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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-SB
GENERAL FORM FOR REGISTRATION OF SECURITIES OF SMALL BUSINESS ISSUERS UNDER
SECTION 12 (b) OR (g) OF THE SECURITIES EXCHANGE ACT OF 1934
NATION ENERGY, INC.
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(Name of Small Business Issuer in its Charter)
Delaware 59-2887569
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(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
Suite 1100 - 609 West Hastings Street
Vancouver BC Canada V6B 4W4 N/A
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number: (800) 400-3969
Securities registered pursuant to Section 12(b) of the Act:
Title of each class Name of each exchange on which
to be so registered each class is to be registered
N/A N/A
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Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value per share
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(Title of Class)
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NATION ENERGY, INC.
FORM 10-SB
TABLE OF CONTENTS
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PART I
Item 1. Description of Business
Item 2. Management's Discussion and Analysis
Item 3. Description of Property
Item 4. Security Ownership of Certain Beneficial Owners and Management
Item 5. Directors, Executive Officers, Promoters and Control Persons
Item 6. Executive Compensation
Item 7. Certain Relationships and Related Transactions
Item 8. Description of Securities
PART II
Item 1. Market Price of and Dividends on the Registrant's Common Equity
and other Shareholder Matters
Item 2. Legal Proceedings
Item 3. Changes in and Disagreements with Accountants
Item 4. Recent Sales of Unregistered Securities
Item 5. Indemnification of Directors and Officers
PART F/S
Financial Statements
PART III
Item 1. Index to Exhibits
Item 2. Description of Exhibits
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
THE COMPANY
Nation Energy, Inc. (the "Company") is a development stage company. It
was formed under the laws of the state of Florida on April 19, 1988 under the
name Excalibur Contracting, Inc. and from that date until September 1998 it
conducted no business and existed as a shell corporation. After the
reinstatement of the Company's Articles of incorporation on September 16, 1998,
the Company's main focus has been the procurement of mineral leasehold
interests, primarily oil and gas exploitation rights. The Company reincorporated
as a Delaware corporation on February 2, 2000 and changed its name to Nation
Energy, Inc. on February 15, 2000. Pursuant to its recent focus, the Company has
commenced corporate strategic development whereby the Company has been
negotiating regarding potential oil and gas projects. The Company has conducted
no significant operations. Though the Company has reviewed its potential
participation in several oil and gas projects in the Rocky Mountain region it
has entered into only one agreement as of this date for the exploration of
properties and has purchased two leases totaling 560 acres. No assurance can be
given that the Company will be successful in its negotiations and will in fact
participate in exploration for hydrocarbons in this region or others or that
such exploration activities will be successful.
SELECTION OF TARGET AREAS FOR ACQUISITION
The Company's proposed plans call for it to consider several factors in
choosing a region for acquisition of oil and gas leases. The Company considers
those regions in which it's industry contacts have the most experience in order
to benefit from such experience. The Company will determine which leases it is
interested in exploring based upon the analysis of technical and production
data, financial analysis based on such production analysis, on site verification
of well equipment and production capability, and verification of ownership of
leasehold rights.
GEOLOGICAL AND GEOPHYSICAL TECHNIQUES
Upon completion of this Offering, the Company may employ detailed
geological interpretation combined with advanced seismic exploration techniques
to identify potential ventures. Geological interpretation is based upon data
recovered from existing oil and gas wells in an area and other sources. Such
information is either purchased from the company that drilled the wells or
becomes public knowledge through state agencies after a period of years. Through
analysis of rock types, fossils and the electrical and chemical characteristics
of rocks from existing wells, the Company can construct a picture of rock layers
in the area. Further, the Company will have access to the logs from the existing
operating wells which will allow the Company to extrapolate a decline curve and
make an estimation of the number of recoverable barrels of oil or cubic feet of
gas existing beneath a particular lease. The Company has not purchased, leased,
or entered into any agreements to purchase or lease any of the equipment
necessary to conduct the geological or geophysical testing referred to herein
and will only to do so, upon the successful completion of this Offering.
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MARKET FOR OIL PRODUCTION
The market for oil and gas production is regulated by federal, state
and foreign governments. The overall market is mature and with the exception of
gas, all producers in a producing region will receive the same price. The major
oil companies will purchase all crude oil offered for sale at posted field
prices. There are price adjustments for deviations from the quality standards
established by the purchaser. Oil sales are normally contracted with a
"gatherer" which is a third-party who contracts to pick-up the oil at the well
site. In some instances there may be deductions for transportation from the
wellhead to the sales point. The majority of crude oil purchasers do not at this
time charge transportation fees, unless the well is outside their service area.
The oil gatherer will usually handle disbursements of sales revenue to both the
owners of the well (a "working interest owner") as well as payments to persons
entitled to royalties as a result of such sales ("royalty owners"). The Company
typically will be a working interest owner in the projects that it undertakes or
in which it invests. By being a working interest owner, the Company is
responsible for the payment of its proportionate share of the operating expenses
of the well. Royalty owners receive a percentage of gross oil production for the
particular lease and are not obligated in any manner whatsoever to pay for the
cost of operating the lease. Therefore, the Company, in most instances, will be
paying the expenses for the oil and gas revenues paid to the royalty owners.
MARKET FOR GAS PRODUCTION
In contrast to sales of oil, the gas purchaser will pay the well
operator 100% of the sales proceeds monthly for the previous month's sales. The
operator is responsible for all checks and distributions to the working interest
and royalty owners. There is no standard price for gas. Prices will fluctuate
with the seasons and the general market conditions. It is the Company's
intention to utilize this market whenever possible in order to maximize
revenues. The Company does not anticipate any significant change in the manner
its gas production would be purchased, however, no assurance can be given that
such changes will not occur in the future.
INITIAL FOCUS
The principal activity for the Company will be the securing of oil and
gas exploration contracts and joint ventures in the Greater Trona Area, Wyoming.
On August 11, 1999, the Company signed a letter of intent with Saurus Resources
Inc., giving the Company the option to enter into a joint venture with Saurus
under which the Company may acquire up to 50% of the profits resulting from oil
and gas development by the venture in the Greater Trona Area prospect, located
in southwest Wyoming. Saurus currently has an interest in 11,960 acres and is
negotiating to acquire an interest in an additional 10,155 acres in the Greater
Trona Area prospect. Under the terms of the letter, the Company paid for a study
reporting on the economic and geologic merits of the Trona venture and had until
September 15, 1999, to enter into a joint venture with Saurus. On October 1,
1999, the Company elected to proceed with the joint venture, and has advanced
the initial payment of $202,131.
Under the arrangement with Saurus, Saurus and the Company will each pay
50% of the costs of obtaining the necessary rights and drilling exploratory
wells in the Greater Trona prospect. The Company expects to spend $525,000 on
drilling and completing approximately 10 wells to a minimum depth of 1,200 feet.
If the cost of drilling and completing these wells is less than $525,000, the
Company will spend the difference on preparing the wells for production and
connecting the wells to a sales line. After spending the $525,000, the Company
will be deemed to have the right to 50% of the profits of the Greater Trona Area
joint venture.
If additional lands become available for purchase and the Company is
successful in leasing such additional lands, Saurus shall have the option to
defer its 50% share of the cost of the first 100,000 acres
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of such additional land that the Company may purchase. Saurus will have this
option for a period of six months from the date of the completion of the last of
the ten initial wells discussed above.
The Greater Trona Area has a mature market for oil and gas production.
The area is serviced by numerous pipelines, providing the Company with access to
a number of potential buyers. The Company will be responsible for moving its oil
and gas production to the sales point. In the case of gas production, the sales
point will be at a pipeline interconnect. In the case of oil production, the
Company will have the option to sell at the wellhead or to elect to build a
tie-in pipeline. Because the areas in which the Company anticipates conducting
its oil and gas exploration have a good infrastructure of both oil and gas
pipelines, the distance to tie in, and therefore the cost, is expected to be
minimal.
At this time the Company has not yet identified any additional lands
for purchase.
RELIANCE ON MANAGEMENT
Investors will have to rely upon the judgment and ability of the
Company's management with regard to finding partners to spread the risk of the
projects in which it engages, acquiring additional funding, and applying the
Company's limited resources if and when the Company is able to participate in
the Greater Trona Area project and other projects in which the company may
choose to participate. Since the nature and extent of the Company's
participation in the Greater Trona Area project and other projects, as well as
any other ventures in which the Company may engage, is subject to many
uncertainties, investors must have a high level of confidence in Management's
judgment and ability to make decisions on behalf of the Company pursuant to the
circumstances surrounding such projects. Any investors that are not comfortable
with these risks and the uncertainties of the Company's potential participation
in the Greater Trona Area project, and other projects, or any investor relying
upon the fact that the Company will participate in the Greater Trona Area
project and not have to possibly search for other prospects should not invest.
