corporation.
(4) In the absence of fraud:
(a) The decision of the board of directors as to the propriety of the
terms and conditions of any insurance or other financial arrangement
made pursuant to this section and the choice of the person to provide
the insurance or other financial arrangement is conclusive; and
(b) The insurance or other financial arrangement;
(1) Is not void or voidable; and
(2) Does not subject any director approving it to personal liability for
his action, even if a director approving the insurance or other
financial arrangement is a beneficiary of the insurance or other
financial arrangement.
(5) A corporation or its subsidiary which provides self-insurance for itself or
for another affiliated corporation pursuant to this section is not subject
to the provisions of Title 57 of NRS.
The Company's articles of incorporation also provide as follows:
To the fullest extent permitted by the laws of the State of Nevada (currently
set forth in NRS 78.037), as the same now exists or may hereafter be amended or
supplemented, no director or officer of the Corporation shall be liable to the
Corporation or to its stockholders for damages for breach of fiduciary duty as a
director or officer.
The Corporation shall indemnify, to the fullest extent permitted by applicable
law in effect from time to time, 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, he is or was serving at the request of
the Corporation as a director, officer, employee, or agent of, or in any similar
managerial or fiduciary position of, another corporation, partnership, joint
venture, trust or other enterprise. The Corporation shall also indemnify any
person who is serving or has served the Corporation as a director, officer,
employee, or agent of the Corporation to the extent and in the manner provided
in any bylaw, resolution of the shareholders or directors, contract, or
otherwise, so long as such provision is legally permissible.
The Company's bylaws provide as follows with respect to indemnification and
insurance:
To the fullest extent permitted by the laws of the State of Nevada (currently
set forth in NRS 78.751), as the same now exists or may hereafter be amended or
supplemented, the Corporation shall indemnify its directors and officers,
including payment of expenses as they are incurred and in advance of the final
disposition of any action, suit, or proceeding. Employees, agents, and other
persons may be similarly indemnified by the Corporation, including advancement
of expenses, in such case or cases and to the extent
23
<PAGE>
set forth in a resolution or resolutions adopted by the Board of Directors. No
amendment of this Section shall have any effect on indemnification or
advancement of expenses relating to any event arising prior to the date of such
amendment.
To the fullest extent permitted by the laws of the State of Nevada (currently
set forth in NRS 78.752), as the same now exists or may hereafter be amended or
supplemented, the Corporation may purchase and maintain insurance and make other
financial arrangements on behalf of any person who is or was a director,
officer, employee, or agent of the Corporation, or is or was serving at the
request of the Corporation as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other enterprise, for any
liability asserted against such person and liability and expense incurred by
such person in its capacity as a director, officer, employee, or agent, or
arising out of such person's status as such, whether or not the Corporation has
the authority to indemnify such person against such liability and expenses.
The Company has not currently made any arrangements regarding insurance but may
do so in the future.
24
<PAGE>
Part F/S: Financial Statements
- --------
Audited Financial Statements from Inception (June 17, 1998) to December 31, 1998
and unaudited financial statements from January 1, 1999 to March 31, 1999 as
required by Item 310 of Regulation S-B are attached below.
25
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
REPORT AND FINANCIAL STATEMENTS
December 31, 1998
(Stated in US Dollars)
----------------------
26
<PAGE>
AUDITORS' REPORT
To the Directors,
Newlands Oil & Gas Inc.
We have audited the balance sheet of Newlands Oil & Gas Inc. (A Development
Stage Company) as at December 31, 1998 and the statement of loss and deficit
accumulated during the development stage, stockholders' equity and cash flows
for the period June 17, 1998 (Date of Incorporation) to December 31, 1998. 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 an audit to obtain reasonable
assurance 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.
In our opinion, these financial statements present fairly, in all material
respects, the financial position of the company as at December 31, 1998 and the
results of its operations and cash flows for the period June 17, 1998 (Date of
Incorporation) to December 31, 1998, in accordance with generally accepted
accounting principles in the United States.
Vancouver, Canada By /s/ Amisano Hanson
February 9, 1999, except as to Note 9 which is as Chartered Accountants
of February 25, 1999
Comments by Auditors for U.S. Readers on Canada - U.S. Reporting Conflict
- -------------------------------------------------------------------------
In the United States, reporting standards for auditors require the addition of
an explanatory paragraph (following the opinion paragraph) when there is
substantial doubt about a company's ability to continue as a going concern. The
accompanying financial statements have been prepared on the basis of accounting
principles applicable to a going concern which assumes the realization of assets
and discharge of liabilities in the normal course of business. As discussed in
Note 1 to the accompanying financial statements in respect of the company's
substantial losses from operations, substantial doubt about the company's
ability to continue as a going concern exists. The accompanying financial
statements do not include any adjustments that might result from the outcome of
this uncertainty.
Our report to the shareholders dated February 7, 1999 is expressed in accordance
with Canadian reporting standards which do not permit a reference to such
uncertainty in the auditors' report when the uncertainty is adequately disclosed
in the financial statements.
Vancouver, Canada By /s/ Amisano Hanson
February 9, 1999, except as to Note 9 which is as Chartered Accountants
of February 25, 1999
27
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
BALANCE SHEET
December 31, 1998
(Stated in US Dollars)
----------------------
ASSETS
------
1998
----
Current
Cash $ 29,472
--------
29,472
Deferred charge - Note 3 45,000
Oil and gas property - Notes 4, 6 and 9 50,000
--------
$ 124,472
========
LIABILITIES
-----------
Current
Accounts payable $ 3,680
--------
STOCKHOLDERS' EQUITY
--------------------
Capital stock - Note 5 150,708
Deficit accumulated during the development stage (29,916)
--------
120,792
--------
$ 124,472
========
Nature and Continuance of Operations - Note 1
Commitments - Note 4
Subsequent Event - Note 9
APPROVED BY THE DIRECTORS:
By: /s/ Allen Sewell Director
----------------
SEE ACCOMPANYING NOTES
28
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
STATEMENT OF LOSS AND DEFICIT
ACCUMULATED DURING THE DEVELOPMENT STAGE
for the period June 17, 1998 (Date of Incorporation) to December 31, 1998
(Stated in US Dollars)
----------------------
June 17, 1998
(Date of
Incorporation) to
December 31,
1998
----
Administrative Expenses
Accounting and audit fees $ 3,500
Consulting fees 7,000
Interest and bank charges 39
Legal fees 13,958
Office and other 317
Travel 571
----------
Net loss before other 25,385
Other
Exploration and development expenses 4,531
----------
Net loss for the period and deficit accumulated during the
development stage $ 29,916
==========
Net loss per share $ 0.03
==========
Weighted average number of shares outstanding 1,020,017
==========
SEE ACCOMPANYING NOTES
29
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
for the period June 17, 1998 (Date of Incorporation) to December 31, 1998
(Stated in US Dollars)
----------------------
June 17, 1998
(Date of
Incorporation) to
December 31,
1998
----
Cash Flows from Operating Activities
Net loss for the period $ ( 29,916)
Changes in non-cash working capital balances related to
operations
Accounts payable 3,680
------------
( 26,236)
------------
Cash Flows from Financing Activity
Issue of common shares 150,708
------------
Cash Flows used in Investing Activities
Deferred charges ( 45,000)
Oil and gas property ( 50,000)
------------
( 95,000)
------------
Net increase in cash during the period 29,472
Cash, beginning of the period -
------------
Cash, end of the period $ 29,472
============
SEE ACCOMPANYING NOTES
30
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS' EQUITY for
the period June 17, 1998 (Date of Incorporation) to December 31, 1998
(Stated in US Dollars)
----------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
(Note 5) Common Shares Additional During the
----------------------- Paid-in Development
# Par Value Capital Stage Total
----- --------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Shares issued pursuant to
offering memorandum 10,047,167 $ 10,047 $ 140,661 $ -- $ 150,708
Net loss for the period -- -- -- (29,916) (29,916)
---------- ---------- ---------- ---------- ----------
Balance, as at
December 31, 1998 10,047,167 $ 10,047 $ 140,661 $ (29,916) $ 120,792
========== ========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
31
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS for
the period June 17, 1998 (Date of Incorporation) to December 31, 1998
(Stated in US Dollars)
----------------------
Note 1 Nature and Continuance of Operations
------------------------------------
The company is in the development stage and is in the process of
exploration and development of oil and gas properties in California
and has not yet determined whether these properties contain reserves
that are economically recoverable. The recoverability of amounts shown
for oil and gas properties is dependent upon the discovery of
economically recoverable reserves and confirmation of the company's
interest in the underlying properties, the ability of the company to
obtain necessary financing to satisfy the expenditure requirements
under resource property agreements and to complete the development of
the properties, and upon future profitable production or proceeds from
the sale thereof.
These financial statements have been prepared on a going concern
basis. The company has accumulated a deficit of $29,916 since
incorporation. Its ability to continue as a going concern is dependent
upon the ability of the company to generate profitable operations in
the future and/or to obtain the necessary financing to meet its
obligations and repay its liabilities arising from normal business
operations when they come due.
The company was incorporated in Nevada on June 17, 1998, as Newlands
Oil & Gas Inc. and commenced operations at that time.
Note 2 Summary of Significant Accounting Policies
------------------------------------------
The financial statements of the company have been prepared in
accordance with generally accepted accounting principles in the United
States. Because a precise determination of many assets and liabilities
is dependent upon future events, the preparation of financial
statements for a period necessarily involves the use of estimates
which have been made using careful judgement.
The financial statements have, in management's opinion, been properly
prepared within reasonable limits of materiality and within the
framework of the significant accounting policies summarized below:
Development Stage Company
-------------------------
The company is a development stage company as defined in Statement of
Financial Accounting Standards No. 7. The company is devoting
substantially all of its present efforts to the business of
exploration and development of oil and gas properties in California.
All losses accumulated since inception have been considered as part of
the company's development stage activities.
32
<PAGE>
Newlands Oil & Gas Inc.
(A Development Stage Company)
Notes to the Financial Statements
June 17, 1998 (Date of Incorporation) to December 31, 1998
(Stated in US Dollars) - Page
--------------------
Note 2 Summary of Significant Accounting Policies - (cont'd)
------------------------------------------
Oil and Gas Project Costs
-------------------------
The company follows the successful efforts method of accounting for
its oil and gas properties. Under this method, the initial acquisition
costs and the costs of drilling and equipping development wells, are
capitalized. The costs of drilling exploratory wells are initially
capitalized and, if subsequently determined to be unsuccessful, are
charged to operations as dry hole expenses. Costs and reserves of
properties are aggregated by country. All other exploration
expenditures, including geological and geophysical costs and annual
rentals on exploration acreage, are charged to operations as incurred.
Lease acquisition costs, subsequently determined to be impaired in
value, are charged to operations.
No gains or losses are recognised on the sale or disposition of oil
and gas properties except when there is a material disposition of
reserves of a country. All other proceeds are credited against the
cost of the related properties.
Depletion of the net capitalized costs of producing wells and leases
is charged to operations on the unit-of-production method, by country,
based upon estimated proved reserves.
Loss Per Share
--------------
Loss per share calculations are based upon the weighted average number
of shares outstanding during the period.
Income Taxes
------------
The company uses the liability method of accounting for income taxes
pursuant to Statement of Financial Accounting Standards, No. 109
"Accounting for Income Taxes".
Fair Value of Financial Instruments
-----------------------------------
The carrying value of cash and accounts payable approximate fair value
because of the short maturity of those instruments.
33
<PAGE>
Newlands Oil & Gas Inc.
(A Development Stage Company)
Notes to the Financial Statements
June 17, 1998 (Date of Incorporation) to December 31, 1998
(Stated in US Dollars) - Page
--------------------
Note 3 Deferred Charge
---------------
By an agreement dated July 1, 1998, the company engaged a consultant
for the purpose of facilitating a private placement of the company's
securities at a cost of $45,000, paid in advance of such services.
This amount will be deferred until the services are provided.
Note 4 Oil and Gas Project Costs - Notes 6 and 9
-------------------------
By a participation agreement dated June 17,1998, with a related
company, the company may earn a 100% working interest before payout
and an 84% working interest after payout in an initial test well and
two subsequent wells to be drilled on the Travis project located in
the Sacramento Basin of California. To earn its working interest the
company was required to pay $600,000 on or before December 31, 1998
($50,000 paid) and pay other exploration and drilling costs.
This company is related by virtue of common directors.
Subsequent to December 31, 1998, this agreement was restructured (Note
9).
Note 5 Capital Stock
-------------
a) Authorized:
50,000,000 common shares, $0.001 par value
1,000,000 preferred shares, $0.01 par value
<TABLE>
<CAPTION>
Additional
Par Paid-in
b) Issued: # Value Capital Total
----- ----- ------- -----
<S> <C> <C> <C> <C>
Common shares:
Pursuant to an offering
memorandum - at $0.015 10,047,167 $ 10,047 $ 140,661 $ 150,708
---------- ------------ ------------- -------------
Balance, December 31, 1998 10,047,167 $ 10,047 $ 140,661 $ 150,708
---------- ------------ ------------- -------------
</TABLE>
Note 6 Related Party Transactions - Notes 4 and 9
--------------------------
The company paid $50,000 with respect to earning an interest in an oil
and gas project to a private company with which it has a common
director.
34
<PAGE>
Newlands Oil & Gas Inc.
(A Development Stage Company)
Notes to the Financial Statements
June 17, 1998 (Date of Incorporation) to December 31, 1998
(Stated in US Dollars) - Page
--------------------
Note 7 Deferred Tax Assets
-------------------
The Financial Accounting Standards Board issued Statement Number 109
in Accounting for Income Taxes ("FAS 109") which is effective for
fiscal years beginning after December 15, 1992. FAS 109 requires the
use of the asset and liability method of accounting of income taxes.
Under the assets and liability method of FAS 109, deferred tax assets
and liabilities are recognized for the future tax consequences
attributable to temporary differences between the financial statements
carrying amounts of existing assets and liabilities and their
respective tax bases. Deferred tax assets and liabilities are measured
using enacted tax rates expected to apply to taxable income in the
years in which those temporary differences are expected to be
recovered or settled.
The following table summarizes the significant components of the
company's deferred tax assets:
Total
-----
Deferred Tax Assets
Non-capital loss carryforwards $ 29,916
=============
Gross deferred tax assets $ 14,958
Valuation allowance for deferred tax asset ( 14,958)
-------------
$ -
=============
The amount taken into income as deferred tax assets must reflect that
portion of the income tax loss carryforwards which is likely to be
realized from future operations. The company has chosen to provide an
allowance of 100% against all available income tax loss carryforwards,
regardless of their time of expiry.
Note 8 Income Taxes
------------
No provision for income taxes has been provided in these financial
statements due to the net loss. At December 31, 1998, the company has
net operating loss carryforwards, which expire commencing in 2008
totalling approximately $29,916, the benefit of which has not been
recorded in the financial statements.
35
<PAGE>
Newlands Oil & Gas Inc.
(A Development Stage Company)
Notes to the Financial Statements
June 17, 1998 (Date of Incorporation) to December 31, 1998
(Stated in US Dollars) - Page
--------------------
Note 9 Subsequent Event - Note 4
----------------
Subsequent to December 31,1998, the company restructured its
investment in the Travis Oil and Gas project by the completion of a
new agreement. Pursuant to an exploration conveyance and assignment
agreement with a related company (Note 4), the company may earn a 7%
working interest in the Travis Oil and Gas project for total estimated
consideration of $73,000 ($50,000 paid). The balance shall be paid on
or before March 30, 1999. The company is required to pay 10% of the
costs for each test well drilled. If its does not pay it's portion
within 15 days of a cash call, it will not have any right to the test
wells nor will it have any right to an interest in any proposed
development well for that prospect. The company can only participate
in development wells by contributing to an initial test well in the
prospect area.
Note 10 New Accounting Standard
-----------------------
In March, 1995, Statement of Financial Accounting Standards No. 12
("SFAS-121") "Accounting for Impairment of long-lived assets and for
long-lived assets to be disposed of" was issued. Certain long-lived
assets held by the company must be reviewed for impairment whenever
events or changes in circumstances indicate the carrying amount of an
asset may not be recoverable. Accordingly, the impairment loss is
recognized in the period it is determined. The company has adopted
these standards and there was no material effect on its financial
position or results of operations of the company from its adoption.
Note 11 Uncertainty Due to the Year 2000 Issue
--------------------------------------
The Year 2000 Issue arises because many computerized systems use two
digits rather than four to identify a year. Date sensitive systems may
recognize the year 2000 as 1900 or some other date, resulting in
errors when information using the year 2000 date is processed. In
addition, similar problems may arise in some systems which use certain
dates in 1999 to represent something other than a date. The effects of
the Year 2000 Issue may be experienced before, on, or after January 1,
2000 and if not addressed, the impact on operations and financial
reporting may range from minor errors to significant system failure
which could affect an entity's ability to conduct normal business
operations. It is not possible to be certain that all aspects of the
Year 2000 Issue affecting the entity, including those related to the
efforts of customers, suppliers or other third parties, will be fully
resolved.
36
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
FINANCIAL STATEMENTS
March 31, 1999
(Stated in US Dollars)
(Unaudited - See Note 1)
----------------------
37
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
BALANCE SHEET
March 31, 1999 and December 31, 1998
(Stated in US Dollars)
(Unaudited - See Note 1)
------------------------
<TABLE>
<CAPTION>
ASSETS
------
March 31, December 31,
1999 1998
---- ----
<S> <C> <C>
Current
Cash $ 2,176 $ 29,472
Deferred charge 45,000 45,000
Oil and gas property - Note 2 73,000 50,000
------------ ------------
$ 120,176 $ 124,472
============ ============
<CAPTION>
LIABILITIES
-----------
<S> <C> <C>
Current
Accounts payable $ 13,927 $ 3,680
------------ ------------
<CAPTION>
STOCKHOLDERS' EQUITY
--------------------
<S> <C> <C>
Capital stock - Note 3 150,708 150,708
Deficit accumulated during the development stage ( 44,459) ( 29,916)
------------ ------------
106,249 120,792
------------ ------------
$ 120,176 $ 124,472
============ ============
</TABLE>
SEE ACCOMPANYING NOTES
38
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
STATEMENT OF LOSS AND DEFICIT
ACCUMULATED DURING THE DEVELOPMENT STAGE
for the three month period ended
March 31, 1999 and for the period June 17, 1998
(Date of Incorporation) to December 31, 1998
and June 17, 1998 (Date of Incorporation) to March 31, 1999
(Stated in US Dollars)
(Unaudited - See Note 1)
------------------------
<TABLE>
<CAPTION>
June 17, 1998 June 17, 1998
Three months (Date of (Date of
ended Incorporation) to Incorporation) to
March 31, December 31, March 31,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Administrative Expenses
Accounting and audit fees $ 500 $ 3,500 $ 4,000
Consulting fees 6,000 7,000 7,000
Interest and bank charges 128 39 167
Legal fees 6,081 13,958 20,039
Office and other 104 317 421
Travel 669 571 1,240
Transfer agent fees 1,228 - 1,228
-------------- -------------- --------------
Net loss before other 14,710 25,385 34,095
Other
Exploration and development expenses - 4,531 4,531
Interest income ( 167) - ( 167)
-------------- -------------- --------------
Net loss for the period 14,543 29,916 38,459
Deficit, beginning of the period 29,916 - -
-------------- -------------- --------------
Deficit, end of the period $ 44,459 $ 29,916 $ 38,459
============== ============== ==============
Net loss per share $ 0.004 $ 0.029
============== ==============
Weighted average number of shares outstanding 10,047,167 1,020,017
============== ==============
</TABLE>
SEE ACCOMPANYING NOTES
39
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
STATEMENT OF CASH FLOWS
for the three month period ended
March 31, 1999 and for the period June 17, 1998
(Date of Incorporation) to December 31, 1998
and June 17, 1998 (Date of Incorporation) to March 31, 1999
(Stated in US Dollars)
(Unaudited - See Note 1)
------------------------
<TABLE>
<CAPTION>
June 17, 1998 June 17, 1998
Three months (Date of (Date of
ended Incorporation) to Incorporation) to
March 31, December 31, March 31,
1999 1998 1999
---- ---- ----
<S> <C> <C> <C>
Cash Flows from Operating Activities
Net loss for the period $ ( 14,543) $ ( 29,916) $ ( 38,459)
Changes in non-cash working capital balances
related to operations
Accounts payable 10,247 3,680 7,927
------------- ------------- -------------
( 4,296) ( 26,236) ( 30,532)
============= ============= =============
Cash Flows from Financing Activity
Issue of common shares - 150,708 150,708
------------- ------------- -------------
Cash Flows used in Investing Activities
Deferred charges - ( 45,000) ( 45,000)
Oil and gas property ( 23,000) ( 50,000) ( 73,000)
------------- ------------- -------------
( 23,000) 29,472 ( 18,000)
------------- ------------- -------------
Net increase (decrease) in cash during the period ( 27,296) 29,472 2,176
Cash, beginning of the period 29,472 - -
------------- ------------- -------------
Cash, end of the period $ 2,176 $ 29,472 $ 2,176
============= ============= =============
</TABLE>
SEE ACCOMPANYING NOTES
40
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
STATEMENT OF STOCKHOLDERS'
EQUITY for the period June 17, 1998 (Date of
Incorporation) to December 31, 1998
and for the three months ended March 31, 1999
(Stated in US Dollars)
(Unaudited - See Note 1)
------------------------
<TABLE>
<CAPTION>
Deficit
Accumulated
(Note 3) Common Shares Additional During the
---------------------- Paid-in Development
# Par Value Capital Stage Total
------- --------- ------- ----- -----
<S> <C> <C> <C> <C> <C>
Shares issued pursuant to
offering memorandum 10,047,167 $ 10,047 $ 140,661 $ - $ 150,708
Net loss for the period - - - ( 29,916) ( 29,916)
---------- ---------- ---------- ---------- ----------
Balance, as at
December 31, 1999 10,047,167 10,047 140,661 ( 29,916) 120,792
Net loss for the period - - - ( 14,543) ( 14,543)
---------- ---------- ---------- ---------- ----------
Balance, as at March 31, 1999 10,047,167 $ 10,047 $ 140,661 $ ( 44,459) $ 106,249
========== ========== ========== ========== ==========
</TABLE>
SEE ACCOMPANYING NOTES
41
<PAGE>
NEWLANDS OIL & GAS INC.
(A Development Stage Company)
NOTES TO THE FINANCIAL STATEMENTS
March 31, 1998
(Stated in U.S. dollars)
(Unaudited - See Note 1)
----------------------
Note 1 Interim Reporting
-----------------
These financial statements have not been audited or reviewed and
have been prepared on a compilation basis only. Readers are
cautioned that these statements may not be appropriate for their
purposes. While the information presented in the accompanying
interim three month financial statements is unaudited, it includes
all adjustments which are, in the opinion of management, necessary
to present fairly the financial position, results of operations
and cash flows for the interim period presented.
Note 2 Oil and Gas Project Costs
-------------------------
Pursuant to an exploration conveyance and assignment agreement
with a related company, the company may earn a 7% working interest
in the Travis Oil and Gas project for total estimated
consideration of $73,000 (paid). The company is required to pay
10% of the costs for each test well drilled. If its does not pay
it's portion within 15 days of a cash call, it will not have any
right to the test wells nor will it have any right to an interest
in any proposed development well for that prospect. The company
can only participate in development wells by contributing to an
initial test well in the prospect area.
Note 3 Capital Stock
-------------
a) Authorized:
50,000,000 common shares, $0.001 par value
1,000,000 preferred shares, $0.01 par value
<TABLE>
<CAPTION>
Additional
Par Paid-in
b) Issued: # Value Capital Total
----- ----- ------- -----
<S> <C> <C> <C> <C>
Common shares:
Pursuant to an offering
memorandum - at $0.015 10,047,167 $ 10,047 $ 140,661 $ 150,708
---------- ----------- ----------- -----------
Balance, December 31, 1998
and March 31, 1999 10,047,167 $ 10,047 $ 140,661 $ 150,708
========== =========== =========== ===========
</TABLE>
42
<PAGE>
43
In accordance with Section 12 of the Securities Exchange Act of 1934, the
registrant caused this registration statement to be signed on its behalf by the
undersigned, thereunto duly authorized.
Newlands Oil & Gas Inc.
- -----------------------
(Registrant)
Date: June 9, 1999
------------
By: By /s/ Graeme Sewell
----------------------
(Signature)
Graeme Sewell
--------------
Print Name
Director
--------
Title
<PAGE>
PART III
Item 1: INDEX TO EXHIBITS
- ------
Exhibit 3.1 Articles of Incorporation
Exhibit 3.2 By-Laws
Exhibit 10.1 Exploration Conveyance and Assignment Agreement
between the Company and Brothers dated March 1, 1999
relating to the Travis 3D Seismic Project.
Exhibit 10.2 Engagement Agreement dated July 1, 1998, between
the Company and Procrass Corp.
Exhibit 27.1 Financial Data Schedule
<PAGE>
Exhibit 3.1
ARTICLES OF INCORPORATION
OF
NEWLANDS OIL & GAS INC.
ARTICLE I
The name of the corporation is Newlands Oil & Gas Inc. (the "Corporation").
ARTICLE II
The purposes for which the Corporation is organized and its powers are to engage
in all lawful business, and to have, enjoy, and exercise all of the rights,
powers, and privileges conferred upon corporations incorporated pursuant to
Nevada law, whether now or hereafter in effect, and whether or not herein
specifically mentioned.
ARTICLE III
The amount of total authorized capital stock which the Corporation shall have
authority to issue is 50,000,000 shares of common stock, each with $0.001 par
value, and 1,000,000 shares of preferred stock, each with $0.01 par value. To
the fullest extent permitted by the laws of the State of Nevada (currently set
forth in NRS 78.195), as the same now exists or may hereafter be amended or
supplemented, the Board of Directors may fix and determine the designations,
rights, preferences or other variations of each class or series within each
class of capital stock of the Corporation.
1
<PAGE>
ARTICLE IV
The business and affairs of the Corporation shall be managed by a Board of
Directors which shall exercise all the powers of the Corporation except as
otherwise provided in the Bylaws, these Articles of Incorporation or by the laws
of the State of Nevada. The number of members of the Board of Directors shall be
set in accordance with the Company's Bylaws; however, the initial Board of
Directors shall consist of one member. The name and address of the person who
shall serve as the director until the first annual meeting of stockholders and
until his successors are duly elected and qualified is as follows:
Name Address
---- -------
Allen Charles Sewell #604 - 750 W. Pender Street
Vancouver, British Columbia
V6C 2T7 CANADA
ARTICLE V
The name and address of the incorporator of the Corporation is Craig A. Stoner,
455 Sherman Street, Suite 300, Denver, Colorado 80203.
ARTICLE VI
To the fullest extent permitted by the laws of the State of Nevada (currently
set forth in NRS 78.037), as the same now exists or may hereafter be amended or
supplemented, no director or officer of the Corporation shall be liable to the
Corporation or to its stockholders for damages for breach of fiduciary duty as a
director or officer.
ARTICLE VII
The Corporation shall indemnify, to the fullest extent permitted by applicable
law in effect from time to time, 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, he is or was serving at the request of
the Corporation as a director, officer, employee, or agent of, or in any similar
managerial or fiduciary position of, another corporation, partnership, joint
venture, trust or other enterprise. The Corporation shall also indemnify any
person who is serving or has served the Corporation as a director, officer,
employee, or agent of the Corporation to the extent and in the manner provided
in any bylaw, resolution of the shareholders or directors, contract, or
otherwise, so long as such provision is legally permissible.
2
<PAGE>
ARTICLE VIII
The owners of shares of stock of the Corporation shall not have a preemptive
right to acquire unissued shares, treasury shares or securities convertible into
such shares.
ARTICLE IX
Only the shares of capital stock of the Corporation designated at issuance as
having voting rights shall be entitled to vote at meetings of stockholders of
the Corporation, and only stockholders of record of shares having voting rights
shall be entitled to notice of and to vote at meetings of stockholders of the
Corporation.
ARTICLE X
The initial resident agent of the Corporation shall be the Corporation Trust
Company of Nevada, whose street address is 1 East lst Street, Reno, Nevada
89501.
ARTICLE XI
The provisions of NRS 78.378 to 78.3793 inclusive, shall not apply to the
Corporation.
ARTICLE XII
One-third of the votes entitled to be cast on any matter by each shareholder
voting group entitled to vote on a matter shall constitute a quorum of that
voting group for action on that matter by shareholders.
ARTICLE XIII
The holder of a bond, debenture or other obligation of the Corporation may have
any of the rights of a stockholder in the Corporation to the extent determined
appropriate by the Board of Directors at the time of issuance of such bond,
debenture or other obligation.
3
<PAGE>
IN WITNESS WHEREOF, the undersigned incorporator has executed these Articles of
Incorporation this 15th day of June, 1998.
By /s/ Craig A. Stoner
--------------------------
Craig A. Stoner
Incorporator
STATE OF COLORADO )
)ss.
CITY AND COUNTY OF DENVER )
Personally appeared before me this 15th day of June, 1998, Craig A. Stoner, who,
being first duly sworn, declared that he executed the foregoing Articles of
Incorporation and that the statements therein are true and correct to the best
of his knowledge and belief.
My commission expires: Witness my hand and official seal.
10/26/98 /s/ Nancy J. Parks
-------- --------------------------
Notary Public
455 Sherman Street, Suite 300
Denver, Colorado 80203
4
<PAGE>
CERTIFICATE OF ACCEPTANCE OF APPOINTMENT
BY RESIDENT AGENT
The undersigned, Corporation Trust Company of Nevada, with address at One East
First Street, Town of Reno, County of Washoe, State of Nevada, hereby accepts
the appointment as Resident Agent of Newlands Oil & Gas Inc. in accordance with
NRS 78.090.
In Witness Whereof, I have hereunto set my hand this ___16th___ day of June,
1998.
CT CORPORATION SYSTEM
/s/ Marcia J. Sunahara
------------------------------
Signature
Marcia J. Sunahara
------------------------------
Print Name
Special Asst. Secretary
------------------------------
Title
5
<PAGE>
Exhibit 3.2
NEWLANDS OIL & GAS INC.
BYLAWS
- ---------------------------
Adopted as of June 17, 1998
1
<PAGE>
NEWLANDS OIL & GAS INC.