Further, no assurance can be given that even if the Company participates in this
project that the test well or any other wells drilled will be capable of
producing oil and/or gas in commercial quantities or that the venture will be
successful.
POSSIBLE DRILL RIG OPERATION
Management is of the opinion that one of the ways to enhance the
Company's position in the development of oil and gas may be the purchase and
operation of drilling rigs. Though no assurances can be given that the Company
will purchase drilling rigs and enter into the drilling business nor that the
Company will be successful in such an enterprise, the Company is currently
investigating the purchase of used drilling rigs and could possibly apply the
proceeds of this Offering to obtain one or more drilling rigs.
The Company would have the option to enter into different types of
drilling contracts with operators, each with varying degrees of risk and reward.
There are three basic types of contract used in the oil and gas industry:
"daywork," "footage," and "turnkey". Pursuant to a daywork contract the rig and
necessary personnel are contracted out at a fixed day rate. Most risks and
delays to drilling are born by the entity hiring the rig. In footage contracts
wells are drilled on a dollars per foot basis to a designated depth. These
contracts are more expensive because part of the burdens for delays and the risk
of drilling are born by the drilling contractor and part by the entity hiring
the rig. A turnkey contract is a well drilled by the contractor for a fixed
price. This type of contract bears the greatest risk for the drilling
contractor, but this risk is usually reflected in the contract with a
substantial increase in service costs or through a substantial participation by
the drilling contractor in the well if it is successful. If and when the Company
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purchases drilling rigs, Management will decide on a deal by deal basis after
evaluation of the particular risks and circumstances which type of drilling
contract, in its sole discretion, will best serve the interests of the Company.
COMPETITION
The oil and gas industry is highly competitive. Competition for
prospects and producing properties is intense. The Company will be competing
with a number of other potential purchasers of prospects and producing
properties, most of which will have greater financial resources than the
Company. The bidding for prospects has become particularly intense with
different bidders evaluating potential acquisitions with different product
pricing parameters and other criteria that result in widely divergent bid
prices. The presence in the market of bidders willing to pay prices higher than
are supported by the Company's evaluation criteria could further limit the
ability of the Company to acquire prospects and low or uncertain prices for
properties can cause potential sellers to withhold or withdraw properties from
the market. In this environment, there can be no assurance that there will be a
sufficient number of suitable prospects available for acquisition by the Company
or that the Company will be able to obtain financing for or participants to join
in the development of prospects. The Company's competitors and potential
competitors include major oil companies and independent producers of varying
sizes. Most of the Company's competitors have greater financial, personnel and
other resources than the Company and therefore have greater leverage to use in
acquiring prospects, hiring personnel and marketing oil and gas. A high degree
of competition in these areas is expected to continue.
GOVERNMENTAL REGULATION
The production and sale of oil and gas is subject to regulation by
state, federal, local authorities, and foreign governments. In most areas there
are statutory provisions regulating the production of oil and natural gas under
which administrative agencies may set allowable rates of production and
promulgate rules in connection with the operation and production of such wells,
ascertain and determine the reasonable market demand of oil and gas, and adjust
allowable rates with respect thereto.
The sale of liquid hydrocarbons was subject to federal regulation under
the Energy Policy and Conservation Act of 1975 that amended various acts,
including the Emergency Petroleum Allocation Act of 1973. These regulations and
controls included mandatory restrictions upon the prices at which most domestic
crude oil and various petroleum products could be sold. All price controls and
restrictions on the sale of crude oil at the wellhead have been withdrawn. It is
possible, however, that such controls may be reimposed in the future but when,
if ever, such reimposition might occur and the effect thereof on the Company
cannot be predicted.
Approvals to conduct oil and gas exploration and production operations
are required from various governmental agencies. There is no assurance when and
if such approvals will be granted.
EMPLOYEES
The Company currently has no employees other than its officers and
directors. None of the officers and directors are employed by the Company on a
full-time basis. Management of the Company expects to hire additional employees
as needed. Management currently estimates that the Company will not hire any
employees in the next twelve months.
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ENVIRONMENTAL LAWS
The Company intends to conduct its operations in compliance with all
applicable environmental laws. The cost of such compliance has been factored in
to the estimated costs of drilling and production. The effects of applicable
environmental laws are to add to the cost of operations in the Trona region and
to add to the time it takes to bring a project to fruition. The Company has
considered these factors in its decision to proceed with the Trona joint venture
and will consider these factor when it evaluates future exploration and
development projects.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS
RESULTS OF OPERATIONS
The Company is a shell company and has not conducted any significant
operations to date.
REVENUES
The Company has had no revenues from the date of its formation in April
18, 1988 to the present.
PLAN OF OPERATION
The Company has conducted no significant operations. Though the Company
has reviewed its potential participation in several oil and gas projects in the
Rocky Mountain region it has entered into only one agreement as of this date
with Saurus Resources Inc., described below in "--Initial Focus," for the
exploration of properties and has purchased two leases totaling 560 acres in the
Greater Trona Area, Wyoming, under this agreement. During the next twelve months
the Company plans to focus its resources on exploring this region and evaluating
additional opportunities for developing oil and gas projects.
During the next twelve months the Company's proposed plans call for it
analyze additional regions for acquisition of oil and gas leases based on
several factors. The Company considers those regions in which it's industry
contacts have the most experience in order to benefit from such experience. The
Company will determine which leases it is interested in exploring based upon the
analysis of technical and production data, financial analysis based on such
production analysis, on site verification of well equipment and production
capability, and verification of ownership of leasehold rights.
INITIAL FOCUS
The principal activity for the Company in the next twelve months and
beyond will be the securing of oil and gas exploration contracts and joint
ventures in the Greater Trona Area, located in Sweetwater County, Wyoming. On
August 11, 1999, the Company signed a letter of intent with Saurus Resources
Inc., giving the Company the option to enter into a joint venture with Saurus
under which the Company may acquire up to 50% of the profits resulting from oil
and gas development by the venture in the Greater Trona Area prospect, located
in southwest Wyoming. Saurus currently has an interest in 11,960 acres and is
negotiating to acquire an interest in an additional 10,155 acres in the Greater
Trona Area prospect. Under the terms of the letter, the Company paid for a study
reporting on the economic and geologic merits of the Trona venture and had until
September 15, 1999, to enter into a joint venture with Saurus. On October 1,
1999, the Company elected to proceed with the joint venture, and has advanced
the initial payment of $202,131 U.S.
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Under the arrangement with Saurus, Saurus and the Company will each pay
50% of the costs of obtaining the necessary rights and drilling exploratory
wells in the Greater Trona prospect. The Company expects to spend $525,000 US on
drilling and completing approximately 10 wells to a minimum depth of 1,200 feet.
If the cost of drilling and completing these wells is less than $525,000 US, the
Company will spend the difference on preparing the wells for production and
connecting the wells to a sales line. After spending the $525,000 US, the
Company will be deemed to have the right to 50% of the profits of the Greater
Trona Area joint venture.
If additional lands become available for purchase and the Company is
successful in leasing such additional lands, Saurus shall have the option to
defer its 50% share of the cost of the first 100,000 acres of such additional
land that the Company may purchase. Saurus will have this option for a period of
six months from the date of the completion of the last of the ten initial wells
discussed above. At this time the Company has not identified any additional
lands for purchase.
All of the Company's lands may be classified as undeveloped acreage at
this time as no wells have been drilled so far. To date, the Company has
purchased one state of Wyoming lease totaling 320 acres and one federal lease
totaling 240 acres. See "Description of the Property -- Principal Property."
The Company does not foresee hiring any additional employees in the
next twelve months.
Capital acquisitions over the next twelve months are expected to total
$200,000. These capital acquisitions will consist of wellhead, tie-in and
compression equipment needed to produce gas in the event the Company's
exploration wells are successful. The Company has enough cash to meet its
obligations in the Greater Trona joint venture.
GEOLOGICAL AND GEOPHYSICAL TECHNIQUES
The Company may, within the next twelve months or thereafter, employ
detailed geological interpretation combined with advanced seismic exploration
techniques to identify potential ventures. Geological interpretation is based
upon data recovered from existing oil and gas wells in an area and other
sources. Such information is either purchased from the company that drilled the
wells or becomes public knowledge through state agencies after a period of
years. Through analysis of rock types, fossils and the electrical and chemical
characteristics of rocks from existing wells, the Company can construct a
picture of rock layers in the area. Further, the Company will have access to the
logs from the existing operating wells which will allow the Company to
extrapolate a decline curve and make an estimation of the number of recoverable
barrels of oil or cubic feet of gas existing beneath a particular lease. The
Company has not purchased, leased, or entered into any agreements to purchase or
lease any of the equipment necessary to conduct the geological or geophysical
testing referred to herein and will only to do so should the Board of Directors
find that the information otherwise available to the Company is insufficient to
identify potentially profitable oil and gas properties.
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POSSIBLE DRILL RIG OPERATION
Management is of the opinion that one of the ways to enhance the
Company's position in the development of oil and gas may be the purchase and
operation of drilling rigs. Though no assurances can be given that the Company
will purchase drilling rigs and enter into the drilling business nor that the
Company will be successful in such an enterprise, the Company is currently
investigating the purchase of used drilling rigs and could possibly apply the
proceeds of this Offering to obtain one or more drilling rigs.
The Company would have the option to enter into different types of
drilling contracts with operators, each with varying degrees of risk and reward.
There are three basic types of contract used in the oil and gas industry:
daywork, footage, and turnkey. Pursuant to a daywork contract the rig and
necessary personnel are contracted out at a fixed day rate. Most risks and
delays to drilling are born by the entity hiring the rig. In footage contracts
wells are drilled on a dollars per foot basis to a designated depth. These
contracts are more expensive because part of the burdens for delays and the risk
of drilling are born by the drilling contractor and part by the entity hiring
the rig. A turnkey contract is a well drilled by the contractor for a fixed
price. This type of contract bears the greatest risk for the drilling
contractor, but this risk is usually reflected in the contract with a
substantial increase in service costs or through a substantial participation by
the drilling contractor in the well if it is successful. If and when the Company
purchases drilling rigs, Management will decide on a deal by deal basis after
evaluation of the particular risks and circumstances which type of drilling
contract, in its sole discretion, will best serve the interests of the Company.
LIQUIDITY AND CAPITAL RESOURCES
The Company has no operating history. The Company does not expect to
generate sufficient revenues within the foreseeable future to support the
expenses of its development and marketing activities and therefore will need to
rely upon significant additional funding to implement its development plans. It
is anticipated that this funding will be accomplished through the sale of the
Company's equity securities or through borrowing. Prior to March, 2000, the
Company has sold 7,170,000 shares of its Common Stock for approximately $728,400
prior to deduction of offering expenses. As of its audited financial statements
of March 31, 1999 the Company had assets of $728,205 and as of its most recent
balance sheet dated December 31, 1999 the Company had assets of $898,120. The
foregoing funds will be and have been mainly used by the company to develop,
exploit and market oil and gas projects. The Company intends to raise future
requisite funds by subsequent offerings of its Common Stock and will not be able
to institute its full plan of operation without significant additional funding.
The Company has pending a private placement of its Common Stock the gross
proceeds of which will amount to $4,500,000 assuming that all of the shares
offered for sale are sold. See "--Private Placement," below. The Company
currently anticipates that, assuming that all of the shares offered for sale are
sold, this private placement will satisfy the cash requirements of the Company
for the next twelve months.
PRIVATE PLACEMENT
The Company has pending a private offering of up to 4,500,000 shares of
its Common Stock at an offering price of $1.00 per share. Net proceeds from this
offering (after deducting expenses of the offering estimated to be $10,000) is
expected to be $4,490,000 if all of the Shares are sold. The Company intends to
use all of the foregoing amounts for working capital. Funds will be used as
general working capital including but not limited to, obtaining oil and/or gas
leases, hiring executive and support personnel, and obtaining facilities to
conduct operations, and inventory equipment. At present the Company is
negotiating regarding several projects and has entered into a joint operating
agreement with Saurus Resources, Inc. for an option on a 50% interest in a
project in the Greater Trona Prospect, located
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in southwest Wyoming. The Company has also purchased two oil and gas leases
totaling 560 acres. No assurance can be given that the Company will be able to
obtain such additional arrangements as will be necessary to develop and
implement its plan in a timely manner or if implemented that said enterprise
will be profitable. No assurance can be given that significant revenues will be
derived from the development and operation of it's the Company's development
plans.
Until required for specific purposes, the net proceeds of the offering
may be invested temporarily in short-term obligations such as short-term
government obligations.
The Company can only estimate the future use of proceeds based on the
current status of the Company's operations, its current plans and current
economic condition. Due to the uncertainties of fund raising and negotiations,
the Company is unable to predict precisely what amount will be used for any
particular purpose. The Company will apply the proceeds of this offering in such
manner as it deems appropriate under the then existing circumstances. The
Company reserves the right to amend the use of proceeds by vote of a majority of
the Board of Directors.
EMPLOYEES
The Company currently has no employees other than its Officers and
Directors. Management of the Company expects to hire additional employees as
needed. Management currently estimates that the Company will not hire any
employees in the next twelve months.
INVESTMENT CONSIDERATIONS
THIS REGISTRATION STATEMENT CONTAINS FORWARD-LOOKING STATEMENTS. ACTUAL EVENTS
OR RESULTS COULD DIFFER MATERIALLY FROM THOSE DISCUSSED IN THE FORWARD-LOOKING
STATEMENTS AS A RESULT OF VARIOUS FACTORS INCLUDING, WITHOUT LIMITATION, THE
RISK FACTORS SET FORTH BELOW AND ELSEWHERE IN THIS REGISTRATION STATEMENT. AN
INVESTMENT IN THE SECURITIES OF THE COMPANY INVOLVES A HIGH DEGREE OF RISK. THE
FOLLOWING DOES NOT PURPORT TO BE A COMPREHENSIVE SUMMARY OF ALL THE RISKS
ASSOCIATED WITH AN INVESTMENT IN THE COMPANY. RATHER, THE FOLLOWING ARE ONLY
CERTAIN PARTICULAR RISKS TO WHICH THE COMPANY IS SUBJECT THAT THE COMPANY WISHES
TO ENCOURAGE PROSPECTIVE INVESTORS TO DISCUSS IN DETAIL WITH THEIR PROFESSIONAL
ADVISORS. PROSPECTIVE INVESTORS, PRIOR TO MAKING AN INVESTMENT IN THE COMPANY,
SHOULD CAREFULLY CONSIDER, AMONG OTHERS, THE FOLLOWING RISK FACTORS:
No Operating History and Revenues. The Company is a shell company and
is subject to all the risks inherent in the creation of a new business. The
Company has no employees other than its management team and no set business
plan. Management of the Company has substantial discretion with respect to the
use of assets of the Company. Since the Company is a new venture, it has no
record of operations, and there is nothing at this time upon which to base an
assumption that the Company's plans will prove successful. If the Company's
plans prove to be unsuccessful, investors in the Company may lose all or a
substantial part of their investment.
No Contracted Projects. The Company is a shell corporation in its
initial stages of development and though it has identified some initial projects
at present it has only entered into one agreement for the exploration of oil and
gas. There is no assurance that the Company will be able to raise funds in a
timely manner or successfully enter into other agreements with regards to any of
its current prospects or, if such
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agreements are entered into, that it will be successful in its exploration
activities. See "DESCRIPTION OF BUSINESS."
Lack of Liquidity and Publicly Available Information. The Common Stock
is currently trading on the OTC Bulletin Board under the symbol "NEGY". The
Common Stock is thinly traded on the OTC Bulletin Board and there can be no
assurance that the shares of the Common Stock will be readily saleable thereon.
In addition, the Company currently is not subject to the periodic information
and reporting provisions of the Securities Exchange Act of 1934 (the "Exchange
Act"). Accordingly, only a relatively small amount of information about the
Company is available to the public and potential purchasers of the Company and
its Common Stock. In the event that a registration statement registering the
Company under the Exchange Act is not effective on or before May 17, 2000, the
Company's stock will become ineligible for trading on the OTC Bulletin Board.
See "DESCRIPTION OF THE CAPITAL STOCK--Trading".
Wildcat Drilling. The Company expects to engage in the exploration of
hydrocarbons by drilling unproven prospects. Such a practice is known as wildcat
drilling, a very high risk drilling activity. Investors should be aware that
there is a high probability that the Company could drill a "dry hole" and that
the investor could lose all or a substantial part of their entire investment.
Volatility of Oil and Gas Markets. Recently the price of oil and gas
has been subject to substantial volatility. There can be no assurance that this
volatility will not continue in the future, making it difficult for the
Company's strategic planning and the valuation of prospects.