BYLAWS
TABLE OF CONTENTS
Section Page
- ------- ----
ARTICLE I
Offices
1.1 Registered Office 6
1.2 Principal Office 6
ARTICLE II
Stockholders
2.1 Annual Meeting 6
2.2 Special Meetings 6
2.3 Place of Meeting 7
2.4 Notice of Meeting 7
2.5 Adjournment 7
2.6 Organization 7
2.7 Closing of Transfer Books or Fixing of Record Date 8
2.8 Quorum 8
2.9 Proxies 8
2.10 Voting of Shares 8
2.11 Action Taken Without a Meeting 9
2.12 Meetings by Telephone 9
2
<PAGE>
Section Page
- ------- ----
ARTICLE III
Directors
3.1 Board of Directors; Number; Qualifications; Election 9
3.2 Powers of the Board of Directors: Generally 9
3.3 Committees of the Board of Directors 9
3.4 Resignation 10
3.5 Removal 10
3.6 Vacancies 10
3.7 Regular Meetings 10
3.8 Special Meetings 10
3.9 Notice 10
3.10 Quorum 10
3.11 Manner of Acting 11
3.12 Compensation 11
3.13 Action Taken Without a Meeting 11
3.14 Meetings by Telephone 11
ARTICLE IV
Officers and Agents
4.1 Officers of the Corporation 11
4.2 Election and Term of Office 12
4.3 Removal 12
4.4 Vacancies 12
4.5 President 12
4.6 Vice Presidents 12
4.7 Secretary 13
4.8 Treasurer 13
4.9 Salaries 13
4.10 Bonds 13
3
<PAGE>
Section Page
- ------- ----
ARTICLE V
Stock
5.1 Certificate 14
5.2 Record 14
5.3 Consideration for Shares 15
5.4 Cancellation of Certificates 15
5.5 Lost Certificates 15
5.6 Transfer of Shares 15
5.7 Transfer Agents, Registrars, and Paying Agent 15
ARTICLE VI
Indemnification of Officers and Directors
6.1 Indemnification; Advancement of Expenses 16
6.2 Insurance and Other Financial Arrangements Against
Liability of Directors, Officers, Employees, and
Agents 16
ARTICLE VII
Acquisition of Controlling Interest
7.1 Acquisition of Controlling Interest 16
4
<PAGE>
Section Page
- ------- ----
ARTICLE VIII
Execution of Instruments; Loans, Checks and Endorsements;
Deposits; Proxies
8.1 Execution of Instruments 17
8.2 Loans 17
8.3 Checks and Endorsements 17
8.4 Deposits 17
8.5 Proxies 18
8.6 Contracts 18
ARTICLE IX
Miscellaneous
9.1 Waivers of Notice 18
9.2 Corporate Seal 18
9.3 Fiscal Year 18
9.4 Amendment of Bylaws 18
9.5 Uniformity of Interpretation and Severability 19
9.6 Emergency Bylaws 19
Secretary's Certification 20
5
<PAGE>
BYLAWS
OF
NEWLANDS OIL & GAS INC.
ARTICLE I
Offices
1.1 Registered Office. The registered office of the Corporation required by
the General Corporation Law of Nevada, Nevada Revised Statutes, 1957 ("NRS"),
Chapter 78, to be maintained in Nevada may be, but need not be, identical with
the principal office if in Nevada, and the address of the registered office may
be changed from time to time by the Board of Directors.
1.2 Principal Office. The Corporation may have such other office or offices
either within or outside of the State of Nevada as the business of the
Corporation may require from time to time if so designated by the Board of
Directors.
ARTICLE II
Stockholders
2.1 Annual Meeting. Unless otherwise designated by the Board of Directors,
the annual meeting shall be held on the date and at the time and place fixed by
the Board of Directors; provided, however, that the first annual meeting shall
be held on a date that is within 18 months after the date on which the
Corporation first has stockholders, and each successive annual meeting shall be
held on a date that is within 18 months after the preceding annual meeting.
2.2 Special Meetings. Special meetings of stockholders of the Corporation,
for any purpose, may be called by the Chairman of the Board, the president, any
vice president, any two members of the Board of Directors, or the holders of at
least 10% of all of the shares entitled to vote at such meeting. Any holder or
holders of not less than 10% of all the outstanding shares of the Corporation
who desire to call a special meeting pursuant to this Section 2 of Article II
shall notify the president that a special meeting of the stockholders shall be
called. Within 30 days after notice to the president, the president shall set
the date, time, and location of a stockholders' meeting. The date set by the
president shall be not less than 30 nor more than 120 days after the date of
notice to the president. If the president fails to set the date, time, and
location of special meeting within
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the 30-day time period described above, the stockholder or stockholders calling
the meeting shall set the date, time, and location of the special meeting. At a
special meeting no business shall be transacted and no corporate action shall be
taken other than that stated in the notice of the meeting.
2.3 Place of Meeting. The Board of Directors may designate any place,
either within or outside the State of Nevada, as the place for any annual
meeting or special meeting called by the Board of Directors. If no designation
is made, or if a meeting shall be called otherwise than by the Board, the place
of meeting shall be the Company's principal offices, whether within or outside
the State of Nevada.
2.4 Notice of Meeting. Written notice signed by an officer designated by
the Board of Directors, stating the place, day, and hour of the meeting and the
purpose for which the meeting is called, shall be delivered personally or mailed
postage prepaid to each stockholder of record entitled to vote at the meeting
not less than 10 nor more than 60 days before the meeting. If mailed, such
notice shall be directed to the stockholder at his address as it appears upon
the records of the Corporation, and notice shall be deemed to have been given
upon the mailing of any such notice, and the time of the notice shall begin to
run from the date upon which the notice is deposited in the mail for
transmission to the stockholder. Personal delivery of any such notice to any
officer of a corporation or association, or to any member of a partnership,
constitutes delivery of the notice to the corporation, association or
partnership. Any stockholder may waive notice of any meeting by a writing signed
by him, or his duly authorized attorney, either before or after the meeting.
2.5 Adjournment. When a meeting is for any reason adjourned to another time
or place, notice need not be given of the adjourned meeting if the time and
place thereof are announced at the meeting at which the adjournment is taken. At
the adjourned meeting, any business may be transacted which might have been
transacted at the original meeting.
2.6 Organization. The president or any vice president shall call meetings
of stockholders to order and act as chairman of such meetings. In the absence of
said officers, any stockholder entitled to vote at that meeting, or any proxy of
any such stockholder, may call the meeting to order and a chairman shall be
elected by a majority of the stockholders entitled to vote at that meeting. In
the absence of the secretary or any assistant secretary of the Corporation, any
person appointed by the chairman shall act as secretary of such meeting. An
appropriate number of inspectors for any meeting of stockholders may be
appointed by the chairman of such meeting. Inspectors so appointed will open and
close the polls, will receive and take charge of proxies and ballots, and will
decide all questions as to the qualifications of voters, validity of proxies and
ballots, and the number of votes properly cast.
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2.7 Closing of Transfer Books or Fixing of Record Date. The directors
may prescribe a period not exceeding 60 days before any meeting of the
stockholders during which no transfer of stock on the books of the Corporation
may be made, or may fix a day not more than 60 days before the holding of any
such meeting as the day as of which stockholders entitled to notice of and to
vote at such meetings must be determined. Only stockholders of record on that
day are entitled to notice or to vote at such meeting.
2.8 Quorum. Unless otherwise provided by the Articles of Incorporation,
one-third 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 fewer than one-third of the outstanding shares are represented
at a meeting, a majority of the shares so represented may adjourn the meeting
without further notice for a period not to exceed 60 days at any one
adjournment. 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 stockholders so that less than a quorum remains.
If a quorum is present, the affirmative vote of a majority of the shares
represented at the meeting and entitled to vote on the subject matter shall be
the act of the stockholders, unless the vote of a greater number or voting by
classes is required by law or the Articles of Incorporation.
2.9 Proxies. At all meetings of stockholders, a stockholder may vote by
proxy, as prescribed by law. Such proxy shall be filed with the secretary of the
Corporation before or at the time of the meeting. No proxy shall be valid after
6 months from the date of its creation, unless it is coupled with an interest,
or unless the stockholder specifies in it the length of time for which it is to
continue in force, which may not exceed 7 years from the date of its creation.
2.10 Voting of Shares. Each outstanding share, regardless of class,
shall be entitled to one vote, and each fractional share shall be entitled to a
corresponding fractional vote on each matter submitted to a vote at a meeting of
stockholders, except as may be otherwise provided in the Articles of
Incorporation or in the resolution providing for the issuance of the stock
adopted by the Board of Directors pursuant to authority expressly vested in it
by the provisions of the Articles of Incorporation. If the Articles of
Incorporation or any such resolution provide for more or less than one vote per
share for any class or series of shares on any matter, every reference in the
Articles of Incorporation, these Bylaws and the General Corporation Law of
Nevada to a majority or other proportion or number of shares shall be deemed to
refer to a majority or other proportion of the voting power of all of the shares
or those classes or series of shares, as may be required by the Articles of
Incorporation, or in the resolution providing for the issuance of the stock
adopted by the Board of Directors pursuant to authority expressly vested in it
by the Articles of Incorporation, or the General Corporation Law of Nevada.
Cumulative voting shall not be allowed. Unless the General Corporation Law of
Nevada, the Articles of Incorporation, or these Bylaws provide for different
proportions, an act of stockholders who hold at least a majority of the voting
power and are present at a meeting at which a quorum is present is the act of
the stockholders.
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2.11 Action Taken Without a Meeting. Unless otherwise provided in the
Articles of Incorporation or these Bylaws, any action required or permitted to
be taken at a meeting of the stockholders may be taken without a meeting if a
written consent thereto is signed by stockholders holding at least a majority of
the voting power, except that if a different proportion of voting power is
required for such an action at a meeting, then that proportion of written
consents is required. In no instance where action is authorized by written
consent need a meeting of stockholders be called or notice given. The written
consent must be filed with the minutes of the proceedings of the stockholders.
2.12 Meetings by Telephone. Unless other restricted by the Articles of
Incorporation or these Bylaws, stockholders may participate in a meeting of
stockholders by means of a telephone conference or similar method of
communication by which all persons participating in the meeting can hear each
other. Participation in a meeting pursuant to this Section constitutes presence
in person at the meeting.
ARTICLE III
Directors
3.1 Board of Directors; Number; Qualifications; Election. The Corporation
shall be managed by a Board of Directors, all of whom must be natural persons at
least 18 years of age. Directors need not be residents of the State of Nevada or
stockholders of the Corporation. The number of directors of the Corporation
shall be not less than one nor more than twelve. Subject to such limitations,
the number of directors may be increased or decreased by resolution of the Board
of Directors, but no decrease shall have the effect of shortening the term of
any incumbent director. Subject to the provisions of Article III of the
Corporation's Articles of Incorporation, each director shall hold office until
the next annual meeting of shareholders or until his successor has been elected
and qualified.
3.2 Powers of the Board of Directors: Generally. Subject only to such
limitations as may be provided by the General Corporation Law of Nevada or the
Articles of Incorporation, the Board of Directors shall have full control over
the affairs of the Corporation.
3.3 Committees of the Board of Directors. The Board of Directors may, by
resolution or resolutions passed by a majority of the whole Board, designate one
or more committees, each committee to consist of one or more directors, which,
to the extent provided in the resolution or resolutions or in these Bylaws,
shall have and may exercise the powers of the Board of Directors in the
management of the business and affairs of the Corporation, and may have power to
authorize the seal of the Corporation to be affixed to all papers on which the
Corporation desires to place on a seal. 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. Unless the Articles of Incorporation or these Bylaws
provide otherwise, the Board of Directors may appoint natural persons who are
not directors to serve on committees.
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3.4 Resignation. Any director of the Corporation may resign at any time by
giving written notice of his resignation to the Board of Directors, the
president, any vice president, or the secretary of the Corporation. Such
resignation shall take effect at the date of receipt of such notice or at any
later time specified therein and, unless otherwise specified therein, the
acceptance of such resignation shall not be necessary to make it effective. When
one or more directors shall resign from the Board, effective at a future date, a
majority of the directors then in office.
3.5 Removal. Except as otherwise provided in the Articles of Incorporation,
any director may be removed, either with or without cause, at any time by the
vote of the stockholders representing not less than two-thirds of the voting
power of the issued and outstanding stock entitled to voting power.
3.6 Vacancies. 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, unless it is otherwise provided in the Articles of
Incorporation. A director elected to fill a vacancy shall be elected for the
unexpired term of his predecessor in office. A director elected to fill a
vacancy caused by an increase in the number of directors shall hold office until
the next annual meeting of stockholders and until his successor has been elected
and has qualified.
3.7 Regular Meetings. A regular meeting of the Board of Directors shall be
held without other notice 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 outside the State of Nevada,
for the holding of additional regular meetings without other notice than such
resolution.
3.8 Special Meetings. Special meetings of the Board of Directors may be
called by or at the request of the president or a one-third of the directors
then in office. The person or persons authorized to call special meetings of the
Board of Directors may fix any place, either within or outside Nevada, as the
place for holding any special meeting of the Board of Directors called by them.
3.9 Notice. Notice of any special meeting shall be given at least two days
previously thereto by written notice delivered personally or mailed to each
director at his business address. Any director may waive notice of any meeting.
A director's presence at a meeting shall constitute a waiver of notice of such
meeting if the director's oral consent is entered on the minutes or by taking
part in the deliberations at such meeting without objecting. Neither the
business to be transacted 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.
3.10 Quorum. A majority of the number of directors elected and
qualified at the time of the meeting shall constitute a quorum for the
transaction of business at any such 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.
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3.11 Manner of Acting. If a quorum is present, the affirmative vote of
a majority of the directors present at the meeting and entitled to vote on that
particular matter shall be the act of the Board, unless the vote of a greater
number is required by law or the Articles of Incorporation.
3.12 Compensation. By resolution of the Board of Directors, any director
may be paid any one or more of the following: his expenses, if any, of
attendance at meetings; a fixed sum for attendance at such meeting; or a stated
salary as director. No such payment shall preclude any director from serving the
Corporation in any other capacity and receiving compensation therefor.
3.13 Action Taken Without a Meeting. Unless otherwise provided in the
Articles of Incorporation or these Bylaws, any action required or permitted to
be taken at a meeting of the Board of Directors or a committee thereof may be
taken without a meeting if, before or after the action, a written consent
thereto is signed by all the members of the Board or of the committee. The
written consent must be filed with the minutes of the proceedings of the Board
or committee.
3.14 Meetings by Telephone. Unless other restricted by the Articles of
Incorporation or these Bylaws, members of the Board of Directors or of any
committee designated by the Board, may participate in a meeting of the Board or
committee by means of a telephone conference or similar method of communication
by which all persons participating in the meeting can hear each other.
Participation in a meeting pursuant to this Section constitutes presence in
person at the meeting.
ARTICLE IV
Officers and Agents
4.1 Officers of the Corporation. The Corporation shall have a president,
a secretary, and a treasurer, each of whom shall be elected by the Board of
Directors. The Board of Directors may appoint one or more vice presidents and
such other officers, assistant officers, committees, and agents, including a
chairman of the board, assistant secretaries, and assistant treasurers, as they
may consider necessary, who shall be chosen in such manner and hold their
offices for such terms and have such authority and duties as from time to time
may be determined by the Board of Directors. One person may hold any two or more
offices. The officers of the Corporation shall be natural persons l8 years of
age or older. 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 (a) the
president, and if a chairman of the board has been elected, then (b) the
chairman of the board.
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4.2 Election and Term of Office. The officers of the Corporation shall
be elected by the Board of Directors annually at the first meeting of the Board
held after each annual meeting of the stockholders. If the election of officers
shall not be held at such meeting, such election shall be held as soon
thereafter as may be convenient. Each officer shall hold office until the first
of the following occurs: until his successor shall have been duly elected and
shall have qualified; or until his death; or until he shall resign; or until he
shall have been removed in the manner hereinafter provided.
4.3 Removal. Any officer or agent may be removed by the Board of
Directors or by the executive committee, if any, whenever in its judgment the
best interests of the Corporation will be served thereby, but such removal shall
be without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not of itself create
contract rights.
4.4 Vacancies. A vacancy in any office, however occurring, may be filled
by the Board of Directors for the unexpired portion of the term.
4.5 President. The president shall, subject to the direction and
supervision of the Board of Directors, be the chief executive officer of the
Corporation and shall have general and active control of its affairs and
business and general supervision of its officers, agents, and employees. He
shall, unless otherwise directed by the Board of Directors, attend in person or
by substitute appointed by him, or shall execute, on behalf of the Corporation,
written instruments appointing a proxy or proxies to represent the Corporation,
at all meetings of the stockholders of any other corporation in which the
Corporation shall hold any stock. He may, on behalf of the Corporation, in
person or by substitute or by proxy, execute written waivers of notice and
consents with respect to any such meetings. At all such meetings and otherwise,
the president, in person or by substitute or proxy as aforesaid, may vote the
stock so held by the Corporation and may execute written consents and other
instruments with respect to such stock and may exercise any and all rights and
powers incident to the ownership of said stock, subject however to the
instructions, if any, of the Board of Directors. The president shall have
custody of the treasurer's bond, if any. If a chairman of the board has been
elected, the chairman of the board shall have, subject to the direction and
modification of the Board of Directors, all the same responsibilities, rights,
and obligations as described in these Bylaws for the president.
4.6 Vice Presidents. The vice presidents, if any, shall assist the
president and shall perform such duties as may be assigned to them by the
president or by the Board of Directors. In the absence of the president, the
vice president designated by the Board of Directors or (if there be no such
designation) the vice president designated in writing by the president shall
have the powers and perform the duties of the president. If no such designation
shall be made, all vice presidents may exercise such powers and perform such
duties.
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4.7 Secretary. The secretary shall perform the following: (a) keep the
minutes of the proceedings of the stockholders, executive committee, and the
Board of Directors; (b) see that all notices are duly given in accordance with
the provisions of these Bylaws or as required by law; (c) be 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; (d) keep, at the
Corporation's registered office or principal place of business within or outside
Nevada, a record containing the names and addresses of all stockholders and the
number and class of shares held by each, unless such a record shall be kept at
the office of the Corporation's transfer agent or registrar; (e) sign with the
president or a vice president, certificates for shares of the Corporation, the
issuance of which shall have been authorized by resolution of the Board of
Directors; (f) have general charge of the stock transfer books of the
Corporation, unless the Corporation has a transfer agent; and (g) 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. Assistant secretaries, if any, shall have the same duties and powers,
subject to supervision by the secretary.
4.8 Treasurer. The treasurer shall be the principal financial officer of
the Corporation and 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 monies paid
in or on account of the Corporation, and shall pay out of the 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 be from time to time 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, 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.
4.9 Salaries. Officers of the Corporation shall be entitled to such
salaries, emoluments, compensation, or reimbursement as shall be fixed or
allowed from time to time by the Board of Directors.
4.10 Bonds. If the Board of Directors by resolution shall so require,
any officer or agent of the Corporation shall give bond to the Corporation in
such amount and with such surety as the Board of Directors may deem sufficient,
conditioned upon the faithful performance of that officer's or agent's duties
and offices.
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ARTICLE V
Stock
5.1 Certificates. The shares of stock shall be represented by consecutively
numbered certificates signed in the name of the Corporation by its president or
a vice president and by the treasurer or an assistant treasurer or by the
secretary or an assistant secretary, and shall be sealed with the seal of the
Corporation, or with a facsimile thereof. Whenever any certificate is
countersigned or otherwise authenticated by a transfer agent or transfer clerk,
and by a registrar, then a facsimile of the signatures of the officers or
agents, the transfer agent or transfer clerk or the registrar of the Corporation
may be printed or lithographed upon the certificate in lieu of the actual
signatures. If the Corporation uses facsimile signatures of its officers and
agents on its stock certificates, it cannot act as the registrar of its own
stock, but its transfer agent and registrar may be identical if the institution
acting in those dual capacities countersigns or otherwise authenticates any
stock certificates in both capacities. 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 delivered by the
Corporation, the certificate or certificates may nevertheless be adopted by the
Corporation and be issued and delivered as though the person or persons who
signed the certificates, or whose facsimile signature has been used thereon, had
not ceased to be an officer of the Corporation. If the Corporation is authorized
to issue shares of more than one class or more than one series of any class,
each certificate shall set forth upon the face or back of the certificate or
shall state that the Corporation will furnish to any stockholder upon request
and without charge a full statement of the designations, preferences,
limitations, and relative rights of the shares of each class authorized to be
issued and, if the Corporation is authorized to issue any preferred or special
class in series, the variations in the relative rights and preferences between
the shares of each such series, so far as the same have been fixed and
determined, and the authority of the Board of Directors to fix and determine the
relative rights and preferences of subsequent series.
Each certificate representing shares shall state the following upon the
face thereof: the name of the state of the Corporation's organization; the name
of the person to whom issued; the number and class of shares and the designation
of the series, if any, which such certificate represents; the par value of each
share represented by such certificate or a statement that the shares are without
par value. Certificates of stock shall be in such form consistent with law as
shall be prescribed by the Board of Directors. No certificate shall be issued
until the shares represented thereby are fully paid.
5.2 Record. A record shall be kept of the name of each person or other
entity holding the stock represented by each certificate for shares of the
Corporation issued, the number of shares represented by each such certificate,
the date thereof and, in the case of cancellation, the date of cancellation. The
person or other entity in whose name shares of stock stand on the books of the
Corporation shall be deemed the owner thereof, and thus a holder of record of
such shares of stock, for all purposes as regards the Corporation.
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5.3 Consideration for Shares. Shares shall be issued for such
consideration, expressed in dollars (but not less than the par value thereof) as
shall be fixed from time to time by the Board of Directors. That part of the
surplus of the Corporation which is transferred to stated capital upon the
issuance of shares as a share dividend shall be deemed the consideration for the
issuance of such dividend shares. Such consideration may consist, in whole or in
part, of money, promissory notes, other property, tangible or intangible, or in
labor or services actually performed for the Corporation, contracts for services
to be performed or other securities of the Corporation.
5.4 Cancellation of Certificates. All certificates surrendered to the
Corporation for transfer shall be canceled and no new certificates shall be
issued in lieu thereof until the former certificate for a like number of shares
shall have been surrendered and canceled, except as herein provided with respect
to lost, stolen, or destroyed certificates.
5.5 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 it may prescribe. The Board of Directors may in its
discretion require a bond, in such form and amount and with such surety as it
may determine, before issuing a new certificate.
5.6 Transfer of Shares. 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 such
documentary stamps as may be required by law, it shall be the duty of the
Corporation to 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 book of the Corporation which shall be kept at its principal office or by
its registrar duly appointed.
The Corporation shall be entitled to treat the holder of record of any
share of stock as the holder in fact thereof, and accordingly shall not be bound
to recognize any equitable or other claim to or interest in such share on the
part of any other person whether or not it shall have express or other notice
thereof, except as may be required by the laws of Nevada.
5.7 Transfer Agents, 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.
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ARTICLE VI
Indemnification of Officers and Directors
6.1 Indemnification; Advancement of Expenses. To the fullest extent
permitted by the laws of the State of Nevada (currently set forth in NRS
78.751), as the same now exists or may hereafter be amended or supplemented, the
Corporation shall indemnify its directors and officers, including payment of
expenses as they are incurred and in advance of the final disposition of any
action, suit, or proceeding. Employees, agents, and other persons may be
similarly indemnified by the Corporation, including advancement of expenses, in
such case or cases and to the extent set forth in a resolution or resolutions
adopted by the Board of Directors. No amendment of this Section shall have any
effect on indemnification or advancement of expenses relating to any event
arising prior to the date of such amendment.
6.2 Insurance and Other Financial Arrangements Against Liability of
Directors, Officers, Employees, and Agents. To the fullest extent permitted by
the laws of the State of Nevada (currently set forth in NRS 78.752), as the same
now exists or may hereafter be amended or supplemented, the Corporation may
purchase and maintain insurance and make other financial arrangements on behalf
of any person who is or was a director, officer, employee, or agent of the
Corporation, or is or was serving at the request of the Corporation as a
director, officer, employee, or agent of another corporation, partnership, joint
venture, trust, or other enterprise, for any liability asserted against such
person and liability and expense incurred by such person in its capacity as a
director, officer, employee, or agent, or arising out of such person's status as
such, whether or not the Corporation has the authority to indemnify such person
against such liability and expenses.
ARTICLE VII
Acquisition of Controlling Interest
7.1 Acquisition of Controlling Interest. The provisions of the General
Corporation Law of Nevada pertaining to the acquisition of a controlling
interest (currently set forth NRS 78.378 to 78.3793, inclusive), as the same now
exists or may hereafter be amended or supplemented, shall not apply to the
Corporation.
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ARTICLE VIII
Execution of Instruments; Loans, Checks and Endorsements;
Deposits; Proxies
8.1 Execution of Instruments. The president or any vice president shall
have the power to execute and deliver on behalf of and in the name of the
Corporation any instrument requiring the signature of an officer of the
Corporation, except as otherwise provided in these Bylaws or where the execution
and delivery thereof shall be expressly delegated by the Board of Directors to
some other officer or agent of the Corporation. Unless authorized to do so by
these Bylaws or by the Board of Directors, no officer, agent, or employee shall
have any power or authority to bind the Corporation in any way, to pledge its
credit, or to render it liable pecuniarily for any purpose or in any amount.
8.2 Loans. The Corporation may lend money to, guarantee the obligations of,
and otherwise assist directors, officers, and employees of the Corporation, or
directors of another corporation of which the Corporation owns a majority of the
voting stock, only upon compliance with the requirements of the General
Corporation Law of Nevada.
No loans shall be contracted on behalf of the Corporation and no evidence
of indebtedness shall be issued in its name unless authorized by a resolution of
the Board of Directors. Such authority may be general or confined to specific
instances.
8.3 Checks and Endorsements. All checks, drafts, or other orders for the
payment of money, obligations, notes, or other evidences of indebtedness, bills
of lading, warehouse receipts, trade acceptances, and other such instruments
shall be signed or endorsed by such officers or agents of the Corporation as
shall from time to time be determined by resolution of the Board of Directors,
which resolution may provide for the use of facsimile signatures.
8.4 Deposits. All funds of the Corporation not otherwise employed shall be
deposited from time to time to the Corporation's credit in such banks or other
depositories as shall from time to time be determined by resolution of the Board
of Directors, which resolution may specify the officers or agents of the
Corporation who shall have the power, and the manner in which such power shall
be exercised, to make such deposits and to endorse, assign, and deliver for
collection and deposit checks, drafts, and other orders for the payment of money
payable to the Corporation or its order.
17
<PAGE>
8.5 Proxies. Unless otherwise provided by resolution adopted by the Board
of Directors, the president or any vice president may from time to time appoint
one or more agents or attorneys-in-fact of the Corporation, in the name and on
behalf of the Corporation, to cast the votes which the Corporation may be
entitled to cast as the holder of stock or other securities in any other
corporation, association, or other entity any of whose stock or other securities
may be held by the Corporation, at meetings of the holders of the stock or other
securities of such other corporation, association, or other entity or to consent
in writing, in the name of the Corporation as such holder, to any action by such
other corporation, association, or other entity, and may instruct the person or
persons so appointed as to the manner of casting such votes or giving such
consent, and may execute or cause to be executed in the name and on behalf of
the Corporation and under its corporate seal, or otherwise, all such written
proxies or other instruments as he may deem necessary or proper in the premises.
8.6 Contracts. The Board of Directors may authorize any officer or
officers, agent or agents, to enter into any contract or execute and deliver any
instrument in the name of and on behalf of the Corporation, and such authority
may be general or confined to specific instances.
ARTICLE IX
Miscellaneous
9.1 Waivers of Notice. Whenever notice is required by the General
Corporation Law of Nevada, by the Articles of Incorporation, or by these Bylaws,
a waiver thereof in writing signed by the director, stockholder, or other person
entitled to said notice, whether before, at, or after the time stated therein,
or his appearance at such meeting in person or (in the case of a stockholders'
meeting) by proxy, shall be equivalent to such notice.
9.2 Corporate Seal. The Board of Directors may adopt a seal circular in
form and bearing the name of the Corporation, the state of its incorporation,
and the word "Seal" which, when adopted, shall constitute the seal of the
Corporation. The seal may be used by causing it or a facsimile of it to be
impressed, affixed, manually reproduced, or rubber stamped with indelible ink.
9.3 Fiscal Year. The Board of Directors may, by resolution, adopt a fiscal
year for the Corporation.
9.4 Amendment of Bylaws. The provisions of these Bylaws may at any time,
and from time to time, be amended, supplemented or repealed by the Board of
Directors.
18
<PAGE>
9.5 Uniformity of Interpretation and Severability. These Bylaws shall be so
interpreted and construed as to conform to the Articles of Incorporation and the
laws of the State of Nevada or of any other state in which conformity may become
necessary by reason of the qualification of the Corporation to do business in
such state, and where conflict between these Bylaws, the Articles of
Incorporation or the laws of such a state has arisen or shall arise, these
Bylaws shall be considered to be modified to the extent, but only to the extent,
conformity shall require. If any provision hereof or the application thereof
shall be deemed to be invalid by reason of the foregoing sentence, such
invalidity shall not affect the validity of the remainder of these Bylaws
without the invalid provision or the application thereof, and the provisions of
these Bylaws are declared to be severable.
9.6 Emergency Bylaws. Subject to repeal or change by action of the
stockholders, the Board of Directors may adopt emergency bylaws in accordance
with and pursuant to the provisions of the laws of the State of Nevada.
19
<PAGE>
SECRETARY'S CERTIFICATION
The undersigned Secretary of Newlands Oil & Gas Inc. (the "Corporation")
hereby certifies that the foregoing Bylaws are the Bylaws of the Corporation
adopted by the Board of Directors as of the 17th day of June, 1998.
By /s/ Allen C. Sewell
------------------------
Allen Charles Sewell
Secretary
20
<PAGE>
EXHIBIT 10.1
1
This Agreement was prepared by Morton & Company, Barristers & Solicitors, acting
on behalf of Brothers Oil & Gas, Inc. It is recommended that Newlands Oil & Gas
Inc. obtain independent legal advice with respect to the provisions contained
herein.
EXPLORATION CONVEYANCE AND ASSIGNMENT AGREEMENT
THIS AGREEMENT made as of the 1st day of March, 1999.
BETWEEN:
BROTHERS OIL & GAS, INC., duly incorporated under the laws of British
Columbia and having a head office at 145 Tyee Drive, Suite 1536, Point
Roberts, Washington 98281-9602.
(hereinafter referred to as "Brothers")
OF THE FIRST PART
- and -
NEWLANDS OIL & GAS INC., duly incorporated under the laws of British
Columbia and having a head office at Suite 604 - 750 West Pender Street,
Vancouver, B.C. V6C 2T7.
(hereinafter referred to as "Newlands")
OF THE SECOND PART
WHEREAS:
A. Brothers has entered into a joint operating agreement dated December
1, 1998 (the "Operating Agreement") with Production Specialties
Company as Operator, and Celsius Energy Company ("Celsius") Vaughan
Exploration, Inc., Sunset Exploration, Inc., Bobsac, LLC, Vaughan
Production Company, and Brothers as Non-Operators (all of the parties
to the Operating Agreement other than Production Specialties Company,
collectively referred to as the "Participants"), attached hereto as
Schedule "A";
B. The Participants have entered into an Exploration Agreement dated
December 1, 1998 (the "Exploration Agreement") with Celsius, whereby
Celsius can acquire a 50% interest in certain oil and gas leases,
options to lease and seismic options (the "Lands"), more particularly
described in Exhibit "A" the Exploration Agreement which is attached
hereto as Schedule "B";
C. Pursuant to the Exploration Agreement Brothers is entitled to acquire
a 10% working interest ("Brothers' Interest") in the Lands; and
D. Brothers has agreed to grant an option to Newlands to earn an interest
in Brothers' Interest in the Lands.
NOW THEREFORE in consideration of the mutual covenants contained herein and
for other good and valuable consideration, the receipt and sufficiency of which
are hereby acknowledged, the parties acknowledge and agree to the following:
<PAGE>
2
1. (a) Brothers hereby grants to Newlands the option (the "Option") to earn
70% of Brothers' Interest (the "Assigned Interest") in and to the
Lands in consideration for Newlands paying to Brothers 100% of
Brothers' portion of the total seismic and land acquisition costs (the
"Option Purchase Price") within the Leasing Area described in Exhibit
"A" to the Exploration Agreement, subject only to the respective terms
and conditions of the Exploration Agreement;
(b) Brothers acknowledges that it has received US$50,000 (the "Initial
Option Payment") from Newlands on account of the Option Purchase Price
as of the date of the execution of this Agreement;
(c) Brothers acknowledges that the estimated Option Purchase Price as at
the date of this Agreement is US$83,000; and
(d) Newlands shall pay the balance owing (the "Final Option Payment") to
Brothers, being the difference between the Option Purchase Price and
the Initial Option Payment by 12:00 noon, Vancouver Time, on March 30,
1999.