Availability of Suitable Prospects or Producing Properties. Competition
for prospects and producing properties is intense. The Company will be competing
with a number of other potential purchasers of prospects and producing
properties, most of whom will have greater financial resources than the Company.
The bidding for prospects has become particularly intense with different bidders
evaluating potential acquisitions with different product pricing parameters and
other criteria that result in widely divergent bid prices. The presence in the
market of bidders willing to pay prices higher than are supported by the
Company's evaluation criteria could further limit the ability of the Company to
acquire prospects and low or uncertain prices for properties can cause potential
sellers to withhold or withdraw properties from the market. In this environment,
there can be no assurance that there will be a sufficient number of suitable
prospects available for acquisition by the Company or that the Company can sell
prospectus or obtain financing for or participants to join in the development of
prospects. See "DESCRIPTION OF BUSINESS."
Title to Properties. It is customary in the oil and gas industry to
acquire an interest in a property based upon a preliminary title investigation.
If the title to the prospects should prove to be defective, the Company could
lose the costs of acquisition, or incur substantial costs for curative title
work.
Shut-in Wells and Curtailed Production. Production from gas wells may
be curtailed or shut-in for considerable periods of time due to a lack of market
demand, and such curtailments may continue for a considerable period of time in
the future. There may be an excess supply of gas in areas where the Company's
operations will be conducted. In such an event, it is possible that there will
be no market or a very limited market for the Company's prospects.
Operating and Environmental Hazards. Hazards incident to the operation
of oil and gas properties, such as accidental leakage of petroleum liquids and
other unforeseen conditions, may be encountered by the Company if it
participates in developing a well and, on occasion, substantial liabilities to
third parties or governmental entities may be incurred. The Company could be
subject to liability for
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pollution and other damages. Governmental regulations relating to environmental
matters could also increase the cost of doing business or require alteration or
cessation of operations in certain areas.
Uninsured Risks. The Company may not be insured against losses or
liabilities which may arise from operations, either because such insurance is
unavailable or because the Company has elected not to purchase such insurance
due to high premium costs or other reasons.
Federal and State Taxation. Federal and state income tax laws are of
particular significance to the oil and gas industry. Recent legislation has
eroded previous benefits to oil and gas producers, and any subsequent
legislation may continue this trend. The states in which the Company may conduct
oil and gas activities also impose taxes upon the production of oil and gas
located within such states. There can be no assurance that the tax laws will not
be changed or interpreted in the future in a manner which adversely affects the
Company.
Government Regulation. The oil and gas business is subject to
substantial governmental regulation, including the power to limit the rates at
which oil and gas are produced and to fix the prices at which oil and gas are
sold. It cannot be accurately predicted whether additional legislation or
regulation will be enacted or become effective.
Write-downs and Limits on Accuracy of Reserve Estimates. Oil and gas
reserve estimates are necessarily inexact and involve matters of subjective
engineering judgment. In addition, any estimates of future net revenues and the
present value of such revenues are based on price and cost assumptions provided
by the Company as its best estimate. These estimates may not prove to have been
correct over time. A further decline in oil and gas prices may require the
Company to write-down the value of its oil and gas reserves.
Need for Subsequent Funding. The Company believes it will need to raise
substantial additional funds in order to maintain its operations. The Company's
continued operations therefore will depend upon its ability to raise additional
funds through bank borrowings or equity or debt financing. There is no assurance
that the Company will be able to obtain additional funding when needed, or that
such funding, if available, can be obtained on terms acceptable to the Company.
If the Company cannot obtain needed funds, it may be forced to curtail or cease
its activities. See "MANAGEMENT'S DISCUSSION AND ANALYSIS--Liquidity and Capital
Resources."
Need for Additional Key Personnel. At present, the Company employs no
full time employees. The success of the Company's proposed business will depend,
in part, upon the Company's ability to attract and retain qualified employees.
The Company believes that it will be able to attract competent employees, but no
assurance can be given that the Company will be successful in this regard. If
the Company is unable to engage and retain the necessary personnel, its business
would be materially and adversely affected.
Reliance Upon Directors and Officers. The Company is wholly dependent,
at the present, upon the personal efforts and abilities of its Officers who will
exercise control over the day to day affairs of the Company, and upon its
Directors, most of whom are engaged in other activities, and will devote limited
time to the Company's activities. Upon completion of this Offering, the officers
of the Company will continue to devote limited time to the operation of the day
to day affairs to the Company.
FOR ALL OF THE AFORESAID REASONS AND OTHERS SET FORTH HEREIN, AS WELL
AS OTHER FACTORS NOT SET FORTH HEREIN, THE PURCHASE OF THE SHARES OF COMMON
STOCK OF COMPANY INVOLVES A HIGH DEGREE OF RISK. ANY PERSON CONSIDERING AN
INVESTMENT IN THE SHARES OF COMMON STOCK OFFERED HEREBY
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<PAGE> 13
SHOULD BE AWARE OF THESE AND OTHER FACTORS SET FORTH IN THIS MEMORANDUM. THE
SHARES OF COMMON STOCK SHOULD BE PURCHASED ONLY BY PERSONS WHO CAN AFFORD TO
ABSORB A TOTAL LOSS OF THEIR INVESTMENT IN THE COMPANY AND HAVE NO NEED FOR A
RETURN ON THEIR INVESTMENT.
ITEM 3. DESCRIPTION OF PROPERTY
PRINCIPAL PROPERTY
The principal real estate utilized by the Company is located in the
Greater Trona Area (which lies in Sweetwater County, Wyoming). On August 11,
1999, the Company signed a letter of intent with Saurus Resources Inc., giving
the Company the option to enter into a joint venture with Saurus under which the
Company may acquire up to 50% of the profits resulting from oil and gas
development by the venture in the Greater Trona Area prospect, located in
southwest Wyoming. Saurus currently has an interest in 11,960 acres and is
negotiating to acquire an interest in an additional 10,155 acres in the Greater
Trona Area prospect. Under the terms of the letter, the Company paid for a study
reporting on the economic and geologic merits of the Trona venture and had until
September 15, 1999, to enter into a joint venture with Saurus. On October 1,
1999, the Company elected to proceed with the joint venture and the Company and
Saurus Resources, Inc. entered into a definitive Joint Operating Agreement on
December 1, 1999. Under their agreement, the Company and Saurus agree to jointly
develop their respective interests in land within the Greater Trona area. The
Company has advanced the initial payment of $202,131 due under its agreement
with Saurus.
Under the agreement with Saurus, Saurus and the Company will each pay
50% of the costs of obtaining the necessary rights and drilling exploratory
wells in the Greater Trona prospect. The Company expects to spend $525,000 on
drilling and completing approximately 10 wells to a minimum depth of 1,200 feet.
If the cost of drilling and completing these wells is less than $525,000, the
Company will spend the difference on preparing the wells for production and
connecting the wells to a sales line. The Company cannot assess the likelihood
that such costs will fall below $525,000. After spending the $525,000, the
Company will be deemed to have the right to 50% of the profits of the Greater
Trona Area joint venture. The agreement terminates only upon the event that
Saurus or the Company lose their respective rights to develop within the Greater
Trona Area.
The Company entered into an arrangement to lease from the State of
Wyoming oil and gas rights to 320 acres located in the Greater Trona Area. This
lease has a five year term beginning December 8, 1999 and under the terms of the
lease one-sixth of the royalties earned by the Company for development on the
leased lands are payable to the state of Wyoming. The Company entered into an
arrangement to lease from the United States Department of the Interior, Bureau
of Land Management, oil and gas rights to 240 acres located in the Greater Trona
Area. This lease has a ten year term beginning February 1, 2000 and under the
terms of the lease one-eighth of the royalties earned by the Company for
development on the leased lands are payable to the United States. The Company
has not received from either the State of Wyoming or the Department of Interior
the final forms of the definitive agreements representing such leases.
If additional lands become available for purchase and the Company is
successful in leasing such additional lands, Saurus shall have the option to
defer its 50% share of the cost of the first 100,000 acres of such additional
land that the Company may purchase. Saurus will have this option for a period of
six months from the date of the completion of the last of the ten initial wells
discussed above. At this time the Company has not identified any additional
lands for purchase.
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<PAGE> 14
The Company does not plan to make any investments in real estate
mortgages, in securities of persons primarily engaged in real estate activities
or, except as described above, in real estate or interests in real estate. The
only other real property utilized by the Company is the office space located at
Suite 1100 - 609 West Hastings Street, Vancouver BC Canada V6B 4W4, which used
without charge by the Company under an oral arrangement with the lessor of the
property, Caravel Management Corp. Should this oral arrangement be terminated,
the Company would be required lease office space, however the Company does not
believe this is likely to happen, and should the Company be required to lease
office space, any cost associated with such lease would not be material to the
Company.