2. Brothers and Newlands acknowledge that:
(a) Allen Sewell is a director of both Brothers and Newlands;
(b) Graeme Sewell is a director of Newlands and his children have an
interest in Brothers; and
(c) with respect to this Agreement, Allen Sewell and Graeme Sewell will
represent Brothers and both will abstain from voting in their capacity
as directors of Newlands.
3. Newlands acknowledges that the Participants have entered into the
Exploration Agreement with Celsius.
4. Newlands and Brothers agree that:
(a) upon receipt by Brothers of a request for payment (the "Payment
Request") for drilling a particular well in accordance with the terms
of the Operating Agreement, Brothers will make a written request (the
"Notice") to Newlands to pay to Brothers 100% of the amount set out in
the Payment Request;
(b) If Newlands does not pay to Brothers the amount set out in the Notice
within 15 days of receipt of the Notice, Newlands will have no rights
with respect to the well contemplated in the Payment Request;
(c) If Newlands receives a Notice from Brothers in connection with the
first exploratory well (the "Initial Test Well") on a prospect within
the Lands
<PAGE>
3
and Newlands makes the payments set out in the Notice then Newlands
shall:
(i) earn the Assigned Interest in the well contemplated in the
Payment Request; and
(ii) have the option to participate in the drilling of subsequent
wells ("Development Wells") on that prospect;
(d) If Newlands receives a Notice from Brothers with respect to an Initial
Test Well and elects not to participate in the drilling of that well,
Newlands shall not have the right to participate in the drilling of
Development Wells on that prospect. However, Newlands shall retain its
right to participate in the drilling of Initial Test Wells and
Development Wells on future prospects within the Lands as provided in
paragraph 4(c) above;
(e) If Newlands receives a Notice from Brothers in connection with a
Development Well on a prospect within the Lands and Newlands makes the
payments set out in the Notice then Newlands shall:
(i) earn the Assigned Interest in the Development Well contemplated
in the Payment Request; and
(ii) have the option to participate in the drilling of further
Development Wells on that prospect; and
(f) with respect to any Notice, Brothers will give to Newlands all
information at its disposal related to same in order to assist
Newlands in determining whether or not it wishes to pay the amount set
out in the Payment Request.
5. If Newlands fails to meet any obligations hereunder, Newlands acknowledges
that its failure to do so shall in no way effect Brothers' right to
participate at its option and in its sole discretion in accordance with the
Operating Agreement.
6. If for any reason Newlands does not pay the Final Option Payment, then
Brothers may, at its sole option, terminate this Agreement and retain the
Initial Option Payment from Newlands as liquidated damages. In
consideration for the foregoing, Brothers hereby waives any and all other
remedies it may have as against Newlands for Newlands' failure to pay the
balance owing on the Purchase Price.
7. Brothers acknowledges that Newlands may enter into an agreement with
another party to assist Newlands to finance its obligations herein. Brother
agrees that if such other party is a company whose shares are listed on a
stock exchange or traded on a dealer network or bulletin board, that
Brothers has the right, not to be unreasonably withheld, but not the
obligation, to amend the terms of this agreement in order to comply with
the requirement of such regulatory authorities as may govern that company.
8. All payments to be made herein shall be forwarded by bank draft or
certified cheque to Brothers or to such other parties as Brothers shall
direct, such direction to be in writing.
9. In no event shall Brothers be responsible or liable for the failure of any
Test Well or any further wells to produce oil or gas for any reason
whatsoever.
<PAGE>
4
10. Newlands acknowledges receipt of such independent geological and other
project information as Newlands requires to inform and satisfy Newlands of
the risks and financial obligations associated with entering into this
Agreement.
11. This Agreement contains the complete and entire agreement between the
parties hereto with respect to the matters contained herein and cannot be
varied except by written agreement.
12. Except as otherwise provided herein, nothing in this Agreement shall be
construed as creating a partnership, association or trust of any kind or as
imposing upon any of the parties any partnership duty, liability,
disability or obligation.
13. Information with respect to the geology, exploration, development and
possible production from the Lands and other factors bearing upon the
evaluation thereof shall be treated as confidential. Such confidential
information may only be disclosed by a party to its affiliates, associates,
agents, contractors and employees and only to the extent required for the
proper performance of their work and each of the parties hereto shall
exercise all appropriate precautions and impose all appropriate safeguards
to avoid improper disclosure of confidential information by such
affiliates, associates, employees, agents or contractors, or as required by
law.
14. All notices which are required or authorized to be given herein shall be
given by post, addressed to the party to whom such notice is given at the
addresses first shown above.
15. If a party is prevented from or delayed in incurring any of its obligations
or carrying out any programs required under this Agreement by a cause
beyond its reasonable control (other than its own lack of funds), as long
as the party complies with the provisions of this section, such delay or
failure to act will not constitute a breach of this agreement. A cause
beyond a party's reasonable control will include, but not be limited to,
acts of God, fire, floods, explosions, labour disputes, strikes, threats of
imminent strike, lockouts or other industrial disturbances, plant
breakdowns or failure of operating equipment, interruptions or delays in
transportation, war, insurrection or mob violence, nationalization, laws,
rules and regulations or orders of any duly constituted governmental
authority or non-availability of labour, equipment or materials.
16. Except as otherwise provided in this Agreement, and without application to
the Option Purchase Price, where a default has occurred, a non-defaulting
party may provide written notice to the defaulting party specifying the
default. If within 30 days (or, if the default cannot reasonably be cured
within 30 days, within such period as may reasonably be required to cure
the default) after the giving of notice of default by the non-defaulting
party, the defaulting party has failed to cure the default, the non-
defaulting party will then be entitled to seek any remedy it may have on
account of the default. The defaulting party will not lose any rights under
this Agreement, nor shall the Agreement terminate upon notice of the
default being given by the non-defaulting party.
<PAGE>
5
17. Time shall be of the essence of this Agreement.
18. Upon the written request of any of the parties, the other parties agree to
furnish such additional further assurances or documents as may be
reasonably necessary to carry out the intent, purposes and terms of this
Agreement.
19. This Agreement shall enure to the benefit of and be binding upon the
parties hereto and their respective successors, permitted assigns, heirs,
administrators and legal representatives.
20. All reference to dollars in this Agreement shall be in US currency.
21. This Agreement, and all rights and obligations hereunder may not be
assigned, in whole or in part without the written consent of Brother's,
such consent not to be unreasonably withheld. This Agreement, and all
rights and obligations hereunder may be assigned, in whole or in part, by
Brother's without the consent of Newlands. Any assignment of interest by
Newlands or Brother's under this Agreement shall be made expressly subject
to this Agreement and shall require the assignee to agree in writing to
assume all of the obligations of Brother's or Newlands as the case may be
and as they relate to the interest assigned.
22. Waiver of any provisions herein by any party hereto shall not be construed
as a waiver of any other provisions or terms of this Agreement.
23. This Agreement may be executed in counterparts which may be delivered by
facsimile. Each executed counterpart shall be deemed to be an original and
all such counterparts when read together constitute one and the same
instrument.
24. The laws of British Columbia shall govern the validity, enforcement and
interpretation of this Agreement. The parties hereby agree that the
exclusive venue for any legal action arising out of this Agreement shall be
in Vancouver, British Columbia.
25. This Agreement contains the complete and entire agreement between the
parties hereto with respect to the matters contained herein and cannot be
varied except by written agreement.
<PAGE>
6
Brothers Oil and Gas Inc.
per: By /s/ Michael Sewell, Director
-------------------------------
Authorized Signatory
Agreed to and accepted this
1st day of March, 1999.
Newlands Oil & Gas Inc.
By /s/ Negar Towfigh, Director
------------------------------
Authorized Signatory
<PAGE>
7
EXPLORATION AGREEMENT
---------------------
TRAVIS PROSPECT
SOLANO COUNTY, CALIFORNIA
THIS AGREEMENT, made and entered into effective as of the 1st day of
December, 1998, by and between CELSIUS ENERGY COMPANY, hereinafter referred to
as "Celsius", and VAUGHAN EXPLORATION, INC., hereinafter referred to as
"Vaughan", SUNSET EXPLORATION, INC., hereinafter referred to as "Sunset",
BOBSAC, LLC, hereinafter referred to as "BOBSAC", BROTHERS OIL & GAS,
hereinafter referred to as "Brothers", PRODUCTION SPECIALTIES COMPANY,
hereinafter referred to as "PSC" and VAUGHAN PRODUCTION COMPANY herein-after
referred to as "VPC". Celsius, Vaughan, Sunset, BOBSAC, Brothers, PSC, and VPC
shall hereinafter be referred to collectively as "The Parties";
W I T N E S S E T H, That,
WHEREAS, the Parties have identified an area ("Contract Area") in Solano
County, California as outlined and described in Exhibit "A", attached hereto and
made a part hereof, which the Parties believe to be prospective for oil and gas
exploration and production; and
WHEREAS, the Parties have obtained certain oil and gas leases, options to
lease and seismic options as to certain lands within the Contract Area and the
Parties anticipate that additional oil and gas leases, options and other
agreements may be obtained in the future covering portions of the Contract Area;
and
WHEREAS, the Parties have reached an agreement with respect to certain
matters concerning the ownership of leases and other interests within the
Contract Area and their future exploration, development and operation;
<PAGE>
8
NOW THEREFORE, in consideration of the mutual covenants contained herein
and for other good and valuable consideration, the receipt and sufficiency of
which are hereby acknowledged, the Parties hereby agree as follows:
1. CONVEYANCE AND ASSIGNMENT BY VAUGHAN AND SUNSET TO CELSIUS:
----------------------------------------------------------
Vaughan and Sunset represent that they control certain oil and gas
leasehold interests in lands hereinafter referred to as "Vaughan and Sunset
Acreage", and more specifically described in Exhibit "B", attached hereto
and made a part hereof.
1.1. Vaughan and Sunset hereby agree to assign and convey to Celsius an
undivided 50% working interest in and to the Vaughan and Sunset
Acreage, as to all depths, subject to all existing royalty,
overriding royalty and other burdens and, in addition, reserving to
Vaughan and Sunset a proportionately reduced 2% of 8/8ths overriding
royalty interest; provided however, in no event shall less than a 78%
net revenue interest, proportionately reduced by the interest
assigned, be delivered to Celsius. The working interest and net
revenue interest of Vaughan and Sunset in and to the Vaughan and
Sunset Acreage, as shown in Exhibit "B", are correct as to the best
information and knowledge of Vaughan and Sunset. However, Vaughan and
Sunset make no express or implied representation or warranty of any
kind as to their title, except by through and under Vaughan and
Sunset, or the quantums of their interests in and to the Vaughan and
Sunset Acreage and hereby disclaim any and all such other implied or
express representations or warranties.
1.2. Vaughan and Sunset shall provide Celsius, and the other Parties that
so request, with copies of all original leases, lease options,
seismic options,
<PAGE>
9
title information, lease files, and other documentation pertaining to
the Vaughan and Sunset Acreage. Vaughan and Sunset make no
representation or warranty as to the completeness or accuracy of any
of the documentations or information provided to the Parties.
1.3. Subject to review and approval of title by Celsius, Celsius will
reimburse Vaughan and Sunset for 66.66% of the actual lease bonus,
lease options, seismic options, brokerage and other direct
acquisition costs payable to third parties expended by Vaughan and
Sunset as of the effective date hereof in acquisition of the leases
and options described on Exhibit "B" attached hereto, and for any
other leases that Celsius elects to acquire under the provision of
Section 2 (AMI) below, up to a total gross expenditure to Vaughan and
Sunset (8/8ths) for bonus, brokerage and other acquisition costs (not
including subsequent lease rentals) of Four Hundred and Twenty Five
Thousand Dollars ($425,000). Upon receipt of payment, Vaughan and
Sunset will make an assignment to Celsius as provided in Section 1.1
hereof.
Until such time as the above $425,000 gross expenditure has been made
by Vaughan and Sunset, the provisions of Section 2 (Area of Mutual
Interest) below shall not apply with respect to Celsius, but instead
it shall be mandatory that Celsius reimburse Vaughan and Sunset for
66.67% of the actual lease bonus, seismic options, brokerage and
other acquisition costs expended by Vaughan and Sunset in the
acquisition of additional oil and gas leases within the Contract Area
which are assigned to Celsius. Any additional Oil and Gas interests
acquired (after the $425,000 gross expenditure has been made) will be
subject to the terms of paragraph 2 (AMI), below. The payment made by
Celsius to Sunset and Vaughan pursuant to the Letter
<PAGE>
10
Agreement dated December 21, 1998 shall be applied towards the total
payment due by Celsius to Vaughan and Sunset.
2. AREA OF MUTUAL INTEREST:
-----------------------
An Area of Mutual Interest, (hereinafter referred to as "AMI"), is hereby
created by and between the Parties and shall cover the Contract Area as
outlined on Exhibit "A".
Such AMI shall extend from December 1, 1998 until December 31, 2002, at
which time the rights, obligations and provisions of this Article shall
terminate. If during the term of the AMI, any Party acquires, directly or
indirectly, any lease or any oil and gas working interest, operating
interest, overriding royalty interest or mineral interest, not previously
offered pursuant to the terms of this AMI, including, but not limited to,
Farmout Agreements, Farmout Option Agreements, acreage or cash
contributions, or any other agreement or document through which such Party
acquires or has the contractual right to acquire an interest or right in
the oil and gas underlying or to be produced from any of the lands within
the AMI, or in or to be produced from lands outside the AMI as a result of
operations on and in the AMI lands (hereinafter referred to as an "Acquired
Interest"), the acquiring Party shall offer in writing, to the non-
acquiring Parties within thirty (30) days of acquisition, an interest in
the Acquired Interest under the identical terms and conditions by which the
acquiring Party acquired the Acquired Interest. Subject to the provisions
of Section 9 hereof, the interest shall be offered to the non-
acquiring Parties, ("Offerees") in the following percentages:
CELSIUS 50%
SUNSET 12.5%
BOBSAC 12.5%
BROTHERS 10.0%
VAUGHAN 5.0%
PSC 5.0%
VPC 5.0%
---------
Total: 100.0%
<PAGE>
11
The acquiring party shall attach a statement of the cost and terms of such
acquisition and all relevant information in the possession of such party in
connection with the Acquired Interest including but not limited to title
information and lease assignment documents. Each Offeree shall have a
thirty (30) day period from the receipt of written notice of such
acquisition in which to notify the Acquiring Party (in writing) whether or
not it elects to participate therein.
Promptly after its receipt of an affirmative election to participate in the
Acquired Interest, the acquiring Party shall invoice each participating
Offeree for its proportionate share of the acquisition costs of the
Acquired Interest. Each participating Offeree shall, within fifteen (15)
days after its receipt of an invoice, reimburse the acquiring Party for
participating Offeree's share of the acquisition costs. Upon receipt of
such reimbursement, the acquiring Party shall execute and deliver an
appropriate assignment to each participating Offeree covering the Offeree's
proportionate share of the Acquired Interest. Any assignment made by the
acquiring Party shall be free of any burdens placed thereon by the
acquiring Party, except as provided herein. Failure of an Offeree to
notify the acquiring Party (in writing) within the aforesaid thirty (30)
day period shall be deemed an election not to participate. In the event
the Acquired Interest is in the form of an agreement whereby such Acquired
Interest may be earned by conducting the drilling of a well or other
operation on lands lying within the AMI, then for any participating
Offeree to be entitled to receive its proportionate share of the interest
earned by conducting the drilling of the well or other operations within
the AMI, said participating Offeree must fully pay its proportionate share
of all costs and expenses of such drilling or other operation.
Vaughan and Sunset shall be entitled to a 2% of 8/8ths overriding royalty
interest in and to all leases, oil and gas working interests, operating
interests or mineral interests acquired within the AMI during the term of
the AMI, or acquired within
<PAGE>
12
lands outside the AMI as a result of operations within the AMI during the
term of the AMI, provided however, in no event shall less than a 78% net
revenue interest, proportionately reduced by the interest assigned, be
delivered to the other Parties. Said overriding royalty shall not apply to
the wellbores that are producing, or capable of producing, if any, in
existence at the time of an acquisition. Such overriding royalty interest
of Vaughan and Sunset shall be subject to proportionate reduction in the
event that any such acquired lease, oil and gas working interest, operating
interest or mineral interest is less than one hundred percent (100%). The
overriding royalty interest of Vaughan and Sunset shall apply to any lease,
oil and gas working interest, operating interest or mineral interest
acquired by Vaughan and Sunset or any other Party to this Agreement in
lands within the AMI, or in lands outside of the AMI as a result of
operations within the AMI during the term of the AMI. If the lease, oil and
gas working interest, operating interest or mineral interest giving rise to
the overriding royalty is acquired by Vaughan and Sunset, then Vaughan and
Sunset shall reserve its overriding royalty in any assignment(s) or
transfer(s) to be made to the other Parties to this Agreement pursuant to
the provisions of this Section 2. On the other hand, if the lease, oil and
gas working interest, operating interest or mineral interest giving rise to
the overriding royalty of Vaughan and Sunset is acquired by a Party(s) to
this Agreement other than Vaughan and Sunset, then the Party(s) acquiring
the interest and all Offerees participating in the interest pursuant to the
provisions of this Section 2 shall convey the appropriate overriding
royalty to Vaughan and Sunset upon demand of Vaughan and Sunset. Vaughan
and Sunset shall be entitled to their overriding royalty whether or not
Vaughan and Sunset acquired the lease, oil and gas working interest,
operating interest or mineral interest giving rise to the overriding
royalty, and whether or not Vaughan and Sunset elects to participate,
pursuant to the terms of this Section 2, in any lease, oil and gas working
interest, operating interest or
<PAGE>
13
mineral interest acquired by any other Party(s) to this Agreement within
the AMI or in lands outside the AMI as a result of operations within the
AMI.
Any acreage within the AMI in which the Parties hereto elect to participate
under this Section shall be governed by the Joint Operating Agreement
provided for in Section 11.1 hereof.
3. PROSPECT FEE AND CONSULTING SERVICES:
-------------------------------------
Celsius will pay Vaughan and Sunset, jointly, a prospect fee of Two Hundred
and Seventy-Five Thousand Dollars ($275,000.00) within three (3) days of
the execution of this Agreement by all Parties and an additional prospect
fee of Two Hundred and Seventy-Five Thousand Dollars ($275,000.00) will be
paid by Celsius to Vaughan and Sunset, jointly, on or before January 22,
1999 or such later date as may be mutually acceptable if Celsius has the
right to defer payment pursuant to Section 4 below. As partial
consideration for the prospect fee Vaughan agrees to provide geological and
geophysical consulting services, as reasonably requested by Celsius, within
the Contract Area free of additional cost to Celsius during the term of the
AMI. The purpose of such consulting services is to provide Celsius with
viable, economic drilling prospects in a timely manner.
4. GEOPHYSICAL DATA:
----------------
Sunset and/or Vaughan have, or will, obtain a license to a minimum of 50
square miles of 3-D seismic data ("3-D data") covering the Contract Area
and lands contiguous to the Contract Area, including a portion of the
Denverton Creek Field, from Western Geophysical. Celsius shall have the
right to defer the second payment of the prospect fee provided for in
paragraph 3 above, if all of the 3-D data is not obtained by January 22,
1999, for so long as is necessary for Vaughan and/or Sunset to obtain such
license. If less than 50 square miles of 3-D seismic
<PAGE>
14
data is obtained by Sunset and/or Vaughan, the total prospect fee shall be
adjusted downward proportionately and the second payment shall be reduced
accordingly. It is understood that Sunset and/or Vaughan will retain
ownership of the 3-D data license and data and will both maintain a working
interest in all leases obtained within the Contract Area during the entire
term of the AMI pursuant to the provisions of Section 2.
4.1 Vaughan and Sunset warrant that they have obtained written evidence
from Western Geophysical, that they have the right under the data
license agreement for the 3-D data to show Celsius and the other
working interest owners the applicable portions of the 3-D data
necessary to encourage participation in specific well proposals made
under this agreement. Vaughan and Sunset shall indemnify, defend and
hold harmless Celsius against any claim by Western Geophysical, or its
successors and assigns, that Vaughan and/or Sunset were prohibited
under their license from sharing such portions of the 3-D data with
Celsius for such purpose.
4.2 Vaughan and Sunset warrant that they have obtained the agreement of
Western Geophysical to allow Celsius, if desired by Celsius, to
purchase a license for the 3-D data, at a cost not to exceed Four
Hundred Twelve Thousand Five Hundred Dollars ($412,500.00).
4.3 Notwithstanding anything to the contrary that may be contained herein,
Celsius shall pay fifty percent (50%) of any and all costs and
expenses of additional work done by third parties on the 3-D data
beyond the final migration such as reprocessing, additional processing
(AVO or continuity volumes), and the acquisition and integration of
support data for
<PAGE>
15
interpretation (E-logs, digitized well data, production data, etc.) to
which Celsius gives its prior written consent.
5. PROSPECT PROPOSALS:
------------------
If any Party desires to propose the drilling of the first exploratory well
in a prospect ("Initial Test Well") within the Contract Area, the Party
desiring to drill the Initial Test Well ("Proposing Party") shall present
such Initial Test Well proposal ("Prospect Proposal") to the other Parties
as set forth below:
5.1 For the purposes of the Agreement, the "Prospect Area" for any
Prospect Proposal submitted hereunder shall be limited to a maximum of
2,560 contiguous acres unless all Parties agree to a larger area. All
Prospect Areas shall (i) be mutually agreed upon and described using
U.S. Governmental survey tracts of not less than quarter-quarter
sections; and (ii) honor the geologic and geophysical interpretations
in the Prospect Proposal to the maximum extent feasible.
5.2 Prospect Proposals shall be made in writing and shall be deemed
delivered as of its receipt by the reviewing Parties. All Prospect
Proposals shall contain the following:
(a) A geoscience summary which includes all geological and
geophysical interpretations, maps and cross-sections (including
any of such items that exist in digital form) utilized by the
Proposing Party to develop the Test Well Proposal (except any
data that may be restricted by third party contract).
<PAGE>
16
(b) A land summary which includes a land map illustrating the
proposed Prospect Area and a schedule of all oil and gas leases,
including mineral and working interest ownership . In the event
that the Prospect Area encompasses lands both inside and outside
the AMI, then the Proposing Party shall also provide a schedule
of all oil and gas leases, including mineral and working interest
ownership, to be acquired within (or outside) the Prospect Area
and the actual or proposed terms and conditions thereof.
(c) The Initial Test Well drilling summary which includes an Initial
Test Well drilling and completion AFE, drilling program, open
hole evaluation plan and well prognosis.
(d) A reservoir engineering summary which includes estimated (i) pay
thickness; (ii) areal extent of the reservoir; (iii) reservoir
porosity and permeability; (iv) reservoir pressure; and (v)
anticipated hydrocarbon recovery factors for each prospective
zone.
6. INITIAL TEST WELL PARTICIPATION ELECTIONS:
-----------------------------------------
Upon receipt of a Prospect Proposal and all the information described in
Sections 5.1 and 5.2 above, the reviewing Parties shall each have thirty
(30) calendar days in which to make individual elections to participate or
not to participate in the Initial Test Well in the Prospect Area. In the
event a reviewing Party fails to deliver its written election to
participate to the Proposing Party within such time frame, said reviewing
Party shall be deemed to have elected not to participate in the Initial
Test Well.
7. PROSPECT PARTICIPATION:
----------------------
<PAGE>
17
7.1 Any party electing not to participate in the drilling of an Initial
Test Well as to its full working interest shall Farmout its entire
interest in the Initial Test Well and all of its oil and gas
leasehold interest(s), mineral interest(s) and other interests within
the boundaries of the Prospect Area containing the Initial Test Well
pursuant to the terms of Section 8 below.
7.2. The Parties electing to participate in the drilling of an Initial
Test Well shall be entitled to participate in any Farmout pursuant to
Section 7.1 above and Article 8 below on a pro rata basis. In the
event that any Party electing to participate in the drilling of an
Initial Test Well does not elect to participate in the Farmout, and
---
the other participating Parties in the Initial Test Well do not elect
to take all of the available Farmout interest on a pro rata basis,
then the Parties electing to participate in the Initial Test Well
shall have a period of thirty (30) calendar days within which to
obtain one or more third parties to join in the Farmout to the extent
of the available Farmout interest. Such one or more third parties
must be acceptable to Celsius, or Operator, as defined and provided
for in Article 11 below, if Celsius is not participating in the
Initial Test Well. Celsius or Operator may not withhold consent
unreasonably. Subject to the commitment of the Parties (or third
parties which are acceptable to Celsius, or Operator, if Celsius is
not participating in the well) to assume one hundred percent (100%)
of the working interest in the Initial Test Well, either pursuant to
their participating interests as provided for in the Agreement or
pursuant to one or more Farmouts as called for in Section 7.1 above
and Article 8 below, Operator shall commence the drilling of the
Initial Test Well within ninety (90) days after such assumption of
one hundred percent (100%) of the working interest in the Initial
Test Well is complete.
<PAGE>
18
7.3. In addition to the duties specified in the Joint Operating Agreement
provided for in Section 11 below, Operator shall notify the parties
when the material and equipment for the drilling of said Initial Test
Well is moved to the location, and when actual drilling is commenced.
After actual drilling has been commenced, and until said well has
been completed as a producer or plugged and abandoned as a dry hole,
Operator shall furnish to the parties daily reports as to the
progress of drilling, testing and completing, as well as any and all
other information reasonably requested by the parties relative to the
progress of said well. If said well proves to be capable of producing
oil or gas in commercial quantities, it shall be equipped for
production by the Operator. If said well proves to be incapable of
producing oil or gas, Operator shall plug same in accordance with all
applicable state and federal laws, rules and regulations, and shall
take such action as may be necessary to restore the surface of the
well site to its original condition insofar as practicable. If, as a
result of encountering impenetrable substances or other conditions,
including geologic information, which render further drilling
impracticable, Operator shall discontinue drilling the well and shall
have the right and option, but not the obligation, of drilling a
Substitute Well at a legal location in the same quarter section in
which the Initial Test Well was drilled. The procedures of Sections 5
and 6 above and of this Section 7 shall govern the notice, right,
option, election, drilling and completing or abandonment of any
Substitute Well, just as if the Substitute Well were to be an Initial
Test Well, except that only Parties to this Agreement that
participated in the Initial Test Well and third parties that
participated in the Initial Test Well shall be entitled to
participate in the Substitute Well, unless all such participating
Parties and third parties agree otherwise. If Operator and Non-
Operator(s) so elect, Operator shall
<PAGE>
19
commence the actual drilling of said Substitute Well no later than
sixty (60) days following the abandonment of drilling operations of
the Initial Test Well. Said Substitute Well shall be drilled in a
manner and to the depth set forth for the original Initial Test Well.
If said Substitute Well is commenced, drilled and completed by
Operator as herein provided, Operator and Non-Operators shall be
deemed to have complied with the terms and provisions of this
Agreement to the same extent as if the Initial Test Well had been
commenced, drilled and completed in conformity herewith. Each
reference herein to the Initial Test Well shall include any Substitute
Well therefore.
7.4. All operations for the Initial Test Well or Substitute Well, including
without limitation, any proposed completion or abandonment thereof,
shall be governed by the provisions of the Joint Operating Agreement
provided for in Article 11 below..
8. FARMOUT PROVISIONS:
------------------
If any Party hereto does not elect to participate in the drilling of an
Initial Test Well in a Prospect Area as to its full working interest, that
party shall support the drilling of said well with a Farmout in lieu of
non-consent under the following general terms and conditions:
Subject to the provisions of this Agreement and the Joint Operating
Agreement provided for in Section 11 below, Operator shall commence the
drilling of the Initial Test Well or Substitute Well at a location
specified in the Prospect Proposal within the boundaries of the Prospect
Area and drill same to the "Required Depth" as specified in the Prospect
Proposal.
<PAGE>
20
As support for drilling the Well, the non-participating Party(s) ("Farmor")
agrees/agree to farmout all of its/their right, title and interest in,
under, or derived from the oil and gas leases, mineral rights and/or other
interests insofar as they relate to the lands within the Prospect Area
containing the Initial Test Well. Such leases, mineral rights and/or the
interests and lands shall hereinafter be referred to as the "Farmout
Acreage".
By drilling the Initial Test Well or Substitute Well to the Required Depth
and completing the same as a well capable of producing oil and/or gas in
commercial quantities, the participating Party or Parties ("Farmee"),
including Parties to this Agreement and third parties, if any, shall earn
an assignment of seventy percent (70%) of Farmor's working interest in the
Farmout Acreage, subject only to existing leasehold burdens as of the date
of this Agreement. In addition, Farmor shall relinquish to Farmee, and
Farmee shall own and be entitled to receive, one hundred percent (100%) of
Farmor's working interest in the Initial Test Well or Substitute Well, the
material and equipment appurtenant thereto, and Farmor's working interest
share of production therefrom; subject to the reservation by Farmor of a
proportionately reduced overriding royalty interest equal to the difference
between existing burdens and seventeen and one-half percent (17.5%) of
8/8ths, however in no event less than 2% of 8/8ths proportionately reduced,
which overriding royalty interest may be converted at Payout (as defined in
the formal Farmout Agreement hereinafter provided for), at each Farmor's
option, to a proportionately reduced thirty percent (30%) working interest
in the Initial Test Well or Substitute Well, the material and equipment
appurtenant thereto, and production obtained therefrom.
In the event the Initial Test Well or Substitute Well is plugged and
abandoned as a dry hole after reaching the Required Depth, Farmor shall
assign to Farmee seventy
<PAGE>
21
percent (70%) of its working interest in the Farmout Acreage, subject only
to existing leasehold burdens as of the date of this Agreement or as
provided for herein.
All earning under this Section shall be limited in depth from the surface
of the earth to the stratigraphic equivalent of 100' below the total depth
drilled in the Initial Test Well or Substitute Well.
Farmor and Farmee agree to enter into a formal Farmout Agreement prior to
spudding the Initial Test Well within each Prospect Proposal utilizing the
form of Farmout Agreement, attached hereto as Exhibit "C".
9. FUTURE ACQUISITIONS IN A PROSPECT AREA AFTER IMPLEMENTATION OF SECTION 8:
------------------------------------------------------------------------
Should any party assign its interest in a Prospect Area pursuant to Section
8 as a result of non-participation in an Initial Test Well or Substitute
Well, such non-participating Party will be entitled to participate in any
future acquisitions (pursuant to Section 2 herein) in the applicable
Prospect Area only as to its "after payout" convertible working interest
percentage.
10. GEOLOGIC REQUIREMENTS:
---------------------
The Parties, regardless of whether they are participating or non-
participating parties, shall be entitled to receive all well and production
data available to the Operator as soon as such data is available with
respect to any Initial Test Well or Substitute Well. All logs, mud logs,
test results and other wellbore evaluations shall be conducted in
accordance with the proposed Initial Test Well or Substitute Well drilling
program submitted with the appropriate Prospect Proposal or Well
<PAGE>
22
proposal. The Parties shall have unrestricted access to the rig floor,
logging trailer or mud logging trailer at their sole cost, risk and expense
to witness drilling, testing, logging or completion operations.