The Company has no real estate interests carried on its books as
assets. The Company has no proved oil or gas reserves. The Company as yet has no
oil production, productive wells or acreage and no delivery commitments. The
Company has no current drilling activities or extraction operations, however
Company anticipates that it will commence drilling a test well in the Greater
Trona Area in May, 2000.
ITEM 4. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Security ownership of certain beneficial owners
The following table sets forth the beneficial ownership of Company
shares of each officer and director, and all directors and executive officers as
a group. The Company has no knowledge of the identity of any person that
beneficially owns more than 5% of the Company's outstanding Common Stock.
<TABLE>
<CAPTION>
Name and address of Amount and nature
beneficial owner of beneficial owner Percent of class
---------------- ------------------- ----------------
<S> <C> <C>
John R. Hislop 0 (1) 0%
Donald A. Sharpe 0 (2) 0%
Darrell Brookstein 0 (3) 0%
All directors and executive
officers as a group (5 persons) 0 0%
</TABLE>
(1) John R. Hislop is the Chairman of the Board of Directors, Vice President and
Chief Financial Officer, Secretary of the Company
(2) Donald A. Sharpe is the President, Chief Executive Office, Director of the
Company
(3) Darrell Brookstein is a Director of the Company
ITEM 5. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS
The directors and executive officers of the Company and their respective
ages are as follows:
<TABLE>
<CAPTION>
Name Age Position
---- --- --------
<S> <C> <C>
John R. Hislop 47 Chairman of the Board of Directors, Vice
President and Chief Financial Officer,
Secretary
Donald A. Sharpe 42 President, Chief Executive Office, Director
Darrell Brookstein 49 Director
</TABLE>
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<PAGE> 15
All directors hold office until the next annual meeting of stockholders and/or
until their successors have been duly elected and qualified. There are no
agreements with respect to the election of directors. The Company has not
compensated its directors for service on the Board of Directors or any committee
thereof. Officers are appointed annually by the Board of Directors and each
executive officer serves at the discretion of the Board of Directors. There are
no other family relationships between any of the directors and executive
officers. The Company does not have any standing committees at this time.
John R. Hislop, Chairman of the Board of Directors, Vice President and
Chief Financial Officer, Secretary
Mr. Hislop has been a director of the Company since June 4, 1999. Since
1990 Mr. Hislop has been working as an independent financial consultant and has
served as an officer and director of various emerging growth companies. He is
currently a director of Ultra Petroleum Corp., a public Oil and Gas production
and exploration company, and served as the company's President from March of
1993 to May of 1996 and as Chief Financial Officer from May of 1996 to September
of 1998. He is currently President and Director of Cubix Investments, Inc.
(formerly named R.I.S. Resources International Corp.), a Canadian holding
company for various public oil and gas and internet Companies. In the past five
years Mr. Hislop has also been an executive officer and/or director of the
following companies: Arrowhead Minerals Corp., Ariel Resources, Ltd., Rio
Amarillo Mining Ltd., Spectrum Resources, Ltd., Luxmatic Technologies N.V.,
Kinesys Pharmaceutical, Inc., Capital Charter Corp., Green River Petroleum,
Inc., and Patriot Capital Corp. Mr. Hislop trained as a Chartered Accountant
with Ernst & Young and has a bachelor of Commerce in Finance from the University
of British Columbia.
Donald A. Sharpe, President, Chief Executive Officer, Director
Mr. Sharpe has been a director of the Company since June 4, 1999. As
President and a member of the Board of Directors of Green River Holdings, Inc.,
a public Company located in Vancouver, British Columbia, Mr. Sharpe oversaw the
reorganization and initial financing of the Company. Mr. Sharpe was responsible
for the negotiations and completion of Green River's large-scale farm-in
arrangement that resulted in oil and gas interests in more than 64,000 acres in
the Green River basin of Wyoming. Prior his tenure at Green River Mr. Sharpe was
President and Director of JABA Inc., of Vancouver, British Columbia, from 1995
to 1997. As President, Mr. Sharpe was responsible for the administration of the
public company, coordinated the financing of the company, and the filing of the
plan of reactivation which the Company used to begin trading on the Alberta
Stock Exchange. Mr. Sharpe was also responsible for securing joint venture
partners for the company's projects in the Southwestern U.S. and Northern
Mexico. From 1981 to 1994 Mr. Sharpe was a Geophysicist with Suncor Inc., of
Calgary Alberta where Mr. Sharpe held positions of increasing responsibility in
the areas of exploration, management and marketing. Over the past five years Mr.
Sharpe has also been director of the following companies: Capital Charter
Corporation, UKT Recycling Technologies Inc., Jaba Inc., Velvet Exploration
Company, Ltd., Patriot Capital Corp., and Empress Capital Corp. Mr. Sharpe
received his B.Sc. in Geophysics from the University of British Columbia and
Certificate in Business Management from the University of Calgary.
Darrell Brookstein, Director
Mr. Brookstein has been a director of the Company since June 4, 1999.
He currently serves as president Resource Development Advisors, Inc., which is
based in San Diego, California and serves as an advisor to certain institutional
investors, including Excalibur Funds Group Natural Resource Venture Capital Ltd.
During Mr. Brookstein's financial services career he has been President and
Director of First Georgetown Securities of Washington D.C. and has owned and
operated Commodity Trading Advisories,
15
<PAGE> 16
Pool Operators and Registered Investment Advisory Firms in Washington D.C. and
Santa Barbara, California. Mr. Brookstein received his BA from Duke University.
ITEM 6. EXECUTIVE COMPENSATION
The Summary Compensation Table shows certain compensation information
for the Chief Executive Officer. Compensation data for other executive officers
is not presented in the graphs because aggregate annual compensation for such
officers does not exceed $100,000. This information includes the dollar value of
base salaries, bonus awards, the number of SARs/options granted, and certain
other compensation, if any, whether paid or deferred.
SUMMARY COMPENSATION TABLE
The following table sets forth the aggregate compensation paid by the
Company to its Chief Executive Officer for services rendered during the periods
indicated:
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
--------------------- ----------------------------
Awards
Other Securities
Annual Restricted Underlying All other
Name and Principal Position Year Salary Compensation Stock Awards Options/SARs compensation
- --------------------------- ---- ------ ------------ ------------ ------------ ------------
<S> <C> <C> <C> <C> <C> <C>
Donald A. Sharpe, CEO 2000(1) $ 0 $ 0 0 0 0
Jeffrey L. Taylor, CEO 2000(1) 0 0 0 0 0 (2)
</TABLE>
(1) The results reported in the "Summary Compensation Table" for the period
designated "2000" are for the current fiscal year ending March 31, 2000. Mr.
Taylor served as CEO and President of the Company from February 8, 1999 to June
4, 1999. Mr. Sharpe has served as CEO and President of the Company since June 4,
1999. No executive officers of the corporation received any compensation during
the fiscal year ended March 31, 1999 or prior to that date.
(2) Mr. Taylor was issued 65,000 shares of the Company's Common Stock then
valued at $.20 per share on May 6, 1999 as compensation for consulting work
performed on behalf of the Company not in connection with his services as
President and CEO.
ITEM 7. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
(a) Transactions during the last two years involving any Director or Executive
Officer of the Company:
The Company anticipates that Cubix Investments, Inc. (formerly named
R.I.S. Resources International, Inc.) a British Columbia, Canada, corporation
whose Common Stock is traded on the Canadian Venture Exchange, will acquire
3,000,000 shares of Common Stock in the private placement that is currently
pending. See "MANAGEMENT'S DISCUSSION AND ANALYSIS--Private Placement." John R.
Hislop, the Company's Chairman of the Board, Secretary and Vice President and
Chief Financial Officer, is the President and a director of Cubix Investments,
Inc. The Company
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<PAGE> 17
anticipates that Excalibur Funds Group Natural Resource Venture Capital Ltd., a
British Virgin Islands Mutual Fund, will acquire 500,000 shares of Common Stock
in the private placement that is currently pending. Darrell Brookstein, a
director of the Company, is president of the investment advisor to Excalibur
Funds Group Natural Resource Venture Capital Ltd.
ITEM 8. DESCRIPTION OF SECURITIES
The Company is authorized to issue two classes of shares, Common Stock
and Preferred Stock. The Company is authorized to issue 50,000,000 shares of its
Common Stock, $.001 par value, and 5,000,000 shares of its Preferred Stock,
$.001 par value.