11. JOINT OPERATING AGREEMENT:
-------------------------
PSC shall serve as Operator in a Prospect Area under the terms and
conditions of the Joint Operating Agreement provided for below, to the
extent it has elected to participate in the drilling of the Initial Test
Well or any Substitute Well in the applicable Prospect Area. The interests
of the Parties shall be determined based on their elections in each Initial
Test Well or Substitute Well proposal.
In the event PSC elects not to participate in an Initial Test Well or
Substitute Well, then Celsius shall have the right, but not the obligation,
to act as Operator for the Initial Test Well or Substitute Well and
Prospect Area.
In the event PSC sells or assigns all or part of its interest in the
Contract Area, or any well within the Contract Area, Celsius shall have the
right to elect to take over as Operator of all of the wells in the Contract Area
in which Celsius has a working interest and all future wells, by giving written
notice within sixty (60) days of the date Celsius received written notification
of the transfer(s) of interest. In addition, if the Parties to this Agreement
other than Celsius, which currently own a combined 50% working interest, sell or
assign all or portion of their working interest in the Contract Area, or any
well within the Contract Area, to a third party or parties such that on a
combined basis their resulting working interest is 25% or less in the Contract
Area or well, Celsius shall have the right to elect to take over as Operator of
all of the wells in the Contract Area in which Celsius has a working interest
and all future wells, by giving written notice within sixty (60) days of the
date Celsius received written notification of the transfer(s) of interest.
<PAGE>
23
At such time as a Prospect Proposal is made and the Parties make their
respective participation elections, the lands subject to such Prospect
shall be made subject to a Joint Operating Agreement covering the lands in
that Prospect utilizing the form provided for herein. The Party named as
Operator under such Joint Operating Agreement shall assume all
responsibilities of the Operator specified therein, subject to the terms
hereof. Any third party joining in a Farmout pursuant to Section 7.2 above
shall become a party to the Operating Agreement to the extent of its
Farmout interest in the subject Prospect Area.
11.1 Form of Operating Agreement All drilling and producing operations
---------------------------
conducted within the AMI shall be performed pursuant to the terms and
conditions of a Joint Operating Agreement in the form attached hereto
as Exhibit "D" and by this reference made a part hereof. The terms and
provisions of the Joint Operating Agreement shall be in full force and
effect as to all operations conducted thereunder, including the
drilling of any Initial Test Well or Substitute Well covered thereby,
except to the extent any specific provision contained in this
Agreement conflicts with a provision of the Joint Operating Agreement,
the terms and provisions of this Agreement shall prevail.
11.2 AMI Lease Acquisitions and Maintenance Operations:
--------------------------------------------------
Sunset or its designee shall act as the party responsible for the
acquisition and maintenance of the joint leasehold interests within
the Contract Area. In such role, Sunset shall use its good faith
efforts to supervise and conduct all such activities, including the
payment of lease delay rentals, shut-in royalties, minimum royalties
and other payments necessary to maintain the joint leasehold interests
within the Contract Area for the benefit of the other Parties.
<PAGE>
24
Sunset shall obtain the approval of all working interest owners prior
to making any subsequent lease rental payments. Any party not desiring
to pay its' share of a subsequent lease rental shall assign all of its
interest in the lease, without reimbursement of prior costs incurred,
subject only to original lease burdens, to those Parties that do elect
to maintain the lease.
12. TERM OF THE AGREEMENT:
---------------------
This Agreement shall remain in force and effect for the life of any leases
jointly owned or acquired hereunder. If the license and the final processed
volume of the 3-D data called for in Section 4 above is not obtained by
Vaughan and/or Sunset on or before May 31, 1999, Celsius shall have the
option to require the termination of this Agreement or grant an extension
of time sufficient in its sole opinion, to permit acquisition of such data
license. If the Agreement is so terminated, Celsius will be entitled to a
complete and full refund of all monies paid under paragraphs 1.3, 2 and 3
for leasehold costs and prospect fees. Said refund shall be paid in
certified funds on or before June 10, 1999 or on or before the expiration
of any extension granted by Celsius. In such event and upon receipt of the
refund, Celsius will reassign the previously conveyed leasehold interests
to Sunset and Vaughan without any burdens or encumbrances created by
Celsius, and the Parties shall have no further rights, remedies or
obligations to one another under this Agreement, except for any monetary
obligations that may have previously accrued.
13. INDEMNITIES:
-----------
All Parties participating in any operation within the Contract Area shall
indemnify, defend and hold harmless any non-participating Parties
("Indemnified Parties") and their officers, directors and employees from
and against any and all losses, claims, demands, liabilities or causes of
action of every kind and character, including costs of litigation,
attorneys' fees, without limit and without regard to the
<PAGE>
25
cause or causes thereof, in favor of any person or party, on account of
damage to property or on account of bodily injury or death, arising out of
or in any way connected with operations in which the Indemnified Parties do
not participate or have an interest (other than a royalty or reversionary
interest) under this Agreement. As to operations in which all Parties
hereto have an interest, the terms and conditions of the Joint Operating
Agreement covering such joint operations shall apply to any losses, claims,
demands, liabilities or causes of action arising from such joint
operations.
14. ASSIGNABILITY:
-------------
No Party hereto may assign its rights or obligations under this Agreement
without first obtaining the prior written consent of the other Parties,
which consent shall not be unreasonably withheld. Notwithstanding the
foregoing limit on the Parties' assignment of their rights and obligations
under this Agreement, the provisions of this Section shall not apply to a
transfer by either Party to an affiliate or subsidiary entity.
15. DEFAULT:
-------
In the event any Party hereto defaults (the "Defaulting Party") in the
timely and proper performance of any obligations or duties specified herein
(time being of the essence), the Non-Defaulting Parties shall give written
notice of such default to the Defaulting Party. If the matter giving rise
to the default is not remedied to the reasonable satisfaction of the non-
defaulting Parties within fifteen (15) days of notice, the non-defaulting
Parties shall, in addition to any other available remedies at law or in
equity, have the right to terminate this Agreement by giving written notice
thereof to the Defaulting Party. Upon such termination, the Defaulting
Party shall have no further rights or obligations hereunder, except as to
those rights and obligations (i) as may exist under a Joint Operating
Agreement executed
<PAGE>
26
by the Parties pursuant to this Agreement (ii) and as may exist under any
existing oil and gas lease.
16. CONFIDENTIALITY:
---------------
Except as otherwise required by law or as expressly permitted pursuant to
the terms and conditions of this Agreement and all Exhibits attached
hereto, the Parties hereto shall keep all data, information and opinions
provided to or developed by any Party or acquired by any Party pursuant to
the terms of this Agreement, including but not limited to any geological or
geophysical interpretations derived therefrom, completely confidential and
shall not reveal or discuss such data, information or interpretations with
any third party (other than such Party's agents, consultants,
representatives, affiliates and third parties which a Party hereto wishes
to interest in participating with a working interest in one or more
Prospects within the Contract Area provided that they first agree in
writing that such items be bound by this confidentiality provision) during
the term of this Agreement, except as may be required for good faith
disclosure required of publicly traded companies, without the prior express
written consent of the other Parties which consent shall not be
unreasonably withheld. Similarly, the parties hereto shall keep all aspects
of (i) this Agreement (other than the relationship created hereby); or (ii)
all prior written or verbal negotiations completely confidential and shall
not reveal or discuss any of the particulars thereof with any third party
(other than any Party's agents, consultants, representatives and
affiliates) without the prior express written consent of the other Parties.
The Parties agree that the provisions of this Section 16 shall survive
termination of this Agreement.
17. NOTICES:
-------
<PAGE>
27
All notices provided for herein shall be in writing and deemed delivered by
actual receipt when delivered in person, by First Class U.S. Mail, by
facsimile, or by overnight courier or service. All notices shall be sent
to the Parties at the addresses or facsimile numbers listed below:
CELSIUS ENERGY COMPANY SUNSET EXPLORATION, INC.
1331 Seventeenth Street, Suite 800 10500 Brentwood Blvd.
Denver, CO 80202 Brentwood, CA 94513
Attention: Mr. Steve Williams Attention: Robert E. Nunn
General Manager Telephone: 510-634-2148
Telephone: 303-672-6901 Facsimile: 510-634-6040
Facsimile: 303-294-9632
BOBSAC, LLC BROTHERS OIL & GAS
250 Newport Center Dr., Ste. 360 Box 31 Saturna Is.
Newport Beach, CA 92660 B.C. VON2Y0
Attention: Mr. Bob Teitsworth Attention: Mr. Al Sewell
Telephone: 949-493-5675 Telephone: 250-539-5680
Facsimile: 949-720-1910 Facsimile: 250-539-5680
VAUGHAN EXPLORATION, INC. PRODUCTION SPECIALTIES CO.
6611 Mt. Whitney Dr. P.O. Box 880
Bakersfield, CA 93309 Woodland, CA 95695
Attention: Mr. Jeffrey K. Vaughan Attention: Mr. Dero D. Parker, Jr
Telephone: 805-832-2001 Telephone: 530-668-5326
Facsimile: 805-832-0883 Facsimile: 530-668-5329
VAUGHAN PRODUCTION COMPANY
P.O. Box 458
Wilson, WY 83014
Attention: Mr. Dick Vaughan
Telephone: 307-733-0340
Facsimile: 307-733-9756
Any Party may, from time to time or at any time, (i) designate any other
person to receive any notice required by this Agreement or (ii) may change
the address at which it receives such notice by providing written notice of
such designation or change to the other Parties. Verbal messages delivered
directly or by voice mail shall not be deemed to be notice for the purposes
of this Section 17.
18. RELATIONSHIP OF THE PARTIES:
---------------------------
The Parties do not intend to create, nor shall this Agreement be construed
as creating, a mining or other partnership or association, nor does this
Agreement
<PAGE>
28
render the Parties hereto liable partners. The liability of the Parties
shall be several and not joint or collective.
19. FORCE MAJEURE:
--------------
As used herein, the phase "Force Majeure" means strike, lockout or other
industrial disturbance; act of the public enemy, war, blockade or riot;
lightning, fire, storm, flood or explosion; governmental action, inaction,
restraint or delay; unavailability of drilling rigs, seismic survey
equipment, other facilities or equipment or transportation therefore,
inability to obtain ingress or egress to conduct operations; or any other
cause, whether similar or dissimilar, which is not reasonably within the
control of the affected Party. If because of Force Majeure any Party hereto
is rendered unable, in whole or in part, to carry out its obligations under
this Agreement, other than obligations to pay money, the affected Party
shall give the other Parties hereto prompt notice describing the Force
Majeure situation in reasonable detail, whereupon the obligations of the
Party claiming Force Majeure shall be suspended during, and to the extent
prevented by, the Force Majeure. Any Party asserting an event of force
Majeure shall exercise all reasonable diligence to remove the cause of
Force Majeure, and further provided that if the period of suspension shall
extend beyond a one hundred eighty (180) day period and the affected party
still be precluded from performing its obligations under this Agreement,
then such failure to perform may be cause for the declaration of a default
under this Agreement with the specified remedies for such default
applicable thereto.
20. CHOICE OF LAW:
-------------
This Agreement and all instruments executed in accordance with it shall be
governed by and interpreted in accordance with the laws of the State of
California, without regard to conflict of law rules that would direct
application of the laws of
<PAGE>
29
another jurisdiction, except to the extent that it is mandatory that the
law of some other jurisdiction, wherein the assets are located, shall
apply.
21. LIMITATION ON LIABILITY:
-----------------------
IN NO EVENT SHALL ANY PARTY BE LIABLE TO THE OTHER PARTIES HERETO FOR ANY
SPECIAL, PUNITIVE, EXEMPLARY, CONSEQUENTIAL OR INCIDENTAL LOSSES OR DAMAGES
(IN TORT, CONTRACT OR OTHERWISE) UNDER OR IN RESPECT TO THIS AGREEMENT OR
FOR ANY FAILURE OF PERFORMANCE RELATED HERETO HOWSOEVER CAUSED, WHETHER OR
NOT ARISING FROM SUCH PARTIES SOLE, JOINT OR CONCURRENT NEGLIGENCE,
PROVIDED, HOWEVER, THAT NOTHING CONTAINED IN THIS PARAGRAPH 21 SHALL LIMIT
THE RIGHT OF ANY PARTY TO RECOVER ANY COMPENSATORY DAMAGES RESULTING FROM
THE BREACH OF THIS AGREEMENT.
22. ARBITRATION OF DISPUTES:
-----------------------
The Parties covenant with each other as follows:
22.1 Generally, any claim, controversy or dispute arising out of, relating
to or in connection with this Agreement or the agreements and transactions
contemplated hereby between the Parties, including the interpretation,
validity, termination or breach thereof, shall be resolved solely in
accordance with the Rules for Non-Administrative Arbitration of Business
Disputes published by the Center of Public Resources, Inc. ("Rules"). The
Parties covenant that they shall not resort to court remedies except for
preliminary relief in aid of arbitration.
22.2 VIOLATIONS:
-----------
A Party who violates the covenants in this Section 22 (including the Rules)
shall pay all the legal expenses incurred by the other Party in connection
with the enforcement thereof. Suits, actions or proceedings in connection
with violations
<PAGE>
30
of the covenants in this Section 22 (including the Rules) shall be
instituted in the District Court for the City and County of Denver,
Colorado. Each party waives any option or objection which it may now or
thereafter have to the laying of the venue in any such suit, action or
proceeding and irrevocably submits to the jurisdiction of such court in any
such suit, action or proceeding.
23. FAVORED NATIONS:
---------------
In the event any Party hereto, other than Celsius, is willing to assign all
or a portion of its interest to a third party prior to the completion of
the first Initial Test Well drilled by the Parties in the Contract Area,
under terms that are more favorable, in Celsius'opinion, than the terms set
forth herein for Celsius' participation, Celsius will be entitled to
participate under said more favorable terms in lieu of the terms set forth
herein and the appropriate refunds and modifications to the Agreement will
be timely made.
24. ENTIRE AGREEMENT:
----------------
This Agreement contains the entire agreement between the Parties and
supersedes all previous agreements or communications between the Parties,
verbal or written, with regard to the subject matter of this Agreement. In
the event of a conflict between this Agreement and the Joint Operating
Agreement, or any other Exhibit attached hereto, the terms of this
Agreement shall prevail. No amendment, modification or alteration of the
terms and conditions contained herein shall have any force or affect unless
made in writing and executed by the Parties hereto.
25. COUNTERPART EXECUTION:
---------------------
This Agreement may be executed by signing the original or a counterpart
thereof. If this Agreement is executed in counterparts, all counterparts
taken together shall have the same effect as if all the Parties signed the
same instruments.
<PAGE>
31
IN WITNESS WHEREOF, this Agreement is executed and effective as of the date
hereinabove provided.
CELSIUS ENERGY COMPANY
By:___________________________________
G. L. Nordloh President & CEO
SUNSET EXPLORATION, INC.
By:___________________________________
BOBSAC, LLC
By: /s/ Richard Atkinson
----------------------------------
BROTHERS OIL & GAS
By: ___________________________________
VAUGHAN EXPLORATION, INC.
By:____________________________________
PRODUCTION SPECIALTIES COMPANY
By:____________________________________
VAUGHAN PRODUCTION COMPANY
By:____________________________________
<PAGE>
32
EXHIBIT "A"
Attached to and made a part of that certain Exploration Agreement dated December
1, 1998 by and between Production Specialties Company as Operator and Celsius
Energy Company, Vaughan Exploration Inc., Sunset Exploration, BOBSAC, LLC,
Brothers Oil & Gas Inc., and Vaughan Production Company as Non-Operators.
AMI Area, Solano County, California
The Legal Description of the Property is as follows:
- ----------------------------------------------------
Township 5 North, Range 1 East: Sections 1-29, 32-36
Township 6 North, Range 1 East: Sections 4-9, 16-22, 26-35
Township 6 North, Range 1 West: Sections 1, 11-14, 23-26, 36
<PAGE>
33
<TABLE>
<CAPTION>
EXHIBIT "B"
- -----------------------------------------------------------------------------------------------------------------------------------
LEASE DATE GROSS % NET TOTAL
LESSOR TERM DESCRIPTION ACRES INTEREST ACRES BONUS PAY ORRI
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LEON C BUFORD, TRUST ET AL 7-27-98 T5N-R1E 146.17 146.17
-------
T-16 5 yr Sec. 23: NW (except M&B)
LAMOYNE DALLY ET AL 8-14-98 T6N - R1E 87.79 87.79
T-67 5 yr Sec. 18: SE1/4 (except M&B)
RULON HATCH TRUST 9-3-98 T6N - R1E 63.77 50% 31.885 $ 478.28
---------
T-64b 5 yr Sec. 31: N1/2 SW1/4
(except M&B)
LAURENCE OLSEN JR ET AL 9-15-98 T6N - R1E 291.44 100% 291.44 $3,867.00
---------
T-62 5 yr Sec. 32: S1/2 (except M&B)
RUDOLFO LOZANO ET AL 9-20-98 T6N - R1E 257.80 100% 257.80 $3,867.00
---------
T-34 5 yr Sec. 19: SE
Sec. 30: NE
(except M&B)
DONALD M. MORIEL, ET UX 7-30-98 T5N - R1E 319.83 19.23076% 61.506 $ 922.59
T-14c 5 yr Sec. 2: E1/2
BROCK TRUST 10-30-98 T6N - R1E 40.00 100% 40.00 $ 600.00
---------
T-84 5 yr Sec. 20: M&B In SE1/4 S 1/4
Sec. 29: M&B In NE1/4 NE 1/4
EDWARD L. FRY 10-14-98 T6N - R1E 68.613 100% 68.613 $1,029.20
---------
T-32 5 yr Sec. 28: The east 70 acres
of the NW 1/4 (except M&B)
WILLIAM HOLDENER ET AL 9-23-98 T6N - R1E 116.74 77.585 $1,163.76
---------
T-45 5 yr Sec. 7: N1/2 NW1/4 50%
Sec. 19: NW1/4 (meles & bounds) 100%
</TABLE>
<PAGE>
34
EXHIBIT "B"
<TABLE>
<CAPTION>
- ------------------------------------------------------------------------------------------------------------------------------------
LEASE DATE GROSS % NET
LESSOR TERM DESCRIPTION ACRES INTEREST ACRES
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
ESTATE OF KATRINA D. GLIDE ET AL 6-15-98 T5N-R1E 1120.60 100% 1120.00
-------
T C/G 5 yr Sec. 21: All
Sec. 22: W1/2, NE1/4
MUZZY FARMS (Frank J. Andrews Jr. et al) 6-1-98 T5N-R1W. M.D.B.M. 4592.00 100% 4592.00
-----------------
TT-P-1 270 days Sec. 1: S 60 Acres of the SE 1/4 SW
Sec. 12: E1/2, NW 1/4
SEISMIC OPTION T5N-R1E M.D.B.M.
----------------
Sec. 5: W1/2
Sec. 6: All
Sec. 7: All
Sec. 8: All
Sec. 16: All
Sec. 17: All
Sec. 20: N1/2
(less meles & bounds)
DETERDING ET AL - SEISMIC OPTION 10-1-98 T5N-R1E M.D.B.M. 2652.02 100% 2652.02
----------------
T1P-2 6 months Sec. 22: E1/2
Sec. 23: NE1/4, S1/2
Sec. 25: NE, W1/2
Sec. 26: N1/2
Sec. 27: All
Sec. 28: N1/2, SE1/4, E1/2SW
CAMPBELL RANCH 7-13-98 T5N-R1E 936.34 936.34
-------
T-18 5 yr Sec. 11: All (except M&B)
Sec. 14: N 1/2
DON HOLDENER 7-30-98 T5N-R1E 119.00 119.00
-------
T-27 5 yr Sec. 29: NE ( except M&B)
<CAPTION>
- ------------------------------------------------------------------------------------------------
LEASE DATE TOTAL
LESSOR TERM BONUS PAY ORRI
- ------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ESTATE OF KATRINA D. GLIDE ET AL 6-15-98 $33,600.00 20% 2%
T C/G 5 yr
MUZZY FARMS (Frank J. Andrews Jr. et al) 6-1-98 $22,196.23 18.50% 2%
TT-P-1 270 days
SEISMIC OPTION
DETERDING ET AL - SEISMIC OPTION 10-1-98 20% 2%
T1P-2 6 months
CAMPBELL RANCH 7-13-98 pooling
T-18 5 yr
DON HOLDENER 7-30-98
T-27 5 yr
</TABLE>
<PAGE>
35
<TABLE>
<CAPTION>
EXHIBIT "B"
- -----------------------------------------------------------------------------------------------------------------------------------
LEASE DATE GROSS % NET TOTAL
LESSOR TERM DESCRIPTION ACRES INTEREST ACRES BONUS PAY ORRI
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
JAM SECURITIES COMPANY 11-3-98 T5N-R1E 1079.20 50% 539.56 $8,093.40 20% 2%
-------
T-4 5 yr Sec. 1: S1/2 (except M&B)
Sec. 12: All (except M&B)
Sec. 13: NE1/4 (except M&B)
ROBERT W. LARNER ET UX 7-30-98 T5N-R1E 319.83 19.23076% 61.506 $ 922.50 500%
-------
T-14b 5 yr Sec. 2: E1/2
JOHN LAUCK ET UX 11-10-98 T6N-R1E 39.22 100% 39.22 $ 588.30 16.67% 2%
-------
T-44 5 yr Sec. 7: S1/2N1/2
(less M&B)
LYNN SEAL, TRUSTEE 10-15-98 T5N-R1E 1177.705 33.333333% 392.56833 $5,888.53
T-10a 5 yr Sec. 32: S1/2
Sec. 9: S1/2
Sec. 15: All
Sec. 6: All
T6N-R1E
-------
Sec. 18: S1/2
LYNN SEAL ET VIR 10-15-98 T6N-R1E 183.96 parcel 1,2 2% 35.66225 $ 534.93
-------
T-10b 5 yr Sec. 18: S1/2 parcel 3 18%
Sec. 32: N1/2 parcel 4 12.5%
Sec. 19: N1/2, W1/2
LYNN SEAL 10-15-98 T6N-R1E 37.05 16.840% 6.7116 $ 100.67
-------
T-10c 5 yr Sec. 19: N1/2, W1/2 parcel 1
</TABLE>
<PAGE>
36
<TABLE>
<CAPTION>
EXHIBIT "B"
- ----------------------------------------------------------------------------------------------------------------------------------
LEASE DATE GROSS % NET TOTAL
LESSOR TERM DESCRIPTION ACRES INTEREST ACRES BONUS PAY ORRI
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
GAYNEL MOONEY ET VIR 10-15-98 T6N-R1E 183.96 Parcel 1,2 2: 35.66225 $ 534.93
T-10d 5 yr Sec. 18: S1/2 Parcel 3 18%
Sec. 32: N1/2 Parcel 4 12.5%
Sec. 19: N1/2, POR, W1/2
GAYNEL MOONEY 10-15-98 T6N-R1E 39.95 4.2% 1.6779 $ 25.17
T-10e 5 yr Sec. 19: N1/2
WILLIAM DALLY ET UX 10-15-98 T6N-R1E 183.96 Parcel 1,2 2: 35.66225 $ 534.93
-------
T-10f 5 yr Sec. 18: S1/2 Parcel 3 18%
Sec. 19: N1/2, W1/2 Parcel 4 12.5%
Sec. 32: N1/2
JAMES WALLACE 10-15-98 T6N-R1E 1237.955 16.666666% 206.32582 $3,094.89
T-10i 5 yr Sec. 19: N1/2, POR W1/2
Sec. 18: S1/2
T5N-R1E
Sec. 15:
Sec. 13: S1/2
Sec. 9:
ALEXANDER GOMEZ ET AL 11-24-98 T5N-R1E 40.23 100% 40.23 $ 804.60
T-20 5 yr Sec. 5:
ROBERT ROGERS ET UX 12-2-98 T5N-R1E 40.16 50% 20.08 $ 301.20
T-24b 5 yr Sec. 5:
MARY L. CHRISTIANSEN ET AL 10-14-98 T6N-R1E 90.00 33.333333% 90.00 $ 450.00
-------
T.33 5 yr Sec. 28:
</TABLE>
<PAGE>
37
<TABLE>
<CAPTION>
EXHIBIT "B"
- ---------------------------------------------------------------------------------------------------------------------------------
LEASE DATE GROSS % NET TOTAL
LESSOR TERM DESCRIPTION ACRES INTEREST ACRES BONUS PAY ORRI
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
RUDOLFO LOZANO ET AL 9-28-98 T6N-R1E 257.00 100% 257.00 $3,867.00
-------
T-34 5 yr Sec. 19: SE
Sec. 30: NE
(except M&B)
DONALD M. MORIEL, ET UX 7-30-98 T5N-R1E 319.83 19.23076% 61.506 $ 922.59
T-14c 5 yr Sec. 2: E1/2
BROCK TRUST 10-30-98 T6N-R1E 40.00 100% 40.00 $ 600.00
-------
T-84 5 yr Sec. 20: M&B In SE1/4S1/4
Sec. 29: M&B In NE1/4NE1/4
EDWARD L. FRY 10-14-98 T6N-R1E 60.613 100% 68.613 $1,029.20
-------
T-32 5 yr Sec. 28: The east 70 acres
of the NW 1/4 (except M&B)
WILLIAM HOLDENER ET AL 9-23-98 T6N-R1E 116.74 77.506 $1,163.78
-------
T-45 5 yr Sec. 7: N1/2NW1/4 50%
Sec. 19: NW1/4 (metes & bounds) 100%
JAM SECURITIES COMPANY 11-3-98 T5N-R1E 1079.20 50% 539.56 $8,093.40 20% 2%
-------
T-4 5 yr Sec. 1: S1/2 (except M&B)
Sec. 12: All (except M&B)
Sec. 13: NE1/4 (except M&B)
ROBERT W. LARNER ET UX 7-30-98 T5N-R1E 319.83 19.23076% 61.506 $ 922.59 500%
-------
T-14b 5 yr Sec. 2: E1/2
JOHN LAUCK ET UX 11-10-98 T6N-R1E 39.22 100% 39.22 $ 588.30 16.67% 2%
-------
T-44 5 yr Sec. 7: S1/2N1/2
(less M&B)
</TABLE>
<PAGE>
38
<TABLE>
<CAPTION>
EXHIBIT "B"
- ---------------------------------------------------------------------------------------------------------------------------------
LEASE DATE GROSS % NET TOTAL
LESSOR TERM DESCRIPTION ACRES INTEREST ACRES BONUS PAY ORRI
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LYNN SEAL, TRUSTEE 10-15-98 T5N-R1E 1177.705 33.333333% 392.56833 $5,888.53
T-10a 5 yr Sec. 32: S1/2
Sec. 9: S1/2
Sec. 15: All
Sec. 6: All
T6N-R1E
-------
Sec. 18: S1/2
LYNN SEAL ET VIR 10-15-98 T6N-R1E 183.96 Parcel 1,2 2: 35.66225 $ 534.93
-------
T-10b 5 yr Sec. 18: S1/2 Parcel 3 18%
Sec. 32: N1/2 Parcel 4 12.5%
Sec. 19: N1/2, W1/2
LYNN SEAL 10-15-98 T6N-R1E 37.05 16.840% 6.7116 $ 100.67
-------
T-10c 5 yr Sec. 19: N1/2, W1/2 Parcel 1
GAYNEL MOONEY ET VIR 10-15-98 T6N-R1E 183.96 Parcel 1,2 2: 35.66225 $ 534.93
T-10d 5 yr Sec. 10: S1/2 Parcel 3 18%
Sec. 32: N1/2 Parcel 4 12.5%
Sec. 19: N1/2, POR, W1/2
GAYNEL MOONEY 10-15-98 T6N-R1E 39.95 4.2% 1.6779 $ 25.17
T-10e 5 yr Sec. 19: N1/2
WILLIAM DALLY ET UX 10-15-98 T6N-R1E 183.96 Parcel 1,2 2: 35.66225 $ 534.93
-------
T-10f 5 yr Sec. 18: S1/2 Parcel 3 18%
Sec. 19: N1/2, W1/2 Parcel 4 12.5%
Sec. 32: N1/2
</TABLE>
<PAGE>
39
<TABLE>
<CAPTION>
EXHIBIT "B"
- ----------------------------------------------------------------------------------------------------------------------------------
LEASE DATE GROSS % NET TOTAL
LESSOR TERM DESCRIPTION ACRES INTEREST ACRES BONUS PAY ORRI
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
JAMES WALLACE 10-15-98 T6N-R1E 1237.955 16.666666% 206.32582 $3,094.89 <C> <C>
T-10i 5 yr Sec. 19: N1/2, POR. W1/2
Sec. 18: S1/2
T5N-R1E
Sec. 15:
Sec. 13: S1/2
Sec. 9:
ALEXANDER GOMEZ ET AL 11-24-98 T5N-R1E 40.23 100% 40.23 $ 804.60
T-20 5 yr Sec. 5:
ROBERT ROGERS ET UX 12-2-98 TN5-R1E 40.1 50% 20.08 $ 301.20
T-24b 5 yr Sec. 5:
MARY L. CHRISTIANSEN ET AL 10-14-98 T6N-R1E 90.00 33.333333% 90.00 $ 450.00
-------
T-33 5 yr Sec. 28:
RUDOLFO LOZANO ET AL 9-28-98 T5N-R1E 257.00 100% 257.80
-------
T-34 5 yr Sec. 19: SE
Sec. 30: NE
(except M&B)
PAUL EVANKOFF ET AL 11-17-98 T6N-R1W 967.06 25% 241.765 $4,835.30
T-37a 5 yr Sec. 24: POR. SE 1/4
Sec. 25:
T6N-R1E
Sec. 19: POR. SW1/4
Sec. 30:
</TABLE>
<PAGE>
40
<TABLE>
<CAPTION>
EXHIBIT "B"
- ---------------------------------------------------------------------------------------------------------------------------------
LEASE DATE GROSS % NET TOTAL
LESSOR TERM DESCRIPTION ACRES INTEREST ACRES BONUS PAY ORRI
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
ANTHONY J ABREW ET AL 11-19-98 T6N-R1E 147.14 16.666666% 73.57 $ 980.94
T-38 5 yr Sec. 30:
BEVERLY BAWJEE LUM, TRUSTEE 11-23-98 T6N-R1E 70.00 25% 35.00 $ 700.00
T-56a 5 yr Sec. 20: POR. SW1/4
Sec. 20: POR. S1/2
Sec. 29: N1/2
ANNE CHRISTINE FRY 12-2-98 T6N-R1E 70.00 25% 17.50 $ 350.00
T-56b 5 yr Sec. 20:
Sec. 29:
BARBARA MCCUNE 11-23-98 T6N-R1E 115.00 50% 57.50 $1,150.00
T-65b 5 yr Sec. 33: N1/2
YOUNG TRUST 11-24-98 T6N-R1E 69.41 100% 69.41 $1,228.20
T-74 5 yr Sec. 18: S1/2
THOMAS GONG LUM 11-19-98 T6N-R1E 66.67 50% 66.87 $ 666.70
T-75 5 yr Sec. 10:
PEARL ROHRKE, TRUSTEE 11-13-98 T6N-R1E 214.66 37.5% 181.31 $1,813.10
T-78a 5 yr Sec. 19: N1/2
Sec. 18: S1/2
EDWARD FRY 11-23-98 T6N-R1E 70.86 100% 70.86 $1,062.90
T-94 5 yr Sec. 29: S1/2
GUY EDWARD GRAYSON 11-18-98 T5N-R1E 40.23 100% 40.23 $ 603.45
T-21 Sec. 5:
</TABLE>
<PAGE>
41
<TABLE>
<CAPTION>
EXHIBIT "B"
- -----------------------------------------------------------------------------------------------------------------------------------
LEASE DATE GROSS % NET TOTAL
LESSOR TERM DESCRIPTION ACRES INTEREST ACRES BONUS PAY ORRI
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
DEL YOUNG ET AL 11-19-98 T6N-R1E 349.05 77.8685 $3,498.53
T-39 Sec. 19: POR. SW 1/4
Sec. 13:
VIRGINIA MARCOTTE 12-1-98 T6N-R1E 73.79 100% 73.79 $1,844.75
T-31 5 yr
WELLS FARGO BANK 11-17-98 T5N-R1E 314.00 16.666666% 52.333333 $1,570.00
T-15d 5 yr Sec. 26
LOUIS LOCKREM ET UX 11-13-98 T6N-R1E 48.00 48.00
T-83 5 yr Sec. 20: M&B In SE1/4S1/4
Sec. 29:
JAMES I PLUNKETT ET AL 11-13-98 T5N-R1E 40.16 50% 40.16 $ 803.20
T-23 5 yr Sec. 5:
</TABLE>
<PAGE>
42
EXHIBIT "C"
-----------
ATTACHED TO AND MADE A PART OF THAT CERTAIN EXPLORATION AGREEMENT, TRAVIS
PROSPECT, SOLANO COUNTY, CALIFORNIA DATED DECEMBER 1, 1998, BY AND BETWEEN
CELSIUS ENERGY COMPANY AND VAUGHAN EXPLORATION, INC. ET AL.