COMMON STOCK
7,170,000 Shares of Common Stock are currently outstanding. Upon
completion of the private placement that is currently pending (see "MANAGEMENT'S
DISCUSSION AND ANALYSIS--Private Placement"), assuming the maximum amount of
shares offered are sold, the Company will have 11,670,000 shares of Common Stock
outstanding. Approximately 1,065,000 of the Company's shares are, and assuming
all 4,500,000 shares being issued in the currently pending private placement are
issued, 5,565,000 of the Company's shares will be, restricted and subject to
Rule 144 promulgated under the Securities Act of 1933 as amended.
All shares of the Company's Common Stock have equal voting rights and
are not assessable. Voting rights are not cumulative and, therefore, the holders
of more than 50% of the Common Stock acting in concert could, if they chose to
do so, elect all of the directors of the Company.
Upon liquidation, dissolution or winding up of the Company the assets
of the Company, after the payment of liabilities and any preferences designated
with respect to the Preferred Stock of the Company (see "--Preferred Stock,"
below), will be distributed pro rata to the holders of the Common Stock. The
holders of the Common Stock do not have preemptive rights to subscribe for any
securities of the Company and have no right to require the Company to redeem or
purchase their shares. The shares of Common Stock presently outstanding are
fully paid and non-assessable.
PREFERRED STOCK
In the annual meeting of shareholders of the Company held January 14,
2000, the shareholders of the Company approved a proposal to amend Article IV of
the Company's Certificate of Incorporation to authorize a series of Preferred
Stock, par value $.001 per share, with the right conferred upon the Board of
Directors to set the dividend, voting, conversion, liquidation and other rights
as well as such redemption or sinking fund provisions and the qualifications,
limitations and restrictions with respect thereto of such Preferred Stock as
they may determine from time to time.
Although the Preferred Stock may be used for such purposes as raising
additional capital or the financing of an acquisition or business combination,
the Company currently has no plans or arrangements related to the issuance of
any of the Preferred Stock proposed to be authorized by the amendment to the
Charter. Such shares would, however, be available for issuance without further
action by the shareholders, unless otherwise required by applicable law. The
Preferred Stock may be issued in one or more series, the terms of which may be
determined at the time of issuance by the Board of Directors, without further
action by the Company's shareholders. The issuance of any Preferred Stock could
affect the rights of the holders of Common Stock and therefore reduce the value
of the Common Stock and make it less likely that holders of Common Stock would
receive a premium upon a sale of their shares of Common Stock. In
17
<PAGE> 18
particular, specific rights granted to future holders of Preferred Stock could
be issued to restrict the Company's ability to merge with or sell its assets to
a third party, which could have the effect of delaying or preventing a change of
control of the Company and may adversely affect the rights of holders of Common
Stock.
DIVIDENDS
Holders of the Common Stock are entitled to share equally in dividends
when, as and if declared by the Board of Directors of the Company, out of funds
legally available therefore. No dividend has been paid on the Common Stock since
inception, and none is contemplated in the foreseeable future.
TRADING
The Common Stock is currently quoted on the NASD/OTCBB with limited
trading and usually little to no volume on a daily basis. No assurance can be
given that a market with meaningful liquidity will ever develop with regards to
the Company on the OTCBB or that the Company will ever move from the OTCBB or be
able to maintain its listing on said trading system. The Company is filing this
registration statement on Form l0-SB with the Securities and Exchange Commission
to register the Company's Common Stock under Section l2(g) of the Securities
Exchange Act of 1934, as amended, which, if declared effective by the Securities
Exchange Commission, will require the Company to make current financial filings
with the Securities and Exchange Commission, thus qualifying the Company to
maintain its listing on the OTCBB pursuant to the rule enacted recently by the
NASD. The filing is subject to review and comment by the Securities and Exchange
Commission, and in the event the Company's proposed registration statement is
not declared effective, the Company's securities would not be approved for
quotation on the OTC Bulletin Board, the result of which could materially and
adversely effect any future liquidity in the Company's Common Stock offered
hereby.
1999 STOCK OPTION AND INCENTIVE PLAN
On May 6, 1999, the Board of Directors adopted the 1999 Stock Option
and Incentive Plan (the "Plan") which was subsequently approved by over 50% of
the shares of Common Stock held by shareholders of the Company. The Plan is
intended to provide incentive to key employees and directors of, and key
consultants, vendors, customers, and others expected to provide significant
services to, the Company, to encourage proprietary interest in the Company, to
encourage such key employees to remain in the employ of the Company and its
Subsidiaries, to attract new employees with outstanding qualifications, and to
afford additional incentive to consultants, vendors, customers, and others to
increase their efforts in providing significant services to the Company. The
aggregate number of Shares which may be issued as awards or upon exercise of
awards under the Plan is 2,500,000 shares. No Incentive Stock Option Agreement
or Non-statutory Stock Option Agreement has been entered into by the Company as
of the date of this Offering. However, it is currently anticipated that
Non-statutory Stock Options to purchase up to 300,000 shares of Common Stock,
subject to periodic vesting as determined by the Company, will be granted within
the next twelve months to key officers and directors for an exercise price of
approximately $1.00 per share.
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<PAGE> 19
PART II
ITEM 1. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND
OTHER SHAREHOLDER MATTERS
(a) Market information.
The Company's Common Stock is traded over-the-counter on NASD'S Over
the Counter Bulletin Board ("OTCBB") under the symbol "NEGY". Prior to March 13,
2000, the Company's Common Stock traded on the OTCBB under the symbol "XCNT."
The change in the symbol resulted from the Company's change of its name from
Excalibur Contracting, Inc. to its current name on February 15, 2000.
The price range of high and low bid for the Company's Common Stock for
the periods shown is set forth below. The quotations reflect inter-dealer
prices, without retail mark-ups, mark-downs or commissions, and may not
represent actual transactions.
<TABLE>
<CAPTION>
Period (1)(2) High Low
------------- ---- ---
<S> <C> <C> <C>
Q1 -- 99 .625 .625
Q2 -- 99 1.25 .125
Q3 -- 99 1.50 1.00
Q4 -- 99 1.25 .875
Q1 -- 00 3.00 1.0625
</TABLE>
(1) Calendar quarters.
(2) Source: Nasdaq Trading and Market Services
(b) Stockholders.
As of March 1, 2000 there were approximately 36 shareholders of record
of Company Common Stock. No shares of Preferred Stock have been issued.
(c) Dividends.
The Company has never declared a cash dividend. Delaware law limits the
Company's ability to pay dividends on its Common Stock if any such dividend
would render the Company insolvent.
ITEM 2. LEGAL PROCEEDINGS
None.
ITEM 3. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
None.
19
<PAGE> 20
ITEM 4. RECENT SALES OF UNREGISTERED SECURITIES
The Company has pending a private offering of up to 4,500,000 shares of
its Common Stock at an offering price of $1.00 per share. Net proceeds from this
offering (after deducting expenses of the Offering estimated to be $10,000) is
expected to be $4,490,000 if all of the Shares are sold. The Company intends to
use all of the foregoing amounts for working capital. This offering shall be
exempt from registration pursuant to Regulation D under the Securities Act of
1933 and is not being underwritten. See "MANAGEMENT'S DISCUSSION AND
ANALYSIS--Private Placement."
In February of 1999, the Company completed a private offering pursuant
to Regulation D under the Securities Act of 1933 whereby it placed 6,070,000
shares of its Common Stock for a purchase price of $.12 per share. This offering
was not underwritten.
On May 6, 1999, the Company issued to Jeffrey L. Taylor 65,000 shares
of the Company's Common Stock as payment in full for $13,000 in consulting
services rendered by Mr. Taylor. On this same date the Company issued to Gregory
V. Gibson 35,000 shares of the Company's Common Stock as payment in full for
$7,000 in legal services rendered by Mr. Gibson. At the time of this issuance,
Messrs. Taylor and Gibson constituted all of the directors of the Company. The
price per share for these issuances was $.20. The shares were offered without
registration in reliance on Section 4(2) of the Securities Act of 1933.
ITEM 5. INDEMNIFICATION OF DIRECTORS AND OFFICERS
The Company's Articles of Incorporation and Bylaws authorize the
Company to indemnify its directors and officers. The Company currently does not
maintain any liability insurance for its directors and officers but is currently
seeking quotes for such coverage.