DATE
_____________________________
_____________________________
_____________________________
ATTENTION:
RE: Farmout Agreement
_______________AREA
Solano County, California
Gentlemen:
Without expressing any warranty of title, either express or implied,
___________________ (hereinafter referred to as "Farmor"), is the owner of a
leasehold interest in and to the oil, gas and mineral lease or leases (which are
referred to in the singular herein whether one or more) described in Exhibit "A"
attached hereto and made a part hereof for all purposes. The described leases,
insofar as they cover lands particularly described therein, are hereinafter
referred to as "Farmout Acreage".
__________________________ (hereinafter referred to as "Farmee") has
expressed to representatives of Farmor its desire to acquire a part of the
interest of Farmor in Farmout Acreage for and in consideration of the
performance of certain operations subject to the terms and provisions
hereinafter set forth.
Subject to Farmee's acceptance and approval in the manner hereinafter
provided, Farmor proposes the following Agreement:
I. INITIAL TEST WELL
-----------------
In consideration of the promises and of the premises hereinafter set forth,
Farmee has the option and right to commence or cause to be commenced on or
before the ______ day of _______________, 199__, the actual drilling of a test
well (hereinafter "Exploratory Well") in search for oil and/or gas in the
__________ of Section ______, Township _________, Range __________, Sweetwater
County, Wyoming, and thereafter continue such drilling with due diligence and in
a workmanlike manner in accordance with good oil field practice until said
Exploratory Well has been drilled to a depth sufficient to adequately test the
_______ formation to a vertical depth of _________ feet, whichever is the
shallower depth.
II EARNINGS
--------
A. Upon completion of the Exploratory Well as a well capable of producing oil
and/or gas in paying quantities (as used herein, "paying quantities" shall mean
production in sufficient quantities to yield a profit after deducting the costs
of operating the well), in compliance with and subject to all conditions,
covenants, and agreements herein set forth and upon delivery of the well
information required herein and subject to the provisions of Article IV hereof,
Farmee shall own and be entitled to receive all of Farmor's working interest in
the Exploratory Well, the material and equipment appurtenant thereto, until
payout, reserving to Farmor free and clear of all cost and expense except
applicable taxes and processing, treating, gathering and transportation costs
which may be assessed against the same, an overriding royalty equal to the
difference between existing burdens and seventeen
<PAGE>
43
and one-half percent (17.5%) of 8/8ths, however, in no event less than two
percent (2%) of 8/8ths, proportionately reduced. In addition, in the event the
Exploratory Well is drilled to the required depth and is plugged and abandoned
as a dry hole or is completed as a well capable of producing oil and/or gas in
paying quantities in accordance with the provisions hereof Farmee will earn an
assignment of seventy percent (70%) of Farmor's right, title and interest in and
to the Farmout Acreage limited to those depths lying between the surface of the
earth to 100' below of the stratigraphic equivalent of the total depth drilled
in the Exploratory Well set out on Exhibit "A".
III. SUBSTITUTE WELL
---------------
Should Farmee fail to reach the objective depth in the Exploratory Well
drilled pursuant to the terms of this Farmout Agreement due to mechanical
difficulties or because of encountering conditions which are normally considered
in the industry to be impenetrable or which, in Farmee's opinion, would make
further drilling impractical by ordinary drilling methods, Farmee shall have the
right, within sixty (60) days after good faith discontinuance of operations of
the Exploratory Well, to commence actual drilling of a substitute well at the
location of Farmee's choice, but approved by Farmor, under all the terms and
conditions prescribed for the Exploratory Well. Such substitute well shall be
treated under this Agreement as the Exploratory Well for which it is
substituted.
IV. PAYOUT AND CONVERSION OF OVERRIDE
---------------------------------
A. After Farmee shall have been reimbursed from the "gross proceeds", as
hereinafter defined, derived from operations of the Exploratory Well for all of
the "chargeable expenses", as hereinafter defined incurred by Farmee in
drilling, completing and operating same, then it shall be considered said well
has "paid out". Accounting during the payout period shall be in accordance with
the provisions of the Accounting Procedure and the Operating Agreement
hereinafter provided for. During the payout period, Farmee shall submit to
Farmor, on or before the last day of each quarter, a monthly detailed statement
of the gross proceeds received and chargeable expenses incurred during the
preceding quarter. Said payout statement shall be furnished to:
At the time the Exploratory Well pays out, Farmee shall notify Farmor in writing
and Farmor shall have the right, exercisable within thirty (30) days after its
receipt of notice of payout, to notify Farmee in writing that Farmor elects to
exchange its overriding royalty interest reserved under Article II.A. above, if
any, for a proportionately reduced thirty percent (30%) working interest in the
Exploratory Well and any and all personal property, fixtures and equipment
associated with said well, burdened only with a proportionate part of all
presently existing overriding royalty and landowner royalty of record; provided,
however, in the event that Farmor shall fail to timely notify Farmee of its
election, same shall be deemed as Farmor's election to retain its overriding
royalty interest in the same assigned premises.
B. The election to exchange its overriding royalty interest to a working
interest by Farmor shall be confirmed by notice in writing to Farmee and such
exchange shall be effective on the day following the date of such payout.
Forthwith, following receipt by Farmee of notice of the election by Farmor to
make such an exchange, Farmee shall execute and deliver to Farmor an assignment
of a proportionately reduced undivided thirty percent (30%) interest in the
Exploratory Well and in any and all personal property, fixtures and equipment
associated with said well, as provided above, and Farmor shall execute an
appropriate instrument to extinguish its overriding royalty interest.
V. ASSUMPTION OF LEASE OBLIGATIONS
-------------------------------
It is understood and agreed that on and after the date of this Agreement,
Farmee shall comply with all covenants and conditions of said Farmout Acreage
and will all applicable laws, rules and regulations, provided that:
<PAGE>
44
(1) Farmor agrees to pay any delay rentals, shut-in royalty payments which may
become due pursuant to the Farmout Acreage during the term of this
Agreement, and Farmee shall promptly reimburse Farmor for seventy percent
(70%) of Farmee's share of such payments within thirty (30) days after
receipt of Farmor's billing. This provision shall not render Farmor liable
for inadvertent failure to pay properly or timely such rentals or payments.
(2) Farmee shall notify Farmor before shutting-in any gas well drilled on lands
covered by this Agreement or pooled therewith whether shut-in occurs before
or after initial production from said well.
VI. JOINT OPERATING AGREEMENT
--------------------------
It is further understood and agreed that the joint operations conducted on
Farmout Acreage or lands pooled therewith, shall be conducted pursuant to the
terms of the Operating Agreement attached as Exhibit "D" to the Exploration
Agreement, dated December 1, 1998, covering the Travis Area in Solano County,
California. Except for those operations specifically described herein, any joint
operations between Farmor and Farmee conducted on the Farmout Acreage or lands
pooled therewith are subject to the terms of the Operating Agreement. In the
event a subsequent well is proposed in the drilling and spacing unit for the
Exploratory Well drilled hereunder or lands pooled therewith prior to payout of
the Exploratory Well as defined herein, said subsequent well or wells shall be
drilled as though the Exploratory Well has paid out and Farmor has elected to
convert its overriding royalty interest to a working interest. Should there be a
conflict between this Farmout Agreement including any Exhibits hereto and the
Operating Agreement provided for hereinabove the former and not the latter shall
prevail.
VII. TESTING
-------
Farmee agrees to keep an accurate log of the Exploratory Well, to drill the
same in a good faith effort to discover oil or gas, and to adequately test all
oil and gas shows encountered in the formations generally considered by the
industry to have the potential for commercial production in the general area of
the Farmout Acreage. You will specifically comply with all requirements set out
in Exhibit "B" entitled "Geological Requirements and Distribution" attached
hereto and made part hereof for all purposes and deliver to Farmor copies of all
such well information. Farmor, its employees and representatives, shall at all
times have full and complete access, at Farmor's sole risk and liability, to
said location, well and derrick floor of the Exploratory Well drilled in
accordance with this Agreement.
VIII. INDEMNIFICATION
---------------
Farmee agrees to protect, indemnify and save Farmor harmless from all
losses, costs, claims, demands, expenses, damages, liabilities, suits, actions,
judgments and decrees in anyway growing out of or attributable to or resulting
from the breach or violation of the laws of the state in which operations are
conducted hereunder or rules or regulations of any legislative, judicial or
regulatory body, State or Federal, exercising jurisdiction of operations
hereunder on Farmout Acreage, or arising out of or resulting from any act or
omission in connection with operations conducted by or on behalf of Farmee under
this Agreement. In addition, at all times while Farmee shall have the right to
conduct any operations hereunder on Farmout Acreage or lands pooled therewith,
Farmee agrees to comply with the insurance provisions set forth in the Operating
Agreement. The Exploratory Well drilled hereunder shall be timely and properly
commenced and completed as a producer or shall be plugged and abandoned as a dry
hole. All such drilling completing plugging and abandoning shall be at Farmee's
sole cost, risk and expense.
IX. INSURANCE
----------
Farmee shall procure and maintain the following insurance until such time,
if ever, the Joint Operating Agreement referenced in Article VI hereof comes
into effect.
<PAGE>
45
(1) a. Worker's Compensation Insurance granting full compensation under the
Worker's Compensation Law of the State in which the Contract Area is
located, and Employer's Liability Insurance with limits of
$1,000,000.00 for all of Farmee's employees engaged in work for the
Joint Account.
b. Comprehensive General Liability Insurance, with a combined single
limit of $2,000,000.00 each occurrence for bodily injury and property
damage. Such insurance shall be extended to cover products and
completed operations, and broad form contractual liability as respects
any contract into which the Farmee may enter under the terms of
Agreement.
c. Automobile Insurance covering all motor vehicles, owned and non-owned,
operated and/or licensed by the Farmee, with a bodily injury, death
and property damage limit of $1,000,000.00 inclusive.
(2) If so requested by Farmor, the Farmee shall furnish evidence of the above
coverages. Farmee may elect to self insure by advising Farmor in writing.
(3) Any accidental loss of or damage to, joint property and any liability to
third parties or each other for bodily injury or property damage arising
out of the operations performed by and on behalf of the parties, in excess
of, or in addition to the insurance maintained for the Joint Account shall
be borne individually by said parties, in proportion to their respective
percentage of interest. The cost of such insurance as each individual party
may carry to cover said party's proportionate share of any such loss or
liability is not chargeable to the Joint Account.
No recitation herein of any amount or amounts shall, however, be constructed in
any manner to limit Farmee's liability to indemnify Farmor as provided in
Paragraph VIII hereof.
X. ASSIGNMENTS
-----------
A. It is understood and agreed that any assignments to be made by Farmor
to Farmee pursuant to the provisions of this Agreement shall be made without
warranty of title, either express or implied, it being understood that Farmee
shall satisfy itself as to the title to said Farmout Acreage by Farmees own
independent examination.
B. It is expressly understood that the terms of this Agreement shall be
binding upon the parties hereto, their heirs, successors and assigns, provided,
however, that this Agreement shall not be assigned by Farmee without first
obtaining Farmor's written consent thereto, which consent shall be unreasonably
withheld.
C. In the event the interest conveyed to Farmee should cover less than
the entire leasehold interest, the overriding royalty and converted working
interest referred to herein shall be subject to proportionate reduction.
D. Should Farmee at any time elect to surrender its interest in Farmout
Acreage or any part thereof, either by execution of a release thereof, or by
election to not pay delay rentals, or by abandonment of operations thereon,
Farmee shall give Farmor written notice of Farmee's intentions at least sixty
(60) days before the date of such surrender. Farmee further agrees to assign to
Farmor, free of any liens or encumbrances by, through, or under Farmee, all of
its interest in such Farmout Acreage or part thereof and wells thereon which
Farmor elects to take by its written notice mailed or delivered to Farmee within
thirty (30) days after Farmor's receipt of Farmee's notice, provided that Farmor
shall pay to Farmee the fair market value of any material and equipment in, on
or used with such assigned Farmout Acreage premises less estimated costs of its
salvage.
E. Any assignment made by Farmee to Farmor pursuant to Paragraph IV
hereinabove, shall be free and clear of any liens or encumbrances created by
Farmee as to the lands covered thereby.
F. Farmor's overriding royalty interest and the working interest to which
Farmor may elect to convert such overriding royalty interest shall remain free
and clear of all liens, claims or
<PAGE>
46
encumbrances arising by, through or under Farmee. Farmor's working interest
shall, at the time of Farmor's conversion of its overriding royalty interest be
free and clear of any gas purchase/sale agreement dedications or commitments
involving the Farmout Acreage and made by Farmee, it being expressly agreed by
the parties hereto that this Farmout Agreement conveys no rights, powers or
authority to Farmee to in any way encumber or burden Farmor's overriding royalty
interest or to dedicate or commit such overriding royalty interest to any
contract which would affect or limit Farmor's right to freely dispose of all
production attributable to the working interest at the time that Farmor converts
its overriding royalty interest to the working interest, all such rights, powers
and authority being hereby expressly excepted and reserved from this Farmout
Agreement.
XI. NOTICES
-------
Except as otherwise herein provided, all notices and communications to be
given under the terms hereof shall be given by certified letter or fax addressed
to the respective parties as follows:
XII. ABANDONMENT OF WELLS
--------------------
Prior to Farmee abandoning the Exploratory Well on the Farmout Acreage
hereunder, Farmor shall have the right within twenty-four (24) hours after
receipt of a log and notice of Farmee's intention to so abandon, to take over
the well for additional testing by any method, or for deepening, with Farmor
being solely responsible for all costs and expenses in connection therewith,
including standby rig time, if required. If the well is taken over by Farmor for
the purpose expressed above, and such work results in a completion attempt
wherein a well capable of producing in paying quantities is encountered, all of
Farmee's rights in such well and in and to the drillsite spacing unit for such
well, shall automatically revert to Farmor effective as to the date of takeover
and Farmee shall execute and deliver to Farmor recordable assignment evidencing
such reversion; provided that Farmor agrees to pay Farmee the reasonable salvage
value of any salvageable material in the hole which Farmee has contributed.
If the above completion attempt results in a dry hole, Farmor agrees to plug
and abandon the well at its sole cost, risk and expense, and Farmee's rights
hereunder shall remain in full force and effect.
XIII. DEFINITIONS
-----------
"Chargeable Expenses" as used herein shall include all of the cost and
-------------------
expense of every nature incurred by Farmee in connection with permitting, title
opinions, drilling, coring, testing, completing, equipping and operating the
earning well up to the time of recoupment of the aforesaid costs and expenses.
The term "Chargeable Expenses" also includes all costs and expenses incurred, up
to the point of recoupment of the aforesaid costs and expenses, with respect to
storage, shipment and marketing of all hydrocarbons produced from the earning
well, and all royalties, presently existing overriding royalties (including the
overriding royalty interest to be reserved hereunder), gross production taxes,
windfall profit taxes, severance taxes and any other applicable taxes paid on
such hydrocarbon production and the equipment used in conjunction with such
production. Chargeable Expenses shall be reduced proportionately if the Farmout
Acreage is pooled or unitized with any other lands and/or leases or if Farmor's
interest in the Farmout Acreage effects less than 100% of the oil and gas
mineral estate.
"Gross Proceeds" as used herein shall include the value of all oil, gas and
--------------
other minerals produced, sold or removed from said drillsite tract, together
with the fair market value of any material salvaged, sold or removed from the
Exploratory Well. Gross proceeds shall be reduced proportionately if the Farmout
Acreage is pooled or unitized with any other lands or leases or if Farmor's
interest in the Farmout Acreage affects less than 100% of the oil and gas
mineral estate.
XIV. COST AND TERM
-------------
A. The Exploratory Well shall be drilled, tested and completed for
production, or if dry, plugged and abandoned and the premises restored, at
Farmee's sole cost, risk, liability and expense, and Farmor shall never be
liable for any such cost, risk, liability or expense. Completion means a well
<PAGE>
47
equipped to produce, if capable, or a shut-in gas well, or a well plugged and
abandoned in compliance with applicable laws and regulations, if a dry hole,
within forty-five (45) days from drilling rig release of the respective well.
B. Notwithstanding anything to the contrary herein contained, in the
event Farmee fails to timely drill the Exploratory Well to the objective depth
as herein provided or to timely complete said well, the only consequence thereof
shall be the termination of this Agreement and Farmee's loss of the right to
earn any interest hereunder.
XV. TAX PARTNERSHIP ELECTIONS
-------------------------
The parties hereto hereby agree to and hereby do elect under the authority
of Section 761 (a) of the Internal Revenue Code of operations hereunder be
excluded from the application of any and all the provisions of Subchapter K of
Chapter 1 of Subtitle A of the Internal Revenue Code of 1986, as amended, and
each of the parties hereto agrees to execute whatever instruments as may be
required to affect this intent.
XVI. OTHER PROVISIONS
----------------
A. The section headings herein are for convenience only and shall not be
considered or construed to limit the subject matter of any section.
B. Farmee shall furnish Farmor one copy of all title opinions or division
order title opinions which Farmee might have written in regard hereto.
Yours very truly,
______________________________
______________________________
______________________________
AGREED TO AND ACCEPTED THIS _______DAY OF _________________________, 1998.
______________________________________
By: __________________________________
Title: _______________________________
<PAGE>
48
EXHIBIT " D"
Attached to and made a part of that certain Exploration Agreement dated December
--------------------------------------------
1, 1998, by and between and Celsius Energy Company, Vaughan Exploration, Inc.,
- ------------------------------------------------------------------------------
Sunset Exploration, Inc., BOBSAC, LLC., Brothers Oil & Gas, Production
- ----------------------------------------------------------------------
Specialties Company and Vaughan Production Company.
- --------------------------------------------------
A.A.P.L. FORM 610-1982
MODEL FORM OPERATING AGREEMENT
OPERATING AGREEMENT
DATED
_____________, _______ ,
year
OPERATOR _______________________________________________________________________
CONTRACT AREA __________________________________________________________________
________________________________________________________________________________
________________________________________________________________________________
COUNTY OR PARISH OF _____________________________ STATE OF ____________________
COPYRIGHT 1982 - ALL RIGHTS RESERVED
AMERICAN ASSOCIATION OF PETROLEUM
LANDMEN, 4100 FOSSIL CREEK BLVD., FORT
WORTH, TEXAS, 76137-2791, APPROVED FORM.
A.A.P.L. NO. 610 - 1982 REVISED
<PAGE>
49
TABLE OF CONTENTS
-----------------
<TABLE>
<CAPTION>
Article Title Page
- ------- ----- ----
<S> <C>
I. DEFINITIONS.............................................................. 50
-----------
II. EXHIBITS................................................................. 50
--------
III. INTERESTS OF PARTIES..................................................... 51
--------------------
A. OIL AND GAS INTERESTS................................................. 51
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION.......................... 51
C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS............. 51
D. SUBSEQUENTLY CREATED INTERESTS........................................ 51
IV. TITLES................................................................... 51
------
A. TITLE EXAMINATION..................................................... 51-52
B. LOSS OF TITLE......................................................... 52
1. Failure of Title................................................... 52
2. Loss by Non-Payment or Erroneous Payment of Amount Due............. 52
3. Other Losses....................................................... 52
V. OPERATOR................................................................. 53
--------
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR.......................... 53
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR......... 53
1. Resignation or Removal of Operator................................. 53
2. Selection of Successor Operator.................................... 53
C. EMPLOYEES............................................................. 53
D. DRILLING CONTRACTS.................................................... 53
VI. DRILLING AND DEVELOPMENT................................................. 53
------------------------
A. INITIAL WELL.......................................................... 53-54
B. SUBSEQUENT OPERATIONS................................................. 54
1. Proposed Operations................................................ 54
2. Operations by Less than All Parties................................ 54-55-56
3. Stand-By Time...................................................... 56
4. Sidetracking....................................................... 56
C. TAKING PRODUCTION IN KIND............................................. 56
D. ACCESS TO CONTRACT AREA AND INFORMATION............................... 57
E. ABANDONMENT OF WELLS.................................................. 57
1. Abandonment of Dry Holes........................................... 57
2. Abandonment of Wells that have Produced............................ 57-58
3. Abandonment of Non-Consent Operations.............................. 58
VII. EXPENDITURES AND LIABILITY OF PARTIES.................................... 58
-------------------------------------
A. LIABILITY OF PARTIES.................................................. 58
B. LIENS AND PAYMENT DEFAULTS............................................ 58
C. PAYMENTS AND ACCOUNTING............................................... 58
D. LIMITATION OF EXPENDITURES............................................ 58-59
1. Drill or Deepen.................................................... 58-59
2. Rework or Plug Back................................................ 59
3. Other Operations................................................... 59
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES.................. 59
F. TAXES................................................................. 59
G. INSURANCE............................................................. 60
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST......................... 60
------------------------------------------------
A. SURRENDER OF LEASES................................................... 60
B. RENEWAL OR EXTENSION OF LEASES........................................ 60
C. ACREAGE OR CASH CONTRIBUTIONS......................................... 60-61
D. MAINTENANCE OF UNIFORM INTEREST....................................... 61
E. WAIVER OF RIGHTS TO PARTITION......................................... 61
F. NOTICE OF SALE........................................................ 61
IX. INTERNAL REVENUE CODE ELECTION........................................... 61
------------------------------
X. CLAIMS AND LAWSUITS...................................................... 62
-------------------
XI. FORCE MAJEURE............................................................ 62
-------------
XII. NOTICES.................................................................. 62
-------
XIII. TERM OF AGREEMENT........................................................ 62
-----------------
XIV. COMPLIANCE WITH LAWS AND REGULATIONS..................................... 63
------------------------------------
A. LAWS, REGULATIONS AND ORDERS.......................................... 63
B. GOVERNING LAW......................................................... 63
C. REGULATORY AGENCIES................................................... 63
XV. OTHER PROVISIONS......................................................... 63-64-65
----------------
XVI. MISCELLANEOUS............................................................ 65
-------------
</TABLE>
<PAGE>
50
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between Production Specialties Company
*
- -------------------------------------------------, hereinafter designated and
referred to as "Operator", and the signatory party or parties other than
Operator, sometimes hereinafter referred to individually herein as "Non-
Operator", and collectively as "Non-Operators".
WITNESSETH:
WHEREAS, the parties to this agreement are owners of oil and gas leases
and/or oil and gas interests in the land identified in Exhibit "A", and the
parties hereto have reached an agreement to explore and develop these leases
and/or oil and gas interests for the production of oil and gas to the extent and
as hereinafter provided,
NOW, THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the
meanings here ascribed to them:
A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas
condensate, and all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is specifically stated.
B. The terms "oil and gas lease", "lease" and "leasehold" shall mean the
oil and gas leases covering tracts of land lying within the Contract Area which
are owned by the parties to this agreement. / including farm-ins & other
contract rights in & to such leases.
C. The term "oil and gas interests" shall mean unleased fee and mineral
interests in tracts of land lying within the Contract Area which are owned by
parties to this agreement.
D. The term "Contract Area" shall mean all of the lands, oil and gas
leasehold interests and oil and gas interests intended to be developed and
operated for oil and gas purposes under this agreement. Such lands, oil and gas
leasehold interests and oil and gas interests are described in Exhibit "A".
E. The term "drilling unit" shall mean the area fixed for the drilling of
one well by order or rule of any state or federal body having authority. If a
drilling unit is not fixed by any such rule or order, a drilling unit shall be
the drilling unit as established by the pattern of drilling in the Contract
Area or as fixed by express agreement of the Drilling Parties.
F. The term "drillsite" shall mean the oil and gas lease or interest on
which a proposed well is to be located.
G. The terms "Drilling Party" and "Consenting Party" shall mean a party who
agrees to join in and pay its share of the cost of any operation conducted under
the provisions of this agreement.
H. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a
party who elects not to participate in a proposed operation.
Unless the context otherwise clearly indicates, words used in the singular
include the plural, the plural includes the singular, and the neuter gender
includes the masculine and the feminine.
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
[X] A. Exhibit "A", shall include the following information:
(1) Identification of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Percentages or fractional interests of parties to this agreement,
(4) Oil and gas leases and/or oil and gas interests subject to this
agreement,
(5) Addresses of parties for notice purposes.
[X] C. Exhibit "C", Accounting Procedure.
[X] D. Exhibit "D", Insurance.
[X] E. Exhibit "E", Gas Balancing Agreement.
[X] F. Exhibit "F", Non-Discrimination and Certification of Non-Segregated
Facilities.
If any provision of any exhibit, except Exhibits "E" and "G", is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail. * Subject to the
provisions of Article XV.J hereof.
<PAGE>
51
ARTICLE III.
INTERESTS OF PARTIES
A. Oil and Gas Interests:
If any party owns an oil and gas interest in the Contract Area, that
interest shall be treated for all purposes of this agreement and during the term
hereof as if it were covered by the form of oil and gas lease attached hereto as
Exhibit "B", and the owner thereof shall be deemed to own both the royalty
interest reserved in such lease and the interest of the lessee thereunder.
B. Interests of Parties in Costs and Production:
Unless changed by other provisions, all costs and liabilities incurred in
operations under this agreement shall be borne and paid, and all equipment and
materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit "A". In the same manner, the
parties shall also own all production of oil and gas from the Contract Area
subject to the basic * payment of / royalties to the extent of *
---------------
which shall be borne as-hereinafter set forth.
Regardless of which party has contributed the lease(s) and/or oil and gas
interest(s) hereto on which royalty is due and payable, each party entitled to
receive a share of production of oil and gas from the Contract Area shall bear
and shall pay or deliver, or cause to be paid or delivered, to the extent of its
interest in such production, the royalty amount stipulated hereinabove and shall
hold the other parties free from any liability therefor. No party shall ever be
responsible, however, on a price basis higher than the price received by such
party, to any other party's lessor or royalty owner, and if any such other
party's lessor or royalty owner should demand and receive settlement on a higher
price basis, the party contributing the affected lease shall bear the additional
royalty burden attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby.
C. Excess Royalties, Overriding Royalties and Other Payments:
Unless changed by other provisions, if the interest of any party in any
lease covered hereby is subject to any royalty, overriding royalty, production
payment or other burden on production in excess of the amount stipulated in
Article III.B., such party so burdened shall assume and alone bear all such
excess obligations and shall indemnify and hold the other parties hereto
harmless from any and all claims and demands for payment asserted by owners of
such excess burden.
D. Subsequently Created Interests:
If any party should create an overriding royalty, production payment or
other burden payable out of production attributable to its working interest
hereunder, (any such interest being hereinafter referred to as "subsequently
created interest and the party out of whose working interest the subsequently
created interest is derived being hereinafter referred to as "burdened party"),
and:
1. If the burdened party is required under this agreement to assign or
relinquish to any other party, or parties, all or a portion of its working
interest and/or the production attributable thereto, said other party, or
parties, shall receive said assignment and/or production free and clear of said
subsequently created interest and the burdened party shall indemnify and save
said other party, or parties, harmless from any and all claims and demands for
payment asserted by owners of the subsequently created interest; and,
2. If the burdened party fails to pay, when due, its share of expenses
chargeable hereunder, all provisions of Article VII.B. shall be enforceable
against the subsequently created interest in the same manner as they are
enforceable against the working interest of the burdened party. It is understood
and agreed that the overriding interest of Vaughan as conveyed/reserved pursuant
to the terms of the Exploration Agreement dated December 1, 1998 shall not be
---
considered a subseqently created interest.
ARTICLE IV.
TITLES
A. Title Examination:
Title examination shall be made on the drillsite of any proposed well prior
to commencement of drilling operations or, if the Drilling Parties so request,
title examination shall be made on the leases and/or oil and gas interests
included, or planned to be included, in the drilling unit around such well. The
opinion will include the ownership of the working interest, minerals, royalty,
overriding royalty and production payments under the applicable leases. At the
time a well is proposed, each party contributing leases and/or oil and gas
interests to the drillsite, or to be included in such drilling unit, shall
furnish to Operator all abstracts (including federal lease status reports),
title opinions, title papers and curative material in its possession free of
charge. All such information not in the possession of or made available to
Operator by the parties, but necessary for the examination of the title, shall
be obtained by Operator. Operator shall cause title to be examined by attorneys
on its staff or by outside attorneys. Copies of all title opinions shall be
furnished to each party hereto. The cost incurred by Operator in this title
program shall be borne as follows:
* the basic royalty provided for in each oil and gas lease and the overriding
royalty interest of Vaughan as reflected on Exhibit "A"
<PAGE>
52
ARTICLE IV
continued
[_] Option No. 2: Costs incurred by Operator in procuring abstracts and
------------
fees paid outside attorneys for title examination (including preliminary,
supplemental, shut-in gas royalty opinions and division order title opinions)
shall be borne by the Drilling Parties in the proportion that the interest of
each Drilling Party bears to the total interest of all Drilling Parties as such
interests appear in Exhibit "A". Operator shall make no charge for services
rendered by its staff attorneys or other personnel in the performance of the
above functions.
Each party shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with leases or oil and gas
interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations as well as the
conduct of hearings before governmental agencies for the securing of spacing or
pooling orders. Costs incurred by Operator pursuant to this sentence shall be
borne in accordance with Option No. 2 above. This shall not prevent any party
from appearing on its own behalf at any such hearing.
No well shall be drilled on the Contract Area until after (1) the title to
the drillsite or drilling unit has been examined as above provided, and (2) the
title has been approved by the examining attorney or title has been accepted by
all of the parties who are to participate in the drilling of the well.
B. Loss of Title:
2. Loss by Non-Payment or Erroneous Payment of Amount Due: If, through
-------------------------------------------------------
mistake or oversight, any rental, shut-in well payment, minimum royalty or
royalty payment, is not paid or is erroneously paid, and as a result a lease or
interest therein terminates, there shall be no monetary liability against the
party who failed to make such payment. Unless the party who failed to make the
required payment secures a new lease covering the same interest within ninety
(90) days from the discovery of the failure to make proper payment, which
acquisition will not be subject to Article VIII.B., the interests of the parties
shall be revised on an acreage basis, effective as of the date of termination of
the lease involved, and the party who failed to make proper payment will no
longer be credited with an interest in the Contract Area on account of ownership
of the lease or interest which has terminated. In the event the party who failed
to make the required payment shall not have been fully reimbursed, at the time
of the loss, from the proceeds of the sale of oil and gas attributable to the
lost interest, calculated on an acreage basis, for the development and operating
costs theretofore paid on account of such interest, it shall be reimbursed for
unrecovered actual costs theretofore paid by it (but not for its share of the
cost of any dry hole previously drilled or wells previously abandoned) from so
much of the following as is necessary to effect reimbursement:
(a) Proceeds of oil and gas, less operating expenses, theretofore accrued
to the credit of the lost interest, on an acreage basis, up to the amount of
unrecovered costs;
(b) Proceeds, less operating expenses, thereafter accrued attributable to
the lost interest on an acreage basis, of that portion of oil and gas thereafter
produced and marketed (excluding production from any wells thereafter drilled)
which, in the absence of such lease termination, would be attributable to the
lost interest on an acreage basis, up to the amount of unrecovered costs, the
proceeds of said portion of the oil and gas to be contributed by the other
parties in proportion to their respective interest; and,
(c) Any monies, up to the amount of unrecovered costs, that may be paid by
any party who is, or becomes, the owner of the interest lost, for the privilege
of participating in the Contract Area or becoming a party to this agreement.
3. Other Losses: All losses incurred, , shall be joint losses and shall be
------------
borne by all parties in proportion to their interests. There shall be no
readjustment of interests in the remaining portion of the Contract Area.
<PAGE>
53
ARTICLE V.
OPERATOR
A. Designation and Responsibilities of Operator:
Production Specialties Company * shall be the Operator of the Contract
Area, and shall conduct and direct and have full control of all operations on
the Contract Area as permitted and required by, and within the limits of this
agreement. It shall conduct all such operations in a good and workmanlike
manner, but it shall have no liability as Operator to the other parties for
losses sustained or liabilities incurred, except such as may result from gross
negligence or willful misconduct.
B. Resignation or Removal of Operator and Selection of Successor:
1. Resignation or Removal of Operator: Operator may resign at any time by
-----------------------------------
giving written notice thereof to Non-Operators. If Operator terminates its legal
existence, no longer owns an interest hereunder in the Contract Area, or is no
longer capable of serving as Operator, Operator shall be deemed to have resigned
without any action by Non-Operators, except the selection of a successor.
Operator may be removed if it fails or refuses to carry out its duties
hereunder, or becomes insolvent, bankrupt or is placed in receivership, by the
affirmative vote of two (2) or more Non-Operators owning a majority interest
based on ownership as shown on Exhibit "A" remaining after excluding the voting
interest of Operator. Such resignation or removal shall not become effective
until 7:00 o'clock A.M. on the first day of the calendar month following the
expiration of ninety (90) days after the giving of notice of resignation by
Operator or action by the Non-Operators to remove Operator, unless a successor
Operator has been selected and assumes the duties of Operator at an earlier
date. Operator, after effective date of resignation or removal, shall be bound
by the terms hereof as a Non-Operator. A change of a corporate name or
structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation shall not be the basis for removal
of Operator. * Subject to the provisions of Article XV.J
2. Selection of Successor Operator: Upon the resignation or removal of
--------------------------------
Operator, a successor Operator shall be selected by the parties. The successor
Operator shall be selected from the parties owning an interest in the Contract
Area at the time such successor Operator is selected. The successor Operator
shall be selected by the affirmative vote of two (2) or more parties owning a
majority interest based on ownership as shown on Exhibit "A"; provided, however,
if an Operator which has been removed fails to vote or votes only to succeed
itself, the successor Operator shall be selected by the affirmative vote of two
(2) or more parties owning a majority interest based on ownership as shown on
Exhibit "A" remaining after excluding the voting interest of the Operator that
was removed. *
C. Employees:
The number of employees used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall be determined by Operator, and all such employees shall
be the employees of Operator.
D. Drilling Contracts:
All wells drilled on the Contract Area shall be drilled on a competitive
contract basis at the usual rates prevailing in the area. If it so desires,
Operator may employ its own tools and equipment in the drilling of wells, but
its charges therefor shall not exceed the prevailing rates in the area and the
rate of such charges shall be agreed upon by the parties in writing before
drilling operations are commenced, and such work shall be performed by Operator
under the same terms and conditions as are customary and usual in the area in
contracts of independent contractors who are doing work of a similar nature.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. Initial Well:
On or before the ______ day of ______ , (year) _____ , Operator shall
commence the drilling of a well for oil and gas at the following location:
As provided for in the Exploration Agreement between the Parties dated effective
December 1, 1998. and shall thereafter continue the drilling of the well with
due diligence to and as provided for in this JOA. unless granite or other
practically impenetrable substance or condition in the hole, which renders
further drilling impractical, is en-countered at a lesser depth, or unless all
parties agree to complete or abandon the well at a lesser depth.
<PAGE>
54
ARTICLE VI.
continued
B. Subsequent Operations:
1. Proposed Operations: Should any party hereto desire to drill any
--------------------
well on the Contract Area other than the well provided for in Article VI.A., or
to rework, deepen complete or plug back a dry hole drilled at the joint expense
of all parties or a well jointly owned by all the parties and not then producing
in paying quantities, the party desiring to drill, rework, deepen complete or
plug back such a well shall give the other parties written notice of the
proposed operation, specifying the work to be performed, the location, proposed
depth, objective formation and the estimated cost of the operation. The parties
receiving such a notice shall have thirty (30) days after receipt of the notice
within which to notify the party wishing to do the work whether they elect to
participate in the cost of the proposed operation. If a drilling rig is on
location, notice of a proposal to rework, plug back complete or drill deeper may
be given by telephone facsimile or telecopier and the response period shall be
limited to forty-eight (48) hours, exclusive of Saturday, Sunday, and legal
holidays. Failure of a party receiving such notice to reply within the period
above fixed shall constitute an election by that party not to participate in the
cost of the proposed operation. Any notice or response given by telephone shall
be promptly confirmed in writing.
If all parties elect to participate in such a proposed operation, Operator
shall, within ninety (90) days after expiration of the notice period of thirty
(30) days (or as promptly as possible after the expiration of the forty-eight
(48) hour period when a drilling rig is on location, as the case may be),
actually commence the proposed operation and complete it with due diligence at
the risk and expense of all par ties hereto; provided, however, said
commencement date may be extended upon written notice of same by Operator to the
other parties, for a period of up to thirty (30) additional days if, in the sole
opinion of Operator, such additional time is reasonably necessary to obtain
permits from governmental authorities, surface rights (including rights-of-way)
or appropriate drilling equipment, or to complete title ex amination or curative
matter required for title approval or acceptance. Notwithstanding the force
majeure provisions of Article XI, if the actual operation has not been commenced
within the time provided (including any extension thereof as specifically
permitted herein) and if any party hereto still desires to conduct said
operation, written notice proposing same must be resubmitted to the other
parties in accordance with the provisions hereof as if no prior proposal had
been made.
2. Operations by Less than All Parties: If any party receiving such notice
------------------------------------
as provided in Article VI.B.1. or VII.D.1. (Option No. 2) elects not to
participate in the proposed operation, then, in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, within ninety (90)
days after the expiration of the notice period of thirty (30) days (or as
promptly as possible after the expiration of the forty-eight (48) hour period
when a drilling rig is on location, as the case may be) actually commence the
proposed operation and complete it with due diligence. Operator shall perform
all work for the account of the Consenting Parties; provided, however, if no
drilling rig or other equipment is on location, and if Operator is a Non-
Consenting Party, the Consenting Parties shall either: (a) request Operator to
perform the work required by such proposed operation for the account of the
Consenting Parties, or (b) designate one (1) of the Consenting Parties as
Operator to perform such work. Consenting Parties, when conducting operations
on the Contract Area pursuant to this Article VI.B.2., shall comply with all
terms and conditions of this agreement.
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period, shall
advise the Consenting Parties of the total interest of the parties approving
such operation and its recommendation as to whether the Consenting Parties
should proceed with the operation as proposed. Each Consenting Party, within
forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after
receipt of such notice, shall advise the proposing party of its desire to (a)
limit participation to such party's interest as shown on Exhibit "A" or (b)
carry its proportionate part of Non-Consenting Parties' interests, and failure
to advise the proposing party shall be deemed an election under (a). In the
event a drilling rig is on location, the time permitted for such a response
shall not exceed a total of forty-eight (48) hours (inclusive of Saturday,
---------
Sunday and legal holidays). The proposing party, at its election, may withdraw
such proposal if there is insufficient participation and shall promptly notify
all parties of such decision.
The entire cost and risk of conducting such operations shall be borne by
the Consenting Parties in the proportions they have elected to bear same under
the terms of the preceding paragraph. Consenting Parties shall keep the
leasehold estates involved in such operations free and clear of all liens and
encumbrances of every kind created by or arising from the operations of the
Consenting Parties. If such an operation results in a dry hole, the Consenting
Parties shall plug and abandon the well and restore the surface location at
their sole cost, risk and expense. If any well drilled, reworked, deepened or
plugged back under the provisions of this Article results in a producer of oil
and/or gas in paying quantities, the Consenting Parties shall complete and equip
the well to produce at their sole cost and risk,
<PAGE>
55
ARTICLE VI.
continued
* carrying the Non-Consenting Parties interest
and the well shall then be turned over to Operator and shall be operated by it
at the expense and for the account of the Consenting Parties. Upon commencement
of operations for the drilling, reworking, deepening or plugging back of any
such well by Consenting Parties in accordance with the provisions of this
Article, each Non-Consenting Party shall be deemed to have relinquished to
Consenting Parties, * and the Consenting Parties shall own and be entitled to
receive, in proportion to their respective interests, all of such Non-Consenting
Party's interest in the well and share of production therefrom until the
proceeds of the sale of such share, calculated at the well, or market value
thereof if such share is not sold, (after deducting production taxes, excise
taxes, royalty, overriding royalty and other interests not excepted by Article
III.D. payable out of or measured by the production from such well accruing with
respect to such interest until it reverts) shall equal the total of the
following:
(a) 100% of each such Non-Consenting Party's share of the cost of any
newly acquired surface equipment beyond the wellhead connections (including, but
not limited to, stock tanks, separators, treaters, pumping equipment and
piping), plus 100% of each such Non-Consenting Party's share of the cost of
operation of the well commencing with first production and continuing until each
such Non-Consenting Party's relinquished interest shall revert to it under other
provisions of this Article, it being agreed that each Non-Consenting Party's
share of such costs and equipment will be that interest which would have been
chargeable to such Non-Consenting Party had it participated in the well from the
beginning of the operations; and
(b) 300 % of that portion of the costs and expenses of drilling,
reworking, deepening, plugging back, testing and completing, after deducting any
cash contributions received under Article VIII.C., and 300 % of that portion of
the cost of newly acquired equipment in the well (to and including the wellhead
connections), which would have been chargeable to such Non-Consenting Party if
it had participated therein.
An election not to participate in the drilling or the deepening of a well
shall be deemed an election not to participate in any re-working or plugging
back operation proposed in such a well, or portion thereof, to which the initial
Non-Consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
account. Any such reworking or plugging back operation conducted during the
recoupment period shall be deemed part of the cost of operation of said well and
there shall be added to the sums to be recouped by the Consenting Parties one
hundred percent (100%) of that portion of the costs of the reworking or plugging
back operation which would have been chargeable to such Non-Consenting Party had
it participated therein. If such a reworking or plugging back operation is
proposed during such recoupment period, the provisions of this Article VI.B.
shall be applicable as between said Consenting Parties in said well.
During the period of time Consenting Parties are entitled to receive Non-
Consenting Party's share of production, or the proceeds therefrom, Consenting
Parties shall be responsible for the payment of all production, severance,
excise, gathering and other taxes, and all royalty, overriding royalty and other
burdens applicable to Non-Consenting Party's share of production not excepted by
Article III.D.
In the case of any reworking, plugging back or deeper drilling operation,
the Consenting Parties shall be permitted to use, free of cost, all casing,
tubing and other equipment in the well, but the ownership of all such equipment
shall remain unchanged; and upon abandonment of a well after such reworking,
plugging back or deeper drilling, the Consenting Parties shall account for all
such equipment to the owners thereof, with each party receiving its
proportionate part in kind or in value, less cost of salvage.
Within sixty (60) days after the completion of any operation under this
Article, the party conducting the operations for the Consenting Parties shall
furnish each Non-Consenting Party with an inventory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
deepening, plugging back, testing, completing, and equipping the well for
production; or, at its option, the operating party, in lieu of an itemized
statement of such costs of operation, may submit a detailed statement of monthly
billings. Each month thereafter, during the time the Consenting Parties are
being reimbursed as provided above, the party conducting the operations for the
Consenting Parties shall furnish the Non-Consenting Parties with an itemized
statement of all costs and liabilities incurred in the operation of the well,
together with a statement of the quantity of oil and gas produced from it and
the amount of proceeds realized from the sale of the well's working interest
production during the preceding month. In determining the quantity of oil and
gas produced during any month, Consenting Parties shall use industry accepted
methods such as, but not limited to, metering or periodic well tests. Any amount
realized from the sale or other disposition of equipment newly acquired in
connection with any such operation which would have been owned by a Non-
Consenting Party had it participated therein shall be credited against the total
unreturned costs of the work done and of the equipment purchased in determining
when the interest of such Non-Consenting Party shall revert to it as above
provided; and if there is a credit balance, it shall be paid to such Non-
Consenting Party.
<PAGE>
56
ARTICLE VI
continued
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished interests
of such Non-Consenting Party shall automatically revert to it, and, from and
after such reversion, such Non-Consenting Party shall own the same interest in
such well, the material and equipment in or pertaining thereto, and the
production therefrom as such Non-Consenting Party would have been entitled to
had it participated in the drilling, reworking, deepening or plugging back of
said well. Thereafter, such Non-Consenting Party shall be charged with and shall
pay its proportionate part of the further costs of the operation of said well in
accordance with the terms of this agreement and the Accounting Procedure
attached hereto.
Notwithstanding the provisions of this Article VI.B.2., it is agreed that
without the mutual consent of all parties, no wells shall be completed in or
produced from a source of supply from which a well located elsewhere on the
Contract Area is producing, unless such well is an obligation well under the
terms of any oil and gas lease subject hereto.
The provisions of this Article shall have no application whatsoever to the
drilling of the initial well described in Article VI.A. except (a) as to Article
VII.D.1. (Option No. 2), if selected, or (b) as to the reworking, deepening and
plugging back of such initial well after if has been drilled to the depth
specified in Article VI.A. if it shall thereafter prove to be a dry hole or, if
initially completed for production, ceases to produce in paying quantities.
3. Stand-By Time: When a well which has been drilled or deepened has
-------------
reached its authorized depth and all tests have been completed, and the results
thereof furnished to the parties, stand-by costs incurred pending response to a
party's notice proposing a reworking, deepening, plugging back or completing
operation in such a well shall be charged and borne as part of the drilling or
deepening operation just completed. Stand-by costs subsequent to all parties
responding, or expiration of the response time permitted, whichever first
occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph of
Article VI.B.2., shall be charged to and borne as part of the proposed
operation, but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated between the Consenting
Parties in the proportion each Consenting Party's interest as shown on Exhibit
"A" bears to the total interest as shown on Exhibit "A" of all Consenting
Parties.
4. Sidetracking: Except as hereinafter provided, those provisions of
------------
this agreement applicable to a "deepening" operation shall also be applicable to
any proposal to directionally control and intentionally deviate a well from
vertical so as to change the bottom hole location (herein call "sidetracking"),
unless done to straighten the hole or to drill around junk in the hole or
because of other mechanical difficulties. Any party having the right to
participate in a proposed sidetracking operation that does not own an interest
in the affected well bore at the time of the notice shall, upon electing to
participate, tender to the well bore owners its proportionate share (equal to
its interest in the sidetracking operation) of the value of that portion of the
existing well bore to be utilized as follows:
(a) If the proposal is for sidetracking an existing dry hole,
reimbursement shall be on the basis of the actual costs incurred in the initial
drilling of the well down to the depth at which the sidetracking operation is
initiated.
(b) If the proposal is for sidetracking a well which has previously
produced, reimbursement shall be on the basis of the well's salvable materials
and equipment down to the depth at which the sidetracking operation is
initiated, determined in accordance with the provisions of Exhibit "C", less the
estimated cost of salvaging and the estimated cost of plugging and abandoning.
In the event that notice for a sidetracking operation is given while the
drilling rig to be utilized is on location, the response period shall be limited
to forty-eight (48) hours, exclusive of Saturday, Sunday and legal holidays;
provided, however, any party may request and receive up to eight (8) additional
days after expiration of the forty-eight (48) hours within which to respond by
paying for all standby time incurred during such extended response period. If
more than one party elects to take such additional time to respond to the
notice, stand by costs shall be allocated between the parties taking additional
time to respond on a day-to-day basis in the proportion each electing party's
interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit
"A" of all the electing parties. In all other instances the response period to a
proposal for sidetracking shall be limited to thirty (30) days.
C. TAKING PRODUCTION IN KIND:
Each party shall take in kind or separately dispose of its proportionate
share of all oil and gas produced from the Contract Area, exclusive of
production which may be used in development and producing operations and in
preparing the treating oil and gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the taking in kind or
separate disposition by any
<PAGE>
57
ARTICLE VI
continued
party of its proportionate share of the production shall be borne by such party.
Any party taking its share of production in kind shall be required to pay for
only its proportionate share of such part of Operator's surface facilities which
it uses.
Each party shall execute such division orders and contracts as may be
necessary for the sale of its interest in production from the Contract Area,
and, except as provided in Article VII.B., shall be entitled to receive payment
directly from the purchaser thereof for its share of all production.
In the event any party shall fail to make the arrangements necessary to
take in kind or separately dispose of its proportionate share of the oil
produced from the Contract Area, Operator shall have the right, subject to the
revocation at will by the party owning it, but not the obligation, to purchase
such oil or sell it to others at any time and from time to time, for the account
of the non-taking party at the best price obtainable in the area for such
production. Any such purchase or sale by Operator shall be subject always to the
right of the owner of the production to exercise at any time its right to take
in kind, or separately dispose of, its share of all oil not previously delivered
to a purchaser. Any purchase or sale by Operator of any other party's share of
oil shall be only for such reasonable periods of time as are consistent with the
minimum needs of the industry under the particular circumstances, but in no
event for a period in excess of one (1) year.
In the event one or more parties' separate disposition of its share of the
gas causes split-stream deliveries to separate pipelines and/or deliveries which
on a day-to-day basis for any reason are not exactly equal to a party's
respective proportionate share of total gas sales to the be allocated to it, the
balancing or accounting between the respective accounts of the parties shall be
in accordance with the gas balancing agreement between the parties hereto,
attached as Exhibit "E". For additional provision, see "Failure to Take Gas
Production in Kind" provision under Article XV.
D. Access to Contract Area and Information:
Each party shall have access to the Contract Area at all reasonable times,
at its sole cost and risk to inspect or observe operations, and shall have
access at reasonable times to information pertaining to the development or
operation thereof, including Operator's books and records relating thereto.
Operator, upon request, shall furnish each of the other parties with copies of
all forms or reports filed with governmental agencies, daily drilling reports,
well logs, tank tables, daily gauge and run tickets and reports of stock on hand
at the first of each month, and shall make available samples of any cores or
cuttings taken from any well drilled on the Contract Area. The cost of gathering
and furnishing information to Non-Operator, other than that specified above,
shall be charged to the Non-Operator that requests the Information.
E. Abandonment of Wells:
1. Abandonment of Dry Holes: Except for any well drilled and/or being
------------------------
completed or deepened pursuant to Article VI.B.2., any well which has been
drilled or deepened under the terms of this agreement and is proposed to be
completed as a dry hole shall not be plugged and abandoned without the consent
of all parties. Should Operator, after diligent effort, be unable to contact any
party, or should any party fail to reply within forty-eight (48) hours
(exclusive of Saturday, Sunday and legal holidays) after receipt of notice of
the proposal to plug and abandon such well, such party shall be deemed to have
consented to the proposed abandonment. All such wells shall be plugged and
abandoned in accordance with applicable regulations and at the cost, risk and
expense of the parties who participated in the cost of drilling or deepening
such well. Any party who objects to plugging and abandoning such well shall have
the right to take over the well and conduct further operations in search of oil
and/or gas subject to the provisions of Article VI.B. by coincidentally
proposing further operations under Article VI.B prior to termination of the
response time for the plugging proposal.
2. Abandonment of Wells that have Produced: Except for any well in which
---------------------------------------
a Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of all the parties hereto. If, within thirty (30)
days after receipt of notice of the proposed abandonment of any well, all
parties do not agree to the abandonment of such well, those wishing to continue
its operation from the interval(s) of the formation(s) then open to production
shall tender to each of the other parties its proportionate share of the value
of the well's salvable material and equipment, determined in accordance with the
provisions of Exhibit "C", less the estimated cost of salvaging and the
estimated cost of plugging and abandoning. Each abandoning party shall assign
the non-abandoning parties, without warranty, express or implied, as to title or
as to quantity, or fitness for use of the equipment and material, all of its
interest in the well and related equipment. If the interest of the abandoning
party is or includes an oil and gas interest, such party shall execute and
deliver to the non-abandoning party or parties an oil and gas lease, limited to
the interval or intervals of the formation or formations then open to
production, for a term of one (1) year and so long thereafter as oil and/or gas
is produced from the interval or intervals of the formation or formations
covered thereby, such lease to provided for a 1/8/th/ basic royalty and to be on
a form acceptable to the non-abadoning parties.
<PAGE>
58
ARTICLE VI
continued
The assignments or leases so limited shall encompass the "drilling unit" upon
which the well is located. The payments by, and the assignments or leases to,
the assignees shall be in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate of
the percentages of participation in the Contract Area of all assignees. There
shall be no readjustment of interests in the remaining portion of the Contract
Area. Under the terms of this paragraph should any party fail to respond to a
plugging proposal within the thirty (30) days provided hereto, any such party
shall be deemed to consent thereto.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
interval or intervals then open other than the royalties retained in any lease
made under the terms of this Article. Upon request, Operator shall continue to
operate the assigned well for the account of the non-abandoning parties at the
rates and charges contemplated by this agreement, plus any additional cost and
charges which may arise as the result of the separate ownership of the assigned
well. Upon proposed abandonment of the producing interval(s) assigned or leased,
the assignor or lessor shall then have the option to repurchase its prior
interest in the well (using the same valuation formula) and participate in
further operations therein subject to the provisions hereof.
3. Abandonment of Non-Consent Operations: The provisions of Article
-------------------------------------
VI.E.1. or VI.E.2 above shall be applicable as between Consenting Parties in the
event of the proposed abandonment of any well excepted from said Articles;
provided, however, no well shall be permanently plugged and abandoned unless and
until all parties having the right to conduct further operations therein have
been notified of the proposed abandonment and afforded the opportunity to elect
to take over the well in accordance with the provisions of this Article VI.E.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. Liability of Parties:
The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations, and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership or association, or to render the parties
liable as partners.
B. Liens and Payment Defaults:
Each Non-Operator grants to Operator a lien upon its oil and gas rights in
the Contract Area, and a security interest in its share of oil and/or gas when
extracted and its interest in all equipment, to secure payment of its share of
expense, together with interest thereon at the rate provided in Exhibit "C". To
the extent that Operator has a security interest under the Uniform Commercial
Code of the state, Operator shall be entitled to exercise the rights and
remedies of a secured party under the Code. The bringing of a suit and the
obtaining of judgment by Operator for the secured indebtedness shall not be
deemed an election of remedies or otherwise affect the lien rights or security
interest as security for the payment thereof. In addition, upon default by any
Non-Operator in the payment of its share of expense, Operator shall have the
right, without prejudice to other rights or remedies, to collect from the
purchaser the proceeds from the sale of such Non-Operator's share of oil and/or
gas until the amount owed by such Non-Operator, plus interest, has been paid.
Each purchaser shall be entitled to rely upon Operator's written statement
concerning the amount of any default. Operator grants a like lien and security
interest to the Non-Operators to secure payment of Operator's proportionate
share of expense.
C. Payments and Accounting:
Except as herein otherwise specifically provided, Operator shall promptly
pay and discharge expenses incurred in the development and operation of the
Contract Area pursuant to this agreement and shall charge each of the parties
hereto with their respective proportionate shares upon the expense basis
provided in Exhibit "C". Operator shall keep an accurate record of the joint
account hereunder, showing expenses incurred and charges and credits made and
received.
Operator, at its election, shall have the right from time to time to demand
and receive from the other parties payment in advance of their respective shares
of the estimated amount of the expense to be incurred in operations hereunder
during the next succeeding month, which right may be exercised only by
submission to each such party of an itemized statement of such estimated
expense, together with an invoice for its share thereof. Each such statement and
invoice for the payment in advance of estimated expense shall be submitted on or
before the 20th day of the next preceding month. Each party shall pay to
Operator its proportionate share of such estimate within thirty (30) days after
such estimate and invoice is received. If any party fails to pay its share of
said estimate within said time, the amount due shall bear interest as provided
in Exhibit "C" until paid. Proper adjustment shall be made monthly between
advances and actual expense to the end that each party shall bear and pay its
proportionate share of actual expenses incurred, and no more.
D. Limitation of Expenditures:
1. Drill or Deepen: Without the consent of all parties, no well shall be
---------------
drilled or deepened, except any well drilled or deepened pursuant to the
provisions of Article VI.B.2. of this agreement. Consent to the drilling or
deepening shall include:
<PAGE>
59
ARTICLE VII
continued
[X] Option No. 2: All necessary expenditures for the drilling or deepening and
-------------
testing of the well. When such well has reached its authorized depth, and all
tests have been completed, and the results thereof furnished to the parties,
Operator shall give immediate notice to the Non-Operators who have the right to
participate in the completion costs. The parties receiving such notice shall
after receiving all logs and the proposed completion program, have forty-eight
(48) hours (exclusive of Saturday, Sunday and legal holidays) in which to elect
to participate in the setting of casing and the completion attempt. Such
election, when made, shall include consent to all necessary expenditures for the
completing and equipping of such well, including necessary tankage and/or
surface facilities. Failure of any party receiving such notice to reply within
the period above fixed shall constitute an election by that party not to
participate in the cost of the completion attempt. If one or more, but less than
all of the parties, elect to set pipe and to attempt a completion, the
provisions of Article VI.B.2. hereof (the phrase "reworking, deepening or
plugging back" as contained in Article VI.B.2. shall be deemed to include
"completing") shall apply to the operations thereafter conducted by less than
all parties.
2. Rework or Plug Back: Without the consent of all parties, no well shall
--------------------
be reworked or plugged back except a well reworked or plugged back pursuant to
the provisions of Article VI.B.2. of this agreement. Consent to the reworking or
plugging back of a well shall include all necessary expenditures in conducting
such operations and completing and equipping of said well, including necessary
tankage and/or surface facilities.
3. Other Operations: Without the consent of all parties, Operator shall
-----------------
not undertake any single project reasonably estimated to require an expenditure
in excess of Twenty-five Thousand Dollars ($ 25,000.00 ) except in connection
well, the drilling, reworking, deepening, completing, recompleting, or plugging
back of which has been previously authorized by or pursuant to this agreement;
provided, however, that, in case of explosion, fire, flood or other sudden
emergency, whether of the same or different nature, Operator may take such steps
and incur such expenses as in its opinion are required to deal with the
emergency to safeguard life and property but Operator, as promptly as possible,
shall report the emergency to the other parties. If Operator shall prepare
an authority for expenditure (AFE) and, Operator shall furnish Non-Operator an
information copy thereof for any single project costing in excess of Twenty-five
Thousand Dollars ( $25,000.00) but less than the amount first set forth above in
this paragraph.
E. Rentals, Shut-in Well Payments and Minimum Royalties:
Subject to the provisions of Section 11.2 of the Exploration Agreement
dated effective December 1, 1998.
Rentals, shut-in well payments, minimum royalties and other payments which
may be required under the terms of any jointly owned lease shall be paid by the
Operator and charged to the joint account.
F. Taxes:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties and
production payments) on leases and oil and gas interests contributed by such
Non-Operator. If the assessed valuation of any leasehold estate is reduced by
reason of its being subject to outstanding excess royalties, over-riding
royalties or production payments, the reduction in ad valorem taxes resulting
therefrom shall inure to the benefit of the owner or owners of such leasehold
estate, and Operator shall adjust the charge to such owner or owners so as to
reflect the benefit of such reduction. If the ad valorem taxes are based in
whole or in part upon separate valuations of each party's working interest, then
notwithstanding anything to the contrary herein, charges to the joint account
shall be made and paid by the parties hereto in accordance with the tax value
generated by each party's working interest. Operator shall bill the other
parties for their proportionate shares of all tax payments in the manner
provided in Exhibit "C".
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assessment shall have been
finally determined, Operator shall pay the tax for the joint ac-count, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C".
Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party's share of oil and/or gas produced under the terms of
this agreement.
<PAGE>
60
ARTICLE VII
continued
G. Insurance:
At all times while operations are conducted hereunder, Operator shall
comply with the workmen's compensation law of the state where the operations are
being conducted; provided, however, that Operator may be a self-insurer for
liability under said compensation laws in which event the only charge that
shall be made to the joint account shall be as provided in Exhibit "C". Operator
shall also carry or provide insurance for the benefit of the joint account of
the parties as outlined in Exhibit "D", attached to and made a part hereof.
Operator shall require all contractors engaged in work on or for the Contract
Area to comply with the workmen's compensation law of the state where the
operations are being conducted and to maintain such other insurance as Operator
may require.
In the event automobile public liability insurance is specified in said
Exhibit "D", or subsequently receives the approval of the parties, no direct
charge shall be made by Operator for premiums paid for such insurance for
Operator's automotive equipment.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. Surrender of Leases:
The leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any lease or
in any portion thereof, and the other parties do not agree or consent thereto,
the party desiring to surrender shall assign, without express or implied
warranty of title, all of its interest in such lease, or portion thereof, and
any well, material and equipment which may be located thereon and any rights in
production thereafter secured, to the parties not consenting to such surrender.
If the interest of the assigning party is or includes an oil and gas interest,
the assigning party shall execute and deliver to the party or parties not
consenting to such surrender an oil and gas lease covering such oil and gas
interest for a term of one (1) year and so long thereafter as oil and/or gas is
produced from the land covered thereby, such lease *. Upon such assignment or
lease, the assigning party shall be relieved from all obligations thereafter
accruing, but not theretofore accrued, with respect to the interest assigned or
leased and the operation of any well attributable thereto, and the assigning
party shall have no further interest in the assigned or leased premises and its
equipment and production other than the royalties retained in any lease made
under the terms of this Article. The party assignee or lessee shall pay to the
party assignor or lessor the reasonable salvage value of the latter's interest
in any wells and equipment attributable to the assigned or leased acreage. The
value of all material shall be determined in accordance with the provisions of
Exhibit "C", less the estimated cost of salvaging and the estimated cost of
plugging and abandoning. If the assignment or lease is in favor of more than one
party, the interest shall be shared by such parties in the proportions that the
interest of each bears to the total interest of all such parties.