Article Nine of the Company's Certificate of Incorporation provides
that a director of the Company shall not be personally liable to the Company or
its shareholders for monetary damages for conduct as a director, except for any
breach of the director's duty of loyalty to the Company or its stockholders, for
acts or omissions not in good faith or which involve intentional misconduct or a
knowing violation of law, under Section 174 of the Delaware General Corporation
Law (which provides that directors may be liable for unlawful dividends or stock
purchases or redemptions), or for any transaction from which the director
derived an improper personal benefit.
If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the Company shall be eliminated
or limited to the fullest extent permitted by the Delaware General Corporation
Law, as so amended. Any repeal or modification of the foregoing provisions by
the shareholders of the Company will not adversely affect any right or
protection of a director with respect to any acts or omissions of such director
occurring prior to such repeal or modification.
Section 145 of the Delaware General Corporation Law provides in
relevant part that 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 (other than an action by or in the right of the corporation) by
reason of the fact that such person is or was a director, officer, employee or
agent of the corporation, or is or was serving at the request of the corporation
as a director, officer, employee or agent of another corporation, partnership,
joint venture, trust or other enterprise, against expenses (including attorneys'
fees), judgments, fines and amounts paid in settlement actually and reasonably
incurred by such person in connection with such action, suit or proceeding if
such person acted in good faith and in a manner such person reasonably believed
to be in or
20
<PAGE> 21
not opposed to the best interests of the corporation, and, with respect to any
criminal action or proceeding, had no reasonable cause to believe such person's
conduct was unlawful. In addition, Section 145 provides that 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 such
person is or was a director, officer, employee or agent of the corporation, or
is or was serving at the request of the corporation as a director, officer,
employee or agent of another corporation, partnership, joint venture, trust or
other enterprise against expenses (including attorneys' fees) actually and
reasonably incurred by such person in connection with the defense or settlement
of such action or suit if such person acted in good faith and in a manner such
person reasonably believed to be in or not opposed to the best interests of the
corporation and except that no indemnification shall be made in respect of any
claim, issue or matter as to which such person shall have been adjudged to be
liable to the corporation unless and only to the extent that the Delaware Court
of Chancery or the court in which such action or suit was brought shall
determine upon application that, despite the adjudication of liability but in
view of all the circumstances of the case, such person is fairly and reasonably
entitled to indemnity for such expenses which the Delaware Court of Chancery or
such other court shall deem proper. Delaware law further provides that nothing
in the above-described provisions shall be deemed exclusive of any other rights
to indemnification or advancement of expenses to which any person may be
entitled under any bylaw, agreement, vote of stockholders or disinterested
directors or otherwise.
Insofar as indemnification for liabilities arising under the Securities
Act of 1933 may be permitted to directors, officers, and controlling persons of
Company pursuant to the above statutory provisions or otherwise, Company has
been advised that in the opinion of the Securities and Exchange Commission such
indemnification is against public policy as expressed in the Securities Act of
1933 and is, therefore, unenforceable.
PART F/S
INDEX TO FINANCIAL STATEMENTS OF NATION ENERGY, INC.
<TABLE>
<CAPTION>
Page
----
<S> <C>
Report of Independent Auditors -- Stark Tinter & Associates, LLC 22
Balance Sheet of March 31, 1999 23
Statements of Operations for the period April 19, 1988 (inception)
to March 31, 1999 24
Statement of Changes in Stockholders' Equity for the period April 19, 1988
(inception) to March 31, 1999 25
Statements of Cash Flows for the period April 19, 1988 (inception) to
March 31, 1999 26
Notes to Financial Statements 27
Unaudited Financial Statements for December 31, 1999 29
Balance Sheet of December 31, 1999 (unaudited) 29
Statements of Operations for the period April 19, 1988 (inception) to
December 31, 1999 (unaudited) 30
Statement of Changes in Stockholders' Equity for the period April 19, 1988
(inception) to December 31, 1999 (unaudited) 31
Statements of Cash Flows for the period April 19, 1988 (inception) to
December 31, 1999 (unaudited) 32
Notes to December 31, 1999 Financial Statements (unaudited) 33
</TABLE>
21
<PAGE> 22
REPORT OF INDEPENDENT AUDITORS
Shareholders and Board of Directors
Excalibur Contracting, Inc.
Las Vegas, Nevada
We have audited the accompanying balance sheet of Excalibur Contracting, Inc. (a
development stage company) as of March 31, 1999, and the related statements of
operations, stockholders' equity, and cash flows for the three months ended
March 31, 1999, and the period from April 19, 1988 (inception) to March 31,
1999. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Excalibur Contracting, Inc. (a
development stage company) as of March 31, 1999, and the results of its
operations, and its cash flows for the three months ended March 31, 1999, and
the period from April 19, 1988 (inception) to March 31, 1999, in conformity with
generally accepted accounting principles.
Stark Tinter & Associates, LLC
Englewood, Colorado
October 14, 1999
22
<PAGE> 23
EXCALIBUR CONTRACTING, INC.
(A DEVELOPMENT STAGE COMPANY)
BALANCE SHEET
MARCH 31, 1999
<TABLE>
<S> <C>
ASSETS
Current Assets:
Cash $ 728,205
---------
Total Assets $ 728,205
=========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts Payable $ 20,741
---------
Total Liabilities 20,741
---------
Stockholders' Equity:
Common stock, $.001 par value; 50,000,000
shares authorized; 7,070,000 shares issued
and outstanding 7,070
Additional Paid-in Capital 722,330
Deficit Accumulated During
Development Stage (21,936)
---------
Total Stockholders' Equity 707,464
---------
Total Liabilities and Stockholders' Equity $ 728,205
=========
</TABLE>
The accompanying notes are an integral part of the financial statements.
23
<PAGE> 24
EXCALIBUR CONTRACTING, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>
For the Period
For three Months April 19, 1988
ended (Inception) to
March 31, 1999 March 31, 1999
<S> <C> <C>
Revenue: $ - $ -
----------- -----------
Costs and expenses:
General, selling and administrative 20,936 21,936
----------- -----------
Total costs and expenses 20,936 21,936
----------- -----------
Net Loss $ (20,936) $ (21,936)
=========== ===========
Per share information:
Weighted average number of common
shares outstanding - basic 4,979,222 120,233
=========== ===========
Net loss per common share - basic NIL $ (0.18)
=========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
24
<PAGE> 25
EXCALIBUR CONTRACTING, INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE PERIOD APRIL 19,
1988 (INCEPTION) TO MARCH 31, 1999
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During The Total
Number of Paid-in Development Stockholders'
Shares Amount Capital Stage Equity
--------- ------- ----------- ---------- ---------
<S> <C> <C> <C> <C> <C>
April 19, 1988 (inception) - $ - $ - $ - $ -
Issuance of common stock
for services at $1.00 per share 1,000 1,000 - - 1,000
Net loss incurred in fiscal 1988 - - - (1,000) (1,000)
Changed par value from $1.00 to $.001
in fiscal 1998 - (999) 999 - -
Forward stock split, 1,000:1
in fiscal 1998 999,000 999 (999) - -
Issuance for cash at $0.12 per share
in fiscal 1999 6,070,000 6,070 722,330 - 728,400
Net loss for the three months ended
March 31, 1999 - - - (20,936) (20,936)
--------- ------- ----------- ---------- ---------
Balance, March 31, 1999 7,070,000 $ 7,070 $ 722,330 $ (21,936) $ 707,464
========= ======= =========== ========== =========
</TABLE>
The accompanying notes are an integral part of the financial statements.
25
<PAGE> 26
EXCALIBUR CONTRACTING,
INC.
(A DEVELOPMENT STAGE COMPANY)
STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the Period
For the three Months April 19, 1988
ended (Inception) to
March 31, 1999 March 31, 1999
------------- --------------
<S> <C> <C>
Cash Flows From Operating Activities:
Net loss $ (20,936) $ (21,936)
Adjustments to reconcile net loss to net cash
flows used in operating activities:
Increase (decrease) in accounts payable 20,741 20,741
------------- --------------
Net cash used in operating activities (195) (1,195)
------------- --------------
Cash Flows From Investing Activities: - -
------------- --------------
Cash Flows From Financing Activities:
Proceeds from stock
sales 728,400 729,400
------------- --------------
Net cash provided by financing
activities 728,400 729,400
------------- --------------
Net Increase in Cash 728,205 728,205
Beginning Cash - -
------------- --------------
Ending Cash $ 728,205 $ 728,205
============= ==============
</TABLE>
The accompanying notes are an integral part of the financial statements.
26
<PAGE> 27
Excalibur Contracting, Inc.