Any assignment, lease or surrender made under this provision shall not
reduce or change the assignor's, lessor's or surrendering party's interest as it
was immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement. * to provide for a 1/8th basic royalty and to be on a form
acceptable to non-surrendering parties.
B. Renewal or Extension of Leases:
If any party secures a renewal of any oil and gas lease subject to this
agreement, all other parties shall be notified promptly, and shall have the
right for a period of thirty (30) days following receipt of such notice in which
to elect to participate in the ownership of the renewal lease, insofar as such
lease affects lands within the Contract Area, by paying to the party who
acquired it their several proper proportionate shares of the acquisition cost
allocated to that part of such lease within the Contract Area, which shall be in
proportion to the interests held at that time by the parties in the Contract
Area.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all parties participating
in the purchase of such renewal lease. Any renewal lease in which less than all
parties elect to participate shall not be subject to this agreement.
Each party who participates in the purchase of a renewal lease shall be
given an assignment of its proportionate interest therein by the acquiring
party.
The provisions of this Article shall apply to renewal leases whether they
are for the entire interest covered by the expiring lease or cover only a
portion of its area or an interest therein. Any renewal lease taken before the
expiration of its predecessor lease, or taken or contracted for within six (6)
months after the expiration of the existing lease shall be subject to this
provision; but any lease taken or contracted for more than six (6) months after
the expiration of an existing lease shall not be deemed a renewal lease and
shall not be subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of
oil and gas leases.
C. Acreage or Cash Contributions:
While this agreement is in force, if any party contracts for or receives a
contribution of cash towards the drilling of a well or any other operation on
the Contract Area, such contribution shall be paid to the party who conducted
the drilling or other operation and shall be applied by it against the cost of
such drilling or other operation. If the contribution be in the form of acreage,
the party to whom the contribution is made shall promptly tender an assignment
of the acreage, without warranty of title, to the Drilling Parties in the
proportions
<PAGE>
61
ARTICLE VII
continued
said Drilling Parties shared the cost of drilling the well. Such acreage shall
become a separate Contract Area and, to the extent possible, be governed by
provisions identical to this agreement. Each party shall promptly notify all
other parties of any acreage or cash contributions it may obtain in support of
any well or any other operation on the Contract Area. The above provisions shall
also be applicable to optional rights to earn acreage inside and/or outside the
Contract Area which are in support of a well drilled inside the Contract Area.
If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.
D. Maintenance of Uniform Interests:
No party shall sell, encumber, transfer or make other disposition of its
interest in the leases embraced within the Contract Area and in wells, equipment
and production unless such disposition covers either:
1. the entire interest of the party in all leases and equipment and
production; or
2. an equal undivided interest in all leases and equipment and production
in the Contract Area.
Every such sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement and shall be made
without prejudice to the right of the other parties.
If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such co-owners
to appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the oil and gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.
E. Waiver of Rights to Partition:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severalty its undivided interest therein.
F. NOTICE OF SALE:
Should any party sell all or any part of its interests under this
agreement, or its rights and interests in the Contract Area, it shall promptly
give written notice to the other parties, which shall include the name and
address of the purchaser
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
This agreement is not intended to create, and shall not be construed to
create, a relationship of partnership or an association for profit between or
among the parties hereto. Notwithstanding any provision herein that the rights
and liabilities hereunder are several and not joint or collective, or that this
agreement and operations hereunder shall not constitute a partnership, if, for
federal income tax purposes, this agreement and the operations hereunder are
regarded as a partnership, each party hereby affected elects to be excluded from
the application of all of the provisions of Subchapter "K", Chapter 1, Subtitle
"A", of the Internal Revenue Code of 1986, as permitted and authorized by
Section 761 of the Code and the regulations promulgated thereunder. Operator is
authorized and directed to execute on behalf of each party hereby affected such
evidence of this election as may be required by the Secretary of the Treasury of
the United States or the Federal Internal Revenue Service, including
specifically, but not by way of limitation, all of the returns, statements, and
the data required by Federal Regulations 1.761. Should there be any requirement
that each party hereby affected give further evidence of this election, each
such party shall execute such documents and furnish such other evidence as may
be required by the Federal Internal Revenue Service or as may be necessary to
evidence this election. No such party shall give any notices or take any other
action inconsistent with the election made hereby. If any present or future
income tax laws of the state or states in which the Contract Area is located or
any future income tax laws of the United States contain provisions similar to
those in Subchapter "K", Chapter 1, Subtitle "A", of the Internal Revenue Code
of 1986, under which an election similar to that provided by Section 761 of the
Code is permitted, each party hereby affected shall make such election as may
be permitted or required by such laws. In making the foregoing election, each
such party states that the income derived by such party from operations
hereunder can be adequately determined without the computation of partnership
taxable income.
<PAGE>
62
ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed Ten
Thousand Dollars ($10,000.00) and if the payment is in complete settlement of
such claim orsuit. If the amount required for settlement exceeds the above
amount, the parties hereto shall assume and take over the further handling of
the claim or suit, unless such authority is delegated to Operator. All costs and
expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation
from which the claim or suit arises. If a claim is made against any party or if
any party is sued on account of any matter arising from operations hereunder
over which such individual has no control because of the rights given Operator
by this agreement, such party shall immediately notify all other parties, and
the claim or suit shall be treated as any other claim or suit involving
operations hereunder. All claims or suits involving title to any interest
subject to this Agreement shall be treated as a claim or suit against all
parties hereto.
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
make money payments, that party shall give to all other parties prompt written
notice of the force majeure with reasonably full particulars concerning it;
thereupon, the obligations of the party giving the notice, so far as they are
affected by the force majeure, shall be suspending during, but no longer than,
the continuance of the force majeure. The affected party shall use all
reasonable diligence to remove the force majeure situation as quickly as
practicable.
The requirement that any force majeure shall be remedied with all
reasonable dispatch shall not require the settlement of strikes, lockouts, or
other labor difficulty by the party involved, contrary to its wishes; how all
such difficulties shall be handled shall be entirely within the discretion of
the party concerned.
The term "force majeure", as here employed, shall mean an act of God,
strike, lockout, or other industrial disturbance, act of the public enemy, war,
blockade, public riot, lightning, fire, storm, flood, explosion, governmental
action, governmental delay, restraint or inaction, unavailability of equipment,
and any other cause, whether of the kind specifically enumerated above or
otherwise, which is not reasonably within the control of the party claiming
suspension.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties and required by any
of the provisions of this agreement, unless otherwise specifically provided,
shall be given in writing by mail or telegram, postage or charges prepaid, or by
telex or telecopier and addressed to the parties to whom the notice is given at
the addresses listed on Exhibit "A". The originating notice given under any
provision hereof shall be deemed given only when received by the party to whom
such notice is directed, and the time for such party to give any notice in
response thereto shall run from the date the originating notice is received. The
second or any responsive notice shall be deemed given when deposited in the mail
or with the telegraph company, with postage or charges prepaid, or sent by telex
or telecopier. Each party shall have the right to change its address at any
time, and from time to time, by giving written notice thereof to all other
parties.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the oil and gas
leases and/or oil and gas interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any lease or oil and gas interest
contributed by any other party beyond the term of this agreement.
[X] Option No. 1: So long as any of the oil and gas leases subject to this
-------------
agreement remain or are continued in force as to any part of the Contract Area,
whether by production, extension, renewal, or otherwise.
It is agreed, however, that the termination of this agreement shall not
relieve any party hereto from any liability which has accrued or attached prior
to the date of such termination.
<PAGE>
63
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. Laws, Regulations and Orders:
and Operator shall comply with
This agreement shall be subject to the conservation laws of the state in
which the Contract Area is located, to the valid rules, regulations, and orders
of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, ordinances, rules, regulations, and
orders.
B. Governing Law: See Agreement dated December 1. 1998, between Celsius Energy
Company and Vaughan, et al.
C. Regulatory Agencies:
Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated under such laws in reference to oil,
gas and mineral operations, including the location, operation, or production of
wells, on tracts offsetting or adjacent to the Contract Area.
With respect to operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claimsand causes of action
arising out of, incident to or resulting directly or indirectly from Operator's
interpretation or application of rules, rulings, regulations or orders of the
Department of Energy or predecessor or successor agencies to the extent such
interpretation or application was made in good faith. Each Non-Operator further
agrees to reimburse Operator for any amounts applicable to such Non-Operator's
share of production that Operator may be required to refund, rebate or pay as a
result of such an incorrect interpretation or application, together with
interest and penalties thereon owing by Operator as a result of such incorrect
interpretation or application.
Non-Operators authorize Operator to prepare and submit such documents as
may be required to be submitted to the purchaser of any crude oil sold hereunder
or to any other person or entity pursuant to the requirements of the "Crude Oil
Windfall Profit Tax Act of 1980", as same may be amended from time to time
("Act"), and any valid regulations or rules which may be issued by the Treasury
Department from time to time pursuant to said Act. Each party hereto agrees to
furnish any and all certifications or other information which is required to be
furnished by said Act in a timely manner and in sufficient detail to permit
compliance with said Act.
ARTICLE XV.
OTHER PROVISIONS
XV.A. Order of Election:
------------------
It is irrevocably stipulated that an election by any party hereto to
complete a well at the original objective depth or horizon of any
operation conducted hereunder, whether such operation be the drilling of
a new well or the re-entering, deepening, sidetracking or plugging back
of a well, shall take precedence over an election to complete a well at a
lesser depth or ho rizon. No well capable of producing in paying
quantities shall be plugged back, reworked or deepened without the
consent of one hundred percent (100%) of the applicable working interest
ownership.
XV.B Certain Additional Operations:
------------------------------
Notwithstanding anything to the contrary contained in this Agreement or
in amendments or supplements thereto, it is expressly understood and
agreed that the parties to this Agreement shall not be required to
consider and/or make an election whether to participate in any proposed
additional operation to drill, rework, deepen or plug back any well
while:
(a) Any drilling, reworking, deepening, completing or plugging back
operations are in progress on any well subject to this Agreement
which is located on or pooled with the Contract Area o r
(b) Any proposal to drill, rework, deepen or plug back any well
subject to this Agreement which is located on or pooled with the
Contract Area is being considered by the parties to this
Agreement.
unless such proposed additional operation is approved by all parties who
would be eligible to participate in such additional operation under the
terms of this Agreement. Provided, however, should any operation be
proposed in order to comply with any express or implied covenant provided
for in any lease or interest subject to this agreement, or if any lease
will expire in the absence of such operation, the proposing party shall
clearly include this information on its notice of the proposed operation.
Should any party then receiving such notice fail to reply within thirty
(30) days or within twenty-four (24) hours if a rig is on location after
receipt thereof, either of its election to participate or become a Non-
Consenting party, then such Failure to reply shall constitute an election
by it not to particiapte in the proposed operation. Additionally, any
party's or parties' waiver of or failure to assert or invoke the rights
herein provided for in any circumstances, shall in no way prejudice such
party's or parties' rights to assert the rights herein provided as to any
future circumstances or occurrence.
XV.C. Revenue Distribution:
---------------------
Operator will make disbursements of all royalties, overriding
royalties and other payments out of, or with respect to, production which are
attributable to the Contact Area at Non-Operator's direction, provided Non-
Operator shall execute such documents as may be necessary in the opinion of
Operator to enable Operator to receive all payments for oil gas or other
<PAGE>
64
ARTICLE XV.
continued
hydrocarbons for such interests directly from said purchaser. In that event,
Operator will use its best efforts to make disbursements correctly, but will be
liable for incorrect disbursements only in the event of gross negligence or
willful misconduct. If a Non-Operator is not in default of its payments due
under this Operating Agreement, it may elect to receive its share of proceeds
direct from its purchases provided - Non-Operator assumes responsibility for
timely payment of all burdens affecting its interest.
XV.D. Failure to Take Gas Production In-Kind:
---------------------------------------
Notwithstanding the provisions of Article VI.C. and the provisions of
Exhibit "E", in the event any party shall fail to make the arrangements
necessary to take in-kind or separately dispose of its share of gas production
from the Contact Area, the non-taking party shall have the right to request that
the Operator purchase or sell to others such gas production for the account of
the non-taking party at the best price renewably obtainable under the
circumstances in the area for such production, and the Operator shall have the
right, but not the obligation to do so. Such requests shall be revocable at will
by the party owning such gas production and the owner of such production may, at
any time, exercise its right to revoke such request and to take in-kind or
separately dispose of its share of gas production from the Contact Area, or to
elect to be an "underproduced party" under the terms of Exhibit "E", Gas
Balancing Agreement. Any purchase or sale by Operator of any party's share of
gas shall be only for such reasonable periods of time as are consistent with the
minimum needs of the industry under the particular circumstances, but in no
event for a period in Excess of one (1) year.
XV.E. Insurance:
----------
Except as provided in Exhibit "C", all damage or injury to the Contract
Area and property thereon shall be borne by the parties hereto in proportion to
their interests therein. The liability, if any, of the parties hereto in damages
for claims growing out of personal injury to or death of third parties or injury
to or destruction of property of third parties resulting from operations
conducted hereunder shall be borne in proportion to their interests in the
Contract Area, and each party individually may acquire such insurance as it
deems proper to protect itself against such claims.
XV.F. Third-party Operating Agreement:
--------------------------------
This Operating Agreement shall control all operations within the Contract
Area. If there is in existence a joint operating agreement or obligation to
enter into a joint operating agreement covering any interest jointly owned by
the parties hereto (such joint operating agreement being referred to herein as a
"Third-Party Operating Agreement") and if the parties to this Operating
Agreement are not parties to such Third-Party Operating Agreement, then at the
appropriate time, all parties to this Operating Agreement agree to accept and
ratify said Third-Party Operating Agreement. Operator shall use its best efforts
to cause such Third-Party Operating Agreement to be modified and amended so as
to conform as closely as possible to this Operating Agreement.
XV.F. Taxes:
------
If Operator is required hereunder to pay ad valorem taxes based in whole
or in part upon separate valuations of each party's working interest, then
notwithstanding anything to the contrary herein, charges to the joint account
shall be made and paid by the parties herein in accordance with the percentage
of tax value generated by each party's working interest.
XV.G. News Releases:
-------------
No party shall distribute any prospect information or photographs to the
press or other media without the approval of all the parties except as required
by law or regulation or as required disclosure by public companies. When all
parties have reviewed such material and approved the issuance of the material,
Operator shall have the principal responsibility for its issuance. The only
exception to the foregoing in shall be that in the event of an emergency
involving extensive property damage, operations failure, loss of human life or
other clear emergency, Operator is authorized to furnish such minimum strictly
factual information as shall be necessary to satisfy the legitimate public
interest on the part of the press and duly constituted authorities if time does
not permit the obtaining of prior approval from the other party or parties;
Operator shall thereupon promptly advise the other party or parties of the
information so furnished. Operator will take the position that if a party to
this Agreement does not respond within forty-eight (48) hours after the
information is received, Operator may disburse information to the press or other
media at its own discretion.
XV.H. Area of Mutual Interest
-----------------------
The Area of Mutual Interest ("AMI") provision contained in the
Exploration Agreement dated effective December 1, 1998, to which this Operating
Agreement attached, is hereby incorporated by reference into this Operating
Agreement for a term expiring December 31, 2002, unless extended by the consent
of all parties. Said AMI shall consist of the Contract Area covered hereby.
XV.I. Priority of Agreement
---------------------
In the event of a conflict between the terms and provisions of this
Operating Agreement and the terms and conditions of that certain Exploration
Agreement dated effective December 1, 1998 (the "Exploration Agreement"), the
terms and provisions of the Exploration Agreement shall prevail.
<PAGE>
65
ARTICLE XV.
continued
XV.J. Change of Operator
------------------
If at any time commencing one year or more after oli and /or gas is found
in commercial quantities on said Contract Area, any Non-Operator owning more
than a 25% working interest considers the cost of operating the Contract Area to
be excessive and is willing to operate the same for a period of one year at a
cost that is at a minimum 10% less than the cost of operating under the direct
control of Operator, such Non-Operator shall deliver to Operator a written
statement detailing the items of expense contributing to the alleged excessive
costs, proposing that such Non-Operator assume such operations, and specifying
the proposed economies. Within ten (10) days of such statement, Operator shall
elect in writing delivered to such Non-Operator to either (a) surrender
operations to the proposing Non-Operator for a period of one year upon the terms
contained in Non-Operator's proposal, or (b) to agree to operate the Contract
Area for such period of one year at a cost consistent with the economies
proposed by Non-Operatopr. If Operator elects to surrender operations, then
proposing non-Operator forthwith shall become Operator for a minimum period of
one year as fully as though such Non-Operator has been herein designated
Operator under the terms hereof as notified by its proposed economies.
In addition, notwithstanding any other provision of this Agreement to the
contrary, the Change of Operator provisions in Section 11 of the Exploration
Agreement dated effective December 1, 1998, between Celsius and Vaughan, et al,
shall be applicable to this Operating Agreement.
ARTICLE XVI.
MISCELLANEOUS
This agreement shall be binding upon and shall inure to the benefit of
the parties hereto and to their respective heirs, devisees, legal
representatives, successors and assigns.
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
IN WITNESS WHEREOF, this agreement shall be effective as of ______ day of
______________, (year)________ , who has prepared and circulated this form for
execution, represents and warrants that the form was printed from and with the
exception listed below, is identical to the AAPL Form 610-1982 Model Form
Operating Agreement, as published in diskette form by Forms On-A-Disk, Inc. No
changes, alterations, or modifications, other than those in Articles____________
_______________, have been made to the form.
O P E R A T O R
___________________________________ _____________________________________
N O N - O P E R A T O R S
___________________________________ _____________________________________
___________________________________ _____________________________________
<PAGE>
66
EXHIBIT "A"
Attached to and made part of that certain Joint Operating Agreement dated
December 1, 1998, by and between Production Specialties, as Operator and Celsius
Energy Company, Vaughan Exploration, Inc., Sunset Exploration, Inc., BOBSAC,
LLC, Brothers Oil & Gas Production, Vaughan Production Company as Non-Operators.
I. Lands subject to Agreement ("Contract Area")
--------------------------------------------
To be determined pursuant to the Exploration Agreement dated December 1,
1998, to which this Agreement is attached.
All in Solano County, California.
II. Restrictions as to Depths and Formations: None
-----------------------------------------
III. Participants and Addresses: Interest *
--------------------------- --------
Celsius Energy Company 50%
1331 17th Street, Ste. 800 * To be determined
Denver, CO 80202 based on each
Party's election in
Sunset Exploration, Inc. 12.5% the drilling of the
10500 Bentwood Blvd. Initial Test Well.
Bentwood, CA 94513
BOBSAC, LLC 12.5%
250 Newport Center Dr. Ste. 360
Newport Beach, CA 92660
Brothers Oil & Gas 10.0%
P.O. Box 31 Saturna Is.
BC V0N 2Y0
Vaughan Exploration, Inc. 5.0%
6611 Mt. Whitney Drive
Bakersfield, CA 93309
Production Specialties Company 5.0%
P.O. Box 880
Woodland, CA 95776
Vaughan Production Company 5.0%
P.O. Box 458
Wilson, N.Y. 83014
IV. Oil and Gas Lease Subject to Agreement
--------------------------------------
To be determined pursuant to the Exploration Agreement dated December 1,
1998, to which this Agreement is attached.
<PAGE>
67
There is no Exhibit "B"
to this Agreement
<PAGE>
68
EXHIBIT "C"
Attached to and made of the that certain Joint Operating Agreement dated
--------------------------------------------
December 1, 1998 by and between Production Specialties Company as Operator and
- ------------------------------------------------------------------------------
Celsius Energy Company, and Vaughan Exploration, Inc., Sunset Exploration, Inc.,
- --------------------------------------------------------------------------------
BOBSAC, LLC, Brothers Oil & Gas and Vaughan Production Company as Non-Operators.
- --------------------------------------------------------------------------------
ACCOUNTING PROCEDURES
JOINT OPERATIONS
I. GENERAL PROVISIONS
1. Definitions
"Joint Property" shall mean the real and personal property subject to the
agreement to which this Accounting Procedure is attached.
"Joint Operations" shall mean all operations necessary or proper for the
development, operation, protection and maintenance of the Joint Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are to be shared
by the Parties.
"Operator" shall mean the party designated to conduct the Joint Operations.
"Non-Operators" shall mean the Parties to this agreement other than the
Operator.
"Parties" shall mean Operator and Non-Operators.
"First Level Supervisors" shall mean those employees whose primary function
in Joint Operations is the direct supervision of other employees and/or
contractor labor directly employed on the Joint Property in a field
operating capacity.
"Technical Employees" shall mean those employees having special and
specific engineering, geological or other profession skills, and whose
primary function in Joint Operations is the handling of specific operating
conditions and problems for the benefit of the Joint Property.
"Personal Expenses" shall mean travel and other reasonable reimbursable
expenses of the Operator's employees.
"Material" shall mean personal property, equipment or supplies acquired or
held for use on the Joint Property.
"Controllable Material" shall mean Material which at the time is so
classified in the Material Classification Manual as most recently
recommended by the Council of Petroleum Accountants Societies.
2. Statement and Billings
Operator shall bill Non-Operators on or before the last day of each month
for their proportionate share of the Joint Account for the preceding month.
Such bills will be accompanied by statements which identify the authority
for expenditure, lease, or facility, and all charges and non credits
summarized by appropriate classifications of investment and expense except
that items of Controllable Material and unusual charges and credits shall
be separately identified and fully described in detail.
3. Advances and Payments by Non-Operators
A. Unless otherwise provided for in the agreement, the Operator may
require the Non-Operators to advance their share of estimated cash
outlay for the succeeding month's operations within thirty (30) days
after receipt of the billing or by the first day of the month for
which the advance is required, whichever is later. Operator shall
adjust each monthly billing to reflect advances received from the Non-
Operators.
B. Each Non-Operator shall pay its proportion of all bills within thirty
(30) days after receipt. If payment is not made within such time, the
unpaid balance shall bear interest monthly at the prime rate in effect
at Chase Manhattan Bank, New York
------------------------------
<PAGE>
69
City on the first day of the month in which delinquency occurs plus 1%
----
or the maximum contract rate permitted by the applicable usury laws in
the state in which the Joint Property is located, whichever is the
lesser, plus attorney's fees, court costs, and other costs in
connection with the collection of unpaid amounts.
4. Adjustments
Payment of any such bills shall not prejudice the right of any Non-Operator
to protest or question the correctness thereof: provided, however, all
bills and statements rendered to Non-Operators by Operator during any
calendar year shall conclusively be presumed to be true and correct after
twenty-four (24) months following the end of any such calendar year, unless
within the said twenty-four (24) month period a Non-Operator takes written
exception thereto and makes claim on Operator for adjustment. No
adjustment, favorable to Operator shall be made unless it is made within
the same prescribed period. The provisions of this paragraph shall not
prevent adjustments resulting from a physical inventory of Controllable
Material as provided for in Section V.
5. Audits
A. A Non-Operator, upon notice in writing to Operator and all other Non-
Operators, shall have the right to audit Operator's accounts and
records relating to the Joint Account for any calendar year within the
twenty-four (24) month period following the end of such calendar year;
provided, however, the making of an audit shall not extend the time
for the taking of written exception to and the adjustments of accounts
as provided for in "Paragraph 4 of this Section I. Where there are two
or more Non-Operators, the Non-Operators shall make every reasonable
effort to conduct a joint audit in a manner which will result in a
minimum of inconvenience to the Operator. Operator shall bear no
portion of the Non-Operators' audit cost, incurred under this
paragraph unless agreed to by the Operator. The audits shall not be
conducted more than once each year without prior approval of Operator,
except upon the resignation or removal of the Operator, and shall be
made at the expense of those Non-Operators approving such audit.
B. The Operator shall reply in writing to an audit report within 180 days
after receipt of such report.
6. Approval By Non-Operators
Where an approval or other agreement of the Parties or Non-Operators is
expressly required under other sections of this Accounting Procedure and if
the agreement to which this Accounting Procedure is attached contains no
contrary provisions in regard thereto, Operator shall notify all Non-
Operators of the Operator's proposal, and the agreement or approval of a
majority in interest of the Non-Operators shall be controlling on all Non-
Operators.
II. DIRECT CHARGES
Operator shall charge the Joint Account with the following items:
1. Ecological and Environmental
Costs incurred for the benefit of the Joint Property as a result of
governmental or regulatory requirements to satisfy environmental
considerations applicable to the Joint Operations. Such costs may include
surveys of an ecological or archaeological nature and pollution control
procedures as required by applicable laws and regulations.
2. Rentals and Royalties
Lease rentals and royalties paid by Operator for the Joint Operations.
<PAGE>
70
3. Labor
A. (1) Salaries and wages of Operator's field employees directly
employed on the Joint Property in the conduct of Joint
Operations.
(2) Salaries of First Level Supervisors in the field.
(3) Salaries and wages of Technical Employees directly employed on
the Joint Property if such charges are excluded from the overhead
rates.
(4) Salaries and wages of Technical Employees either temporarily or
permanently assigned to and directly employed in the operation of
Joint Property if such charges are excluded from the overhead
rates.
B. Operator's cost of holiday, vacation, sickness and disability benefits
and other customary allowances paid to employees whose salaries and
wages are chargeable to the Joint Account under Paragraph 3A of this
Section II. Such costs under this Paragraph 3B may be charged on a
"when and as paid basis" or by "percentage assessment" on the amount
of salaries and wages chargeable to the Joint Account under Paragraph
3A of this Section II. If percentage assessment is used, the rate
shall be based on the Operator's cost experience.
C. Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs
chargeable to the Joint Account under Paragraphs 3A and 3B of this
Section II.
D. Personal Expenses of those employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section II.
4. Employee Benefits
Operator's current costs of established plans for employees' group life
insurance, hospitalization, pension, retirement, stock purchase, thrift,
bonus, and other benefit plans of a like nature, applicable to Operator's
labor cost chargeable to the Joint Account under Paragraphs 3A and 3B of
this Section II shall be Operator's actual cost not to exceed the percent
most recently recommended by the Council of Petroleum Accountants
Societies.
5. Material
Material purchased or furnished by Operator for use on the Joint Property
as provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and
is reasonably practical and consistent with efficient and economical
operations. The accumulation of surplus stocks shall be avoided.
6. Transportation
Transportation of employees and Material necessary for the Joint Operations
but subject to the following limitations:
A. If material is moved to the Joint Property from the Operator's
warehouse or other properties, no charge shall be made in the Joint
Account for a distance greater than the distance from the nearest
reliable supply store where like material is normally available or
railway receiving point nearest the Joint Property unless agreed to by
the Parties.
B. In surplus Material is moved to Operator's warehouse or other storage
point, no charge shall be made to the Joint Account for the distance
greater than the distance to the nearest reliable supply store where
like material is normally available, or railway receiving point,
nearest the Joint Property unless agreed to by the Parties. No charge
shall be made to the Joint Account for moving Material to other
properties belonging to Operator, unless agreed to by the Parties.
<PAGE>
71
C. In the application of subparagraphs A and B above, the option to
equalize or charge actual trucking cost is available when the actual
charge is $400 or less excluding accessorial charges. The $400 will be
adjusted to the amount most recently recommended by the Council of
Petroleum Accountants Societies.
7. Services
The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 10 of Section II and
Paragraph i, ii, and iii of Section III. The cost of professional
consultant services and contract services of technical personnel directly
engaged on the Joint Property if such charges are excluded from the
overhead rates. The cost of professional consultant services or contract
services of technical personnel not directly engaged on the Joint Property
shall not be charged to the Joint Account unless previously agreed to by
the Parties.
8. Equipment and Facilities Furnished by Operator
A. Operator shall charge the Joint Account for use of Operator owned
equipment and facilities at rates commensurate with costs of ownership
and operation. Such rates shall include costs of maintenance, repairs,
other operating expense, insurance, taxes, depreciation, and interest
on gross investment less accumulated depreciation not to exceed twelve
------
percent (12%) per annum. Such rates shall not exceed average
-----
commercial rates currently prevailing in the immediate area of the
Joint Property.
B. In lieu of charges in paragraph 8A above, Operator may elect to use
average commercial rates prevailing in the immediate area of the Joint
Property less 20%. For automotive equipment, Operator may elect to use
rates published by the Petroleum Motor Transport Association.
9. Damages and Losses to Joint Property
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire,
flood, storm, theft, accident, or other cause, except those resulting from
Operator's gross negligence or willful misconduct. Operator shall furnish
Non-Operator written notice of damages or losses incurred as soon as
practicable after a report thereof has been received by Operator.
10. Legal Expense
Expenses of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgements and amounts paid for settlement
of claims incurred in or resulting from operations under the agreement or
necessary to protect or recover the Joint Property, except that no charge
for services of Operator's legal staff or fees or expense of outside
attorneys shall be made unless previously agreed to by the Parties. All
other legal expense is considered to be covered by the overhead provisions
of Section III unless otherwise agreed to by the Parties, except as
provided in Section I, Paragraph 3.
11. Taxes
All taxes of every kind and nature assessed or levied upon or in connection
with the Joint Property, the operation thereof, or the production
therefrom, and which taxes have been paid by the Operator for the benefit
of the Parties. If the ad valorem taxes are based in whole or in part upon
separate valuations of each party's working interest, then notwithstanding
anything to the contrary herein, charges to the Joint Account shall be made
and paid by the Parties hereto in accordance with the tax value generated
by each party's working interest.
<PAGE>
72
12. Insurance
Net premiums paid for insurance required to be carried for the Joint
Operations for the protection of the Parties. In the event Joint
Operations are conducted in a state in which Operator may act as self-
insurer for Worker's Compensation and/or Employers Liability under the
respective state's laws. Operator may, at its election, include the risk
under its self-insurance program and in that event, Operator shall include
a charge of Operator's cost not to exceed manual rates.
13. Abandonment and Reclamation.
Costs incurred for abandonment of the Joint Property, including costs
required by governmental or other regulatory authority.
14. Communications
Cost of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave facilities
directly serving the Joint Property. In the event communication
facilities/systems serving the Joint Property are Operator owned, charges
to the Joint Account shall be made as provided in Paragraph 8 of this
Section II.
15. Other Expenditures
Any other expenditure not covered or dealt with in the foregoing provisions
of this Section II, or in Section III and which is of direct benefit to the
Joint Property and is incurred by the Operator in the necessary and proper
conduct of the Joint Operations.
III. OVERHEAD
1. Overhead - Drilling and Producing Operations
i. As compensation for administrative, supervision, office services and
warehousing costs, Operator shall charge drilling and production
operations on either:
(x) Fixed Rate Basis, Paragraph 1A, or
( ) Percentage Basis, Paragraph 1B
Unless otherwise agreed to by the Parties, such charge shall be in
lieu of costs and expenses of all offices and salaries or wages plus
applicable burdens and expenses of all personnel, except those
directly chargeable under Paragraph 3A, Section II. The cost and
expense of service from outside sources in connection with matters of
taxation, traffic, accounting or matters before or involving
governmental agencies shall be considered as included in the overhead
rates provided for in the above selected Paragraph of this Section III
unless such cost and expense are agreed to by the Parties as a direct
charge to the Joint Account.
ii. The salaries, wages, and Personal Expenses of Technical Employees
and/or the cost of professional consultant services and contract
services of technical personnel directly employed on the Joint
Property:
( ) shall be covered by the overhead rates, or
(x) shall not be covered by the overhead rates.
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services and contract services
of technical personnel either temporarily or permanently assigned to
and directly employed in the operation of the Joint Property:
(x) shall be covered by the overhead rates, or
( ) shall not be covered by the overhead rates.
<PAGE>
73
A. Overhead - Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates per
well per month:
Drilling Well Rate $ 6,000.00
--------
(Prorated for less than a full month)
Producing Well Rate $ 600.00
------
(2) Application of Overhead - Fixed Rate basis shall be as follows:
(a) Drilling Well Rate
1) Charges for drilling wells shall begin on the date the
well is spudded and terminate on the date the drilling
rig, completion rig, or other units used in completion
of the well is released, whichever is later, except
that no charge shall be made during suspension of
drilling or completion operations for fifteen (15) or
more consecutive calendar days.
2) Charges for wells undergoing any type of workover or
recompletion for a period of five (5) consecutive work
days or more shall be made at the drilling well rate.
Such charges shall be applied for the period from date
workover operations, with rig or other units used in
workover, commence through date of rig or other unit
release, except that no charge shall be made during
suspension of operations for fifteen (15) or more
consecutive calendar days.
(b) Producing Well Rates
1) An active well either produced or injected into for any
portion of the month shall be considered as a one-well
charge for the entire month.
2) Each active completion in a multi-completed well in
which production is not commingled down hole shall be
considered as a one-well charge providing each
completion is considered a separate well by the
governing regulatory authority.
3) An inactive gas well shut in because of overproduction
or failure of purchaser to take the production shall be
considered as a one-well charge providing the gas well
is directly connected to a permanent sales outlet.
4) A one-well charge shall be made for the month in which
plugging and abandonment operations are completed on
any well. This one-well charge shall be made whether or
not the well has produced except when drilling well
rate applies.
5) All other inactive wells (including but not limited to
inactive wells covered by unit allowable, lease
allowable, transferred allowable, etc.) shall not
qualify for an overhead charge.
(3) The well rates shall be adjusted as of the first day of April each
year following the effective date of the agreement to which this
Accounting Procedure is attached. The adjustment shall be computed by
multiplying the rate currently in use by the percentage increase or
decrease in the average weekly earnings of Crude Petroleum and Gas
Production Workers for the last calendar year compared to the calendar
year preceding as shown by the index of average weekly earnings of
Crude Petroleum and Gas Production Workers as published by the United
States Department of Labor, Bureau of Labor Statistics, or the
equivalent Canadian index as published by
<PAGE>
74
Statistics Canada, as applicable. The adjusted rates shall be the
rates currently in use, plus or minus the computed adjustment.
2. Overhead - Major Construction
To compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernible as a fixed asset, required for the development
and operation of the Joint Property, Operator shall either negotiate a rate
prior to the beginning of construction, or shall charge the Joint Account
for overhead based on the following rate for any Major Construction project
in excess of $ 100,000.00:
----------
A. 5 % of first $100,000 or total cost if less, plus
------
B. 3 % of costs in excess of $100,000 but less than $1,000,000 plus
------
C. 2 % of costs in excess of $1,000,000.
------
Total cost shall mean the gross cost of any one project. For the purpose
of this paragraph, the component parts of a single project shall not be
treated separately and the cost of drilling and workover wells and
artificial lift equipment shall be excluded.
3. Catastrophe Overhead
To compensate Operate for overhead costs incurred in the event of
expenditures resulting from a single occurrence due to oil spill, blowout,
explosion, fire, storm, hurricane, or other catastrophes as agreed to by
the Parties, which are necessary to restore the Joint Property to the
equivalent condition that existed prior to the event causing the
expenditures, Operator shall either negotiate a rate prior to charging the
Joint Account or shall charge the Joint Account for overhead based on the
following rates:
A. 5 % of total costs through $100,000; plus
------
B. 3 % of total costs in excess of $100,000 but less than
------
$1,000,000; plus
C. 2 % of total costs in excess of $1,000,000
------
Expenditures subject to the overheads above will not be reduced by
insurance recoveries, and no other overhead provisions of this Section III
shall apply.
4. Amendment of Rates
The overhead rates provided for in this Section III may be amended from
time to time only by mutual agreement between the Parties hereto if, in
practice, the rates are found to be insufficient or excessive.
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND
DISPOSITIONS.
Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property;
however, at Operator's option, such Material may be supplied by the Non-
Operator. Operator shall make timely disposition of idle and/or surplus
Material, such disposal being made either through sale to Operator or Non-
Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall be under no obligation to purchase, interest of Non-Operators in surplus
condition A or B Material. The disposal of surplus Controllable Material not
purchased by the Operator shall be agreed to by the Parties.
1. Purchases
Material purchased shall be charged at the price paid by Operator after
deduction of all discounts received. In case of Material found to be
defective or returned to vendor for
<PAGE>
75
any other reasons, credit shall be passed to the Joint Account when
adjustment has been received by the Operator.
2. Transfers and Dispositions
Material furnished to the Joint Property and Material transferred from the
Joint Property or disposed of by the Operator, unless otherwise agreed to
by the Parties, shall be priced on the following basis exclusive of cash
discounts.
A. New Material (Condition A)
(1) Tubular Goods Other than Line Pipe
a) Tubular goods, sized 2 3/8 inches OD and larger, except line
pipe, shall be priced at Eastern mill published carload base
prices effective as of date of movement plus transportation cost
using the 80,000 pound carload weight basis to the railway
receiving point nearest the Joint Property for which published
rail rates for tubular goods exist. If the 80,000 pound rail rate
is not offered, the 70,000 pound or 90,000 pound rail rate may be
used. Freight charges for tubing will be calculated from Lorain,
Ohio and easing from Youngstown, Ohio.
b) For grades which are special to one mill only, prices shall be
computed at the mill base of that mill plus transportation cost
from that mill to the railway receiving point nearest the Joint
Property as provided above in Paragraph 2.A (1) (a). For
transportation cost from points other than Eastern mills, the
30,000 pound Oil Field Haulers Association interstate truck rate
shall be used.
c) Special end finish tubular goods shall be priced at the lowest
published out-of-stock price, f.o.b. Houston, Texas, plus
transportation cost, using Oil Field Haulers Association
interstate 30,000 pound truck rate, to the railway receiving
point nearest the Joint Property.
d) Macaroni tubing (size less than 2 3/8 inch OD) shall be priced at
the lowest published out-of-stock prices f.o.b. the supplier plus
transportation costs, using the Oil Field Haulers Association
interstate truck rate per weight of tubing transferred, to the
railway receiving point nearest the Joint Property.
(2) Line Pipe
a) Line pipe movements (except size 24 inch OD and larger with walls
3/4 inch and over) 30,000 pounds or more shall be priced under
provisions of tubular goods pricing in Paragraph A.(1)(a) as
provided above. Freight charges shall be calculated from Lorain,
Ohio.
b) Line pipe movements (except size 24 inch OD and larger with walls
3/4 inch and over) less than 30,000 pounds shall be priced at
Eastern mill published carload base prices effective as of date
of shipment, plus 20 percent, plus transportation costs based on
freight rates as set forth under provisions of tubular goods
pricing in Paragraph A.(1)(a) a provided above. Freight charges
shall be calculated from Lorain, Ohio.
c) Line pipe 24 inch OD and over 3/4 inch wall and larger shall be
priced f.o.b. the point of manufacture at current new published
prices plus transportation cost to the railway receiving point
nearest the Joint Property.
d) Line pipe, including fabricated line pipe, drive pipe and conduit
not listed on published price lists shall be priced at quoted
prices plus freight to the railway receiving point nearest the
Joint Property or at prices agree to by the Parties.
(3) Other Material shall be priced at the current new price, in effect at
date of movement, as listed by a reliable supply store nearest the
Joint Property, or point
<PAGE>
76
of manufacture, plus transportation costs, if applicable, to the
railway receiving point nearest the Joint Property.
(4) Unused new Material, except tubular goods, moved from the Joint
Property shall be priced at the current new price, in effect on date
of movement, as listed by a reliable supply store nearest the Joint
Property, or point of manufacture, plus transportation costs, if
applicable, to the railway receiving point nearest the Joint Property.
Unused new tubulars will be priced as provided above in Paragraph 2 A
(1) and (2).
B. Good Used Material (Condition B)
Material in sound and serviceable condition and suitable for reuse without
reconditioning:
(1) Material moved to the Joint Property
At seventy-five percent (75%) of current new price, as determined by
Paragraph A.
(2) Material used on and moved from the Joint Property.
(a) At seventy-five percent (75%) of current new price, as determined
by Paragraph A, if Material was originally charged to the Joint
Account as new Material or
(b) At sixty-five (65%) of current new price, as determined by
Paragraph A, if Material was originally charged to the Joint
Account as used Material.
(3) Material not used on and moved from the Joint Property.
At seventy-five percent (75%) of current new price as determined by
Paragraph A.
The cost of reconditioning, if any, shall be absorbed by the transferring
property.
C. Other Used Material
(1) Condition C
Material which is not in sound and serviceable condition and not
suitable for its original function until after reconditioning shall be
priced at fifty percent (50%) of current new price as determined by
Paragraph A. The cost of reconditioning shall be charged to the
receiving property, provided Condition C value plus cost of
reconditioning does not exceed Condition B value.
(2) Condition D
Material, excluding junk, no longer suitable for its original purpose,
but usable for some other purpose shall be priced on a basis
commensurate with its use. Operator may dispose of Condition D
Material under procedures normally used by Operator without prior
approval of Non-Operators.
(a) Casing, tubing, or drill pipe used as line pipe shall be priced
as Grade A and B seamless line pipe of comparable size and
weight. Used casing, tubing or drill pipe utilized as line pipe
shall be priced at used line pipe prices.
(b) Casing, tubing, or drill pipe used as higher pressure service
lines than standard line pipe, e.g., power oil lines, shall be
priced under normal
<PAGE>
77
pricing procedures for casing, tubing, or drill pipe. Upset
tubular goods shall be priced on a non upset basis.
(3) Condition E
Junk shall be priced at prevailing prices. Operator may dispose of
Condition E Material under procedures normally utilized by Operator
without prior approval of Non-Operators.
D. Obsolete Material
Material which is serviceable and usable for its original function but
condition and/or value of such Material is not equivalent to that
which would justify a price as provided above may be specially priced
as agreed to by the Parties. Such price should result in the Joint
Account being charged with the value of the service rendered by such
Material.
D. Pricing Conditions
(1) Loading or unloading costs may be charged to the Joint Account at
the rate of twenty-five cents (25c) per hundred weight on all
tubular goods movements, in lieu of actual loading or unloading
costs sustained at the stocking point. The above rate shall be
adjusted as of the first day of April each year following January
1, 1985 by the same percentage increase or decrease used to
adjust overhead rates in Section III, Paragraph 1.A(3). Each
year, the rate calculated shall be rounded to the nearest cent
and shall be the rate in effect until the first day of April next
year. Such rate shall be published each year by the Council of
Petroleum Accountants Societies.
(2) Material involving erection costs shall be charged at applicable
percentage of the current knocked-down price of new Material.
3. Premium Prices
Whenever Material is not readily obtainable at published or listed
prices because of national emergencies, strikes or other unusual
causes over which the Operator has no control, the Operator may charge
the Joint Account for the required Material at the Operator's actual
cost incurred in providing such Material, in making it suitable for
use, and in moving it to the Joint Property; provided notice in
writing is furnished to Non-Operators of the proposed charge prior to
billing Non-Operators for such Material. Each Non-Operator shall have
the right, by so electing and notifying Operator within ten days after
receiving notice from Operator, to furnish in kind all or part of his
share of such Material suitable for use and acceptable to Operator.
4. Warranty of Material Furnished By Operator
Operator does not warrant the Material furnished. In case of
defective Material, credit shall not be passed to the Joint Account
until adjustment has been received by Operator from the manufacturers
or their agents.
V. INVENTORIES
The Operator shall maintain detailed records of Controllable Material.
1. Periodic Inventories, Notice and Representation
At reasonable intervals, inventories shall be taken by taken by Operator of
the Joint Account Controllable Material. Written notice of intention to
take inventory shall be given by Operator at least thirty (30) days before
any inventory is to begin so that Non-Operators may be represented when any
inventory is taken. Failure of Non-Operators to
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78
be represented at an inventory shall bind Non-Operators to accept the
inventory taken by Operator.
2. Reconciliation and Adjustment of Inventories
Adjustments to the Joint Account resulting from the reconciliation of a
physical inventory shall be made within six months following the taking of
the inventory. Inventory adjustments shall be made by Operator to the
Joint Account for overages and shortages, but, Operator shall be held
accountable only for shortages due to lack of reasonable diligence.
3. Special Inventories
Special inventories may be taken whenever there is any sale, change of
interest, or change of Operator in the Joint Property. It shall be the
duty of the party selling to notify all other Parties as quickly as
possible after the transfer of interest takes place. In such cases, both
the seller and the purchaser shall be governed by such inventory. In cases
involving a change of Operator, all Parties shall be governed by such
inventory.
4. Expense of Conducting Inventories
A. The expense of conducting periodic inventories shall not be charged to
the Joint Account unless agreed to by the Parties.
B. The expense of conducting special inventories shall be charged to the
Parties requesting such inventories, except inventories required due
to change of Operator shall be charged to the Joint Account.
<PAGE>
79
ARTICLE V - BALANCING OF GAS ACCOUNTS
-------------------------
5.01 The Operator shall have the duty of administering the provisions of
this Agreement. The Operator shall use its good faith efforts to cause Gas to be
delivered as may be required to give effect to the intent that there be a
Balance between the Parties in accordance with the provisions hereof. The
Operator shall only be liable for its failure to make deliveries of gas in
accordance with the terms of this Agreement if such failure is due to its gross
negligence or willful misconduct.
5.02 The Operator shall promptly forward notice to all affected Parties,
and each month the Operator will furnish each Party a report showing for the
prior month the total volume of Gas in Btu's produced from each Well, including
the volumes vented, flared, lost or used in joint operations; the volume of Gas
disposed by each Party; each Party's overproduction or underproduction for the
month, and the cumulative overproduction or underproduction of each Party in
each Well. In the event that production from each well is not separately
measured, then the Operator will allocate production to each Well on the basis
of periodic tests or such other methods as are commonly used and accepted in the
industry. Make-up Gas disposed of by an Underproduced Party shall offset
underproduction in the order in which such underproduction accrued, i.e., First
in, First out.
5.03 During the term of this Agreement and for a period of two (2) years
thereafter, each Party shall retain all data, information and records pertaining
to the Gas disposed of by such Party in a well. Each Party shall have the right
to audit the records retained hereunder. Any audit shall be conducted at the
expense of the Party or Parties desiring such audit after reasonable notice and
during normal business hours in the office of the Party whose records are being
audited. No more than one audit of a Party shall be conducted in any twelve (12)
month period.
ARTICLE VI - CASH SETTLEMENT OF IMBALANCE
----------------------------
6.01 When production from a Well permanently ceases, there shall be a cash
settlement between the Parties hereto for any Gas not in Balance. Within sixty
(60) days after notice from the Operator that a well has permanently ceased to
produce, each Overproduced Party shall pay to the Operator the proceeds received
at the Measurement Point for the overproduction which remains accrued to such
Party, less taxes, gathering, transporting, or other reasonable charges in fact
paid on the overproduced volumes by such Overproduced Party. The Operator shall
distribute the total of such amounts so collected among the Underproduced
Parties in Proportion of each such Parties' underproduction.
6.02 The price of Gas for cash settlement by an Overproduced Party shall
be the price actually or constructively received at the Measurement Point in
arms-length transactions for the overproduction less any taxes, royalties and
other reasonable charges in fact paid on the overproduced volumes. If a
proportion of an Overproduced Party's Gas production is disposed of for its own
use, the price for such Gas will be the price received for any Gas disposed of
by such Party in arm's length transactions. During periods when an Overproduced
Party disposed of Gas for its own use and had no arms-length gas sales,
overproduction will be valued at the weighted average price received
simultaneously by all Parties for Gas disposed of in arm's length transactions.
If no Party sold Gas when the overproduction occurred, then the price shall be
the last price received by any Party making sales. A price determined for Gas
production not sold by the Overproduced Party shall be deemed to have been
constructively received by such Party.
6.03 If any portion of the price which is to be paid to an Underproduced
Party is subject to refund by any governmental authority, then the Overproduced
Party may withhold the amount subject to refund until that portion of the price
is finally approved. If any governmental agency requires an Overproduced Party
to refund any portion of a price used to make payment hereunder, then the
Underproduced Parties shall reimburse the Overproduced Parties for such refund,
including any interest. This Paragraph 6.03 shall survive the termination of
this Agreement.
6.04 If an Overproduced Party sells or assigns any or all of its interest
to an independent, un-affiliated third party which is subject to the terms
hereof, the selling/assigning party shall
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80
immediately make a cash settlement in accordance with this Article VI to any
Underproduced Parties in proportion to the volume which such party is
underproduced to the total underproduction of all parties to the Well.
ARTICLE VII - COSTS AND OWNERSHIP OF LIQUIDS
------------------------------
All operating costs, expenses and liabilities shall be borne and paid by
the Parties in accordance with the provisions of the Operating Agreement,
regardless of which Parties are disposing of Gas from a Well at any given time.
Liquid hydrocarbons of a well separated from the Gas upstream of the Measurement
Point shall be owned by all Parties in accordance with their Percentage
Ownership in the Well.
ARTICLE VIII - INDEMNITY
---------
Each Party hereby indemnifies and agrees to hold the other Parties harmless
from all claims, costs and liabilities arising out of the operation of this
Agreement and the performance of obligations hereunder by the indemnifying
Party.
ARTICLE IX - PAYMENT OF LEASE BURDENS
------------------------
Each Party shall be responsible for and shall pay or cause to be paid all
royalties, production payments and other similar burdens due on its Percentage
Ownership of Gas production from a Well and shall hold the other Parties free
from any liability therefore. The Parties disposing of Gas from a Well shall pay
or cause to be paid all production, severance, ad valorem or any other taxes,
fees or levies on such production.
ARTICLE X - BINDING EFFECT
--------------
10.1 This agreement shall be binding upon and inure to the benefit of the
Parties and their respective successors and assigns. This Agreement shall be
effective only if it is executed by all Parties with a Percentage Ownership in
the Well. This agreement may be executed in multiple counterparts.
ARTICLE XI - NOTICES
-------
Any notices or other communications required or permitted hereunder shall
be in writing and shall be deemed given only when received by the Party to whom
the same is directed at the addresses and in the manner then provided under the
Operating Agreement.
IN WITNESS HEREOF the Parties hereto have cause this Agreement to be duly signed
and sealed in duplicate originals.
ARTICLE XI - NOTICES
-------
Any controversy or claim arising out of or relating to this Agreement, or
the breach thereof, shall be settled by binding arbitration in accordance with
the Commercial Arbitration Rules of the American Arbitration Association and
judgment upon the award may be entered in any court having jurisdiction thereof.
The arbitrator shall not award punitive damages in settlement of any controversy
or claim.
IN WITNESS HEREOF the Parties hereto have caused this Agreement to be duly
signed and sealed in duplicate originals.
OPERATOR
--------
By: ___________________________________ By: ______________________________
NON-OPERATOR(S)
---------------
By: _______________________________
<PAGE>
81
EXHIBIT "F"
Attached to and made a part of that Joint Operating Agreement dated December 1,
1998, by and between Production Specialties Company as Operator and Celsius
Energy Company, Vaughan Exploration Inc., Sunset Exploration, Inc., BOBSAC, LLC,
Brothers Oil and Gas, and Vaughan Production Company as Non-Operators.
Unless exempted by Federal law, regulation or order, the following terms and
conditions shall apply during the performance of this contract:
EQUAL OPPORTUNITY CLAUSE
A. During the performance of this contract, the OPERATOR agrees as follows:
1) The OPERATOR will not discriminate against any employee or applicant
for employment because of race, color, religion, sex, or national
origin. The OPERATOR will take affirmative action to ensure that
applicants are employed and that employees are treated during
employment, without regard to their race, color, religion, sex, or
national origin. Such action shall include, but not be limited to the
following: Employment, upgrading, demotion or transfer, recruitment or
recruitment advertising, layoff or termination, rates of pay or other
forms of compensation, and selection for training, including
apprenticeship. The OPERATOR agrees to post in conspicuous places,
available to employees and applicants for employment, notices to be
provided by the contracting officer setting forth the provisions of
this nondiscrimination clause.
2) The OPERATOR will, in all solicitations or advertisements for
employees placed by or on behalf of the OPERATOR, state that all
qualified applicants will receive consideration for employment without
regard to race, color, religion, sex, or national origin.
3) The OPERATOR will send to each labor union or representative of
workers with which he has a collective bargaining agreement or other
contract or understanding, a notice to be provided by the agency
contracting officer, advising the labor union or workers'
representative of the OPERATOR'S commitments under Section 202 of the
Executive Order 11246 of September 24, 1965, and shall post copies of
the notice in conspicuous places available to employees and applicants
for employment.
4) The OPERATOR will comply with all provisions of Executive Order 11246
of September 24, 1965, and of the rules, regulations, and relevant
orders of the Secretary of Labor.
5) The OPERATOR will furnish all information and reports required by
Executive Order 11246 of September 24, 1965, and by the rules,
regulations and orders of the Secretary of Labor, or pursuant thereto,
and will permit access to his books, records, and accounts by the
contracting agency and the Secretary of Labor for purposes of
investigation to ascertain compliance with such rules, regulations and
orders.
6) In the event of the OPERATOR'S noncompliance with the
nondiscrimination clauses of this Agreement or with any of such rules,
regulations or orders, this Agreement may be cancelled, terminated or
suspended in whole or in part and the OPERATOR may be declared
ineligible for further Government contracts in accordance with
procedures authorized in Executive Order 11246 of September 24, 1965,
and such sanctions as may be imposed and remedies invoked as provided
in Executive Order 12246 of September 24, 1965, or by rule, regulation
or order of the Secretary of Labor, or as otherwise provided by law.
<PAGE>
82
7) The OPERATOR will include the provisions of paragraphs (1) through (7)
in every subcontract or purchase order unless exempted by rules,
regulations, or orders of the Secretary of Labor issued pursuant to
Section 204 of Executive Order 11246 of September 24, 1965, so that
such provisions will be binding upon each subcontractor or vendor. The
OPERATOR will take such action with respect to any subcontract or
purchase order as the contracting agency may direct as a means of
enforcing such provisions including sanctions for noncompliance:
Provided however, that in the event the OPERATOR becomes involved in
----------------
or is threatened with litigation with a subcontractor or vendor as a
result of such direction by the contracting agency, the OPERATOR may
request the United States to enter into such litigation to protect the
interests of the United States.
B. If required to do so by Federal law, regulation, or order, OPERATOR agrees
that he shall:
1) File with the Office of Federal Contract Compliance or agency
designated by it, a complete and accurate report on Standard Form 100
(EEO-1) within 30 days after the signing of this Agreement (unless
such a report has been filed in the last 12 months), and continue to
file such reports annually, on or before March 31st;
2) Develop and maintain a written affirmative action compliance program
for each of its establishments in accordance with the regulations of
the Secretary of Labor promulgated under Executive Order 11246, as
amended.
CERTIFICATE OF NONSEGREGATED FACILITIES
OPERATOR certifies that he does not and will not maintain or provide for his
employees any segregated facilities at any of his establishments, and that he
does not and will not permit his employees to perform their services at any
location, under his control, where segregated facilities are maintained.
OPERATOR understands that the phrase "segregated facilities" includes facilities
which are in fact segregated on a basis of race, color, creed, or national
origin, because of habit, local custom or otherwise. OPERATOR understands and
agrees that maintaining or providing segregated facilities for his employees or
permitting his employees to perform their services at any locations, under his
control, where segregated facilities are maintained is a violation of the Equal
Opportunity Clause required by Executive Order No. 11246 of September 24, 1965,
and the regulations of the Secretary of Labor set out in 41 CFR Chapter 60.
OPERATOR further agrees that (except where it has obtained identical
certifications from proposed subcontractors for specific time periods) it will
obtain identical certifications from proposed subcontractors prior to the award
of subcontractors exceeding $10,000 which are not exempt from the provisions of
the Equal Opportunity Clause; that it will retain such certifications in its
files, and that it will forward the following notice to such proposed
subcontractors (except where the proposed subcontractors have submitted
identical certifications for specific time periods):
NOTICE TO PROSPECTIVE SUBCONTRACTORS OF REQUIREMENT FOR
CERTIFICATIONS OF NONSEGREGATED FACILITIES:
A Certification of Nonsegregated Facilities as required by the May 9, 1967,
order on Elimination of Segregated Facilities, by the Secretary of Labor (32 F.
R. 7439, May 19, 1967), and as required by the regulations of the Secretary of
Labor set out in 41 CFR Chapter 60, and as they may be amended, must be
submitted prior to the award of a subcontract exceeding $10,000 which is not
exempt from the provisions of the Equal Opportunity Clause. The certification
may be submitted either for each subcontract or for all subcontracts during a
period (i.e., quarterly, semi-annually, or annually).
<PAGE>
83
EXECUTIVE ORDER 11598, 41, CFR 50-250
LISTING JOB VACANCIES WITH THE
FEDERAL STATE EMPLOYMENT SERVICE SYSTEM
"As provided by 41 CFR 50-250, the contractor agrees that all employment
openings of the contractor which exist at the time of the execution of the
contract, and those which occur during the performance of this contract,
including those not generated by the contract and including those occurring at
an establishment of the contractor other than the one wherein the contract is
being performed but excluding those of independently operated corporate
affiliates, shall to the maximum extent feasible, be offered for listing at an
appropriate local office of the State Employment Service System wherein the
opening occurs and to provide such periodic reports to such local office
regarding employment openings and hires as may be required; provided, that this
provision shall not apply to openings which the contractor fills from within the
contractor's organization or are filled pursuant to a customary and traditional
employer-union hiring arrangement and that the listing of employment openings
shall involve only the normal obligations which attach to the placing of job
orders."
"The contractor agrees further to place the above provision in any subcontract
directly under this contract."
"The above two clauses shall not be operative when the contract or subcontract
is for an amount less than $10,000, or which will generate less than 400 man-
days of employment within the contractor's or subcontractor's organization or
when the provisions of 41, CFR 50-250 are not otherwise applicable hereto. Each
man-day consists of any day during which an employee performs more than one hour
of work."
<PAGE>
EXHIBIT 10.2
Procrass Corp
PO Box 1792
Anderson Square
Grand Cayman, British West Indies
July 1, 1998
Mr. Allen Sewell, President
Newlands Oil & Gas Inc.
750 West Pender Street, Suite 604
Vancouver, BC Canada V6C 1G8
RE: ENGAGEMENT AGREEMENT
Dear Mr. Sewell:
This letter will set forth the terms and conditions of our agreement by which
Newlands Oil & Gas Inc., hereinafter referred to as NEWLANDS will engage
Procrass Corp, hereinafter referred to as PROCRASS, as a consultant and
coordinator for the purpose of facilitating the preparation of a Private
Placement, hereinafter referred to as PP, or a Joint Venture, hereinafter
referred to as JV.
PROCRASS proposes to assist in the structure of a Preferred Convertible Stock.
NEWLANDS agrees to engage PROCRASS to coordinate certain components of the PP or
JV program for NEWLANDS. Included in the services to be provided by PROCRASS are
the following:
A) PROCRASS will consult with securities professionals to evaluate the
capital needs of NEWLANDS and advise on the best means available for
structuring the Offering.
B) PROCRASS will consult with a securities attorney, in preparation of
the Offering and disclosure documents. NEWLANDS agrees to provide all
information and documentation as required for the completion of the
Offering.
C) PROCRASS will undertake to raise on a "best-efforts" basis, $1,500,000
for NEWLANDS.
1
<PAGE>
D) PROCRASS will advise and coordinate with NEWLANDS in the preparation
of all accounting information required for the capital-raising
program; however, NEWLANDS agrees to be responsible to provide the
necessary financial and accounting documentation. NEWLANDS further
agrees to provide all such information in an expedited manner.
E) PROCRASS will prepare and print the PP documents or JV agreement.
PROCRASS can make no guarantee and NEWLANDS acknowledges that there is no
guarantee that the Offering can be completed in any required time frame due to
current market conditions.
NEWLANDS agrees to pay a turnkey amount of forty five thousand dollars
($45,000.00) to PROCRASS for the services to be rendered. The turnkey fee will
be payable in advance and is non-refundable.
NEWLANDS agrees that the above mentioned turnkey fee covers the cost and
expenses said costs and expenses herein are defined as, but not limited to,
coordination, administration costs, packaging, printing, consulting, due
diligence, travel and any other expenses deemed necessary by PROCRASS in
connection with the Offering.
Upon execution of this Agreement and receipt of the required payment, PROCRASS
will proceed to immediately evaluate NEWLANDS and verify the initial information
and documentation prepared and presented by NEWLANDS to PROCRASS. Furthermore,
PROCRASS shall immediately commence with the preparation of NEWLANDS disclosure
documents for submissions to potential investors. The responsibility for the
full and accurate disclosure shall at all times remain that of NEWLANDS.
NEWLANDS agrees to make available at all times to PROCRASS, for the purposes of
due diligence of NEWLANDS and its operations and preparation of the Offering,
all of NEWLANDS books, records, files, agreements and other documents as deemed
necessary by PROCRASS, as well as direct access to NEWLANDS officers, directors
and key personal. Should there occur any event which would have a material
effect upon NEWLANDS business, operations, properties or prospects, NEWLANDS
shall promptly advise PROCRASS.
NEWLANDS on behalf of itself and its officers and employees hereby agrees that
the corporation, division, subsidiaries, employees, agents or consultants will
not make any contact with, deal with, or otherwise involve in any transaction
with any Broker/Dealer, institution, trust, corporate or individual and
investors introduced by their association with PROCRASS or its agents, without
written permission from PROCRASS.
This agreement is a perpetuating non-circumvention and non-disclosure guarantee
for a period of one (1) year from the date of execution of this agreement and is
to be applied to any and all transactions entertained by NEWLANDS.
2
<PAGE>
NEWLANDS further acknowledges receipt of a copy of this agreement and that the
person signing has the legal and proper authority to execute same. Furthermore,
this agreement automatically voids any and all contracts or agreements signed
prior to this agreement and is agreed to be retroactive to said date by all
parties.
This agreement contains the entire understanding of all parties and the
undersigned are in agreement that there are no other representations made or
obligations accrued except as specified in the terms of this agreement. Said
terms may not be amended or altered except in writing, dated and signed by both
NEWLANDS and PROCRASS, with reference being made to this agreement.
If the foregoing accurately sets forth our understanding and agreement, please
indicate your acceptance by signing in the place provided below and returning to
PROCRASS.
Sincerely,
Edward Warwick
AGREED AND ACCEPTED:
NEWLANDS OIL & GAS INC.
By: /s/ Allen Sewell Date: July 1, 1998
------------------ ----------------
Allen C. Sewell
President
3
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