(A Development Stage Company)
Notes to Financial Statements
Note 1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company was incorporated on April 19, 1988, in the State of Florida. The
Company is an oil and gas drilling company in the development stage and
currently has no operations.
Net loss per share
The net loss per share is computed by dividing the net loss for the period by
the weighted average number of common shares outstanding for the period.
Estimates
The preparation of the Company's financial statements in conformity with
generally accepted accounting principles requires the Company's management to
make estimates and assumptions that affect the amounts reported in these
financial statements and accompanying notes. Actual results could differ from
those estimates.
Comprehensive Loss
There were no items of other comprehensive loss for the three months ended March
31, 1999, and the period April 19, 1988 (inception) to March 31, 1999, and thus,
net loss is equal to comprehensive loss.
Note 2. CONCENTRATIONS OF CREDIT RISK
The Company's funds are federally insured up to $100,000. As of March 31, 1999,
the funds under deposit exceed this insured amount by $628,205.
Note 3. STOCKHOLDERS' EQUITY
On May 1, 1988, the Company issued 1,000 shares of its $1.00 par value common
stock for services of $1,000. On September 16, 1998, the State of Florida
approved the Company's restated Articles of Incorporation, which increased its
capitalization from 1,000 common shares to 50,000,000 common shares. The par
value was changed from $1.00 par to $0.001. On September 16, 1998, the Company
forward split its common stock 1,000:1, thus increasing the number of
outstanding common stock shares from 1,000 shares to 1,000,000 shares. On
February 10, 1999, the Company issued 6,070,000 shares of its $0.001 par value
common stock to various investors at $0.12 per share. As of March 31, 1999,
7,070,000 shares are outstanding.
Note 4. YEAR 2000
The Company has assessed its exposure to date sensitive computer software
programs that may not be operative subsequent to 1999 and has implemented a
requisite course of action to minimize Year 2000
27
<PAGE> 28
risk and ensure that neither significant costs nor disruption of normal business
operations are encountered. However, because there is no guarantee that all
systems of outside vendors or other entities on which the Company's operations
rely will be Year 2000 compliant, the Company remains susceptible to
consequences of the Year 2000 issue.
Note 5. RELATED PARTY TRANSACTIONS
During the period April 19, 1988 (inception) to March 31, 1999, an officer and
director of the Company, purchased 10,000 shares of common stock for $10. As of
March 31, 1999, this officer is no longer a part of the Company.
Note 6. AGREEMENTS
On February 8, 1999, the Company signed an agreement to enter into an option to
purchase certain drilling rigs from an unrelated company. The option agreement
offered two separate options to purchase two separate drilling rigs. To exercise
the option to purchase the first drilling rig, the Company must tender $31,000
to the unrelated company within 30 days of signing the agreement. To exercise
the option to purchase the second drill rig, the Company must tender cash
$173,000 to the unrelated company within 30 days of signing the agreement. The
Company could exercise either of the options set forth in the option agreement
without the exercise of the remaining option. The Company, however, chose not to
exercise either option.
Note 7. SUBSEQUENT EVENTS
On May 6, 1999, the Company issued 65,000 shares of the Company's common stock
to the President of the Company for payment in full for consulting work
performed on behalf of the Company and invoiced in the amount of $13,000.
Also, on May 6, 1999, the Company issued 35,000 shares of the Company's common
stock to the treasurer of the Company for payment in full for legal work
performed on behalf of the Company and invoiced in the amount of $7,000.
Note 8. INCOME TAXES
The Company has a Federal net operating loss carryforward of approximately
$22,000, which will expire in the year 2019. The tax benefit of this net
operating loss of approximately $4,400 has been offset by a full allowance for
realization. This carryforward may be limited upon the consummation of a
business combination under Section 381 of the Internal Revenue Code.
28
<PAGE> 29
NATION ENERGY INC.
(formerly Excalibur Contracting, Inc.)
(A development Stage Company)
BALANCE SHEET
(unaudited - prepared internally by management)
<TABLE>
<CAPTION>
DECEMBER 31,
------------------------------
1999 1998
------------- -----------
<S> <C> <C>
ASSETS
Current assets
Cash $ 423,274 $ -
------------- -----------
423,274 -
Properties 474,846 -
------------- -----------
$ 898,120 $ -
============= ===========
LIABILITIES
Current liabilities
Accounts payable $ 6,264 $ -
Accrued Liabilities 199,500 -
------------- -----------
205,764 -
SHAREHOLDER'S EQUITY
Common Stock, $.001 par value; 50,000,000 7,170 1,000
shares authorized; 7,170,000 shares
issued and outstanding
Additional Paid-in Capital 742,230 -
Deficit Accumulated During
Development Stage (57,044) (1,000)
------------- -----------
692,356 -
------------- -----------
$ 898,120 $ -
============= ===========
</TABLE>
29
<PAGE> 30
NATION ENERGY INC.
(formerly Excalibur Contracting, Inc.)
(A development Stage Company)
STATEMENTS OF OPERATIONS
(unaudited - prepared internally by management)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE PERIOD
NINE MONTHS NINE MONTHS APRIL 19, 1988
ENDED ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31
1999 1998 1999
-------------- --------------- -------------
<S> <C> <C> <C>
Revenue: $ - $ - $ -
-------------- --------------- -------------
Costs and expenses:
General, selling and administrative 35,108 - 57,044
-------------- --------------- -------------
Total costs and expenses
Net Loss $ (35,108) $ - $ (57,044)
============== =============== =============
Per share information:
Weighted average number of common
shares outstanding - basic 7,159,091 334,912 576,965
============== =============== =============
Net loss per common share - basic NIL NIL (0.10)
============== =============== =============
</TABLE>
(The above statements have not been audited and are subject to year-end
adjustments)
30
<PAGE> 31
NATION ENERGY INC.
(formerly Excalibur Contracting, Inc.)
(A development Stage Company)
STATEMENT OF CHANGES IN SHAREHOLDERS' EQUITY FOR THE PERIOD APRIL 19,
1988 (INCEPTION) TO DECEMBER 31, 1999
(unaudited - prepared internally by management)
<TABLE>
<CAPTION>
Deficit
Accumulated
Common Stock Additional During the Total
Number of Paid-in Development Stockholders'
Shares Amount Capital Stage Equity
--------- ---------- ----------- ----------- ------------
<S> <C> <C> <C> <C> <C>
April 19, 1988 (inception) 0 $ 0 $ 0 $ 0 $ 0
Issuance of common stock
for services at $1.00 per share 1,000 1,000 0 0 1,000
Net loss incurred in fiscal 1988 0 0 0 (1,000) (1,000)
Changed par value from $1.00 to $.001
in fiscal 1998 0 (999) 999 0 0
Forward stock split, 1,000:1
in fiscal 1998 999,000 999 (999) 0 0
Issuance for cash at $0.12 per share
in fiscal 1999 6,070,000 6,070 722,330 0 728,400
Net loss incurred in fiscal 1999 0 0 0 (20,936) (20,936)
Issuance of common stock
for services at $.20 per share 100,000 100 19,900 0 20,000
Net loss for the nine months ended
December 31, 1999 0 0 0 (35,108) (35,108)
--------- ---------- ----------- ----------- ------------
Balance, December 31, 1999 7,170,000 $ 7,170 $ 742,230 $ (57,044) $ 692,356
========= ========== =========== =========== ============
</TABLE>
31
<PAGE> 32
NATION ENERGY INC.
(formerly Excalibur Contracting, Inc.)
(A development Stage Company)
STATEMENT OF CASH FLOWS
(unaudited - prepared internally by management)
<TABLE>
<CAPTION>
FOR THE FOR THE FOR THE PERIOD
NINE MONTHS NINE MONTHS APRIL 19, 1988
ENDED ENDED (INCEPTION) TO
DECEMBER 31, DECEMBER 31, DECEMBER 31,
1999 1998 1999
-------------- ------------- -------------
<S> <C> <C> <C>
Cash Flows From Operating Activities
Net loss $ (35,108) $ - $ (57,044)
Non-cash operating activities:
Increase (decrease) in accounts payable 185,023 - 205,764
Issuance of common shares for services 20,000 20,000
-------------- ------------- -------------
Net cash used in operating activities 169,915 - 168,720
-------------- ------------- -------------
Cash Flows from Investing Activities:
Acquisition of oil & gas properties (202,131) - (202,131)
Oil & gas property expenditures (272,715) - (272,715)
-------------- ------------- -------------
Net cash used for investing activities (474,846) - (474,846)
-------------- ------------- -------------
Cash Flows From Financing Activities:
Proceeds from stock sales - - 729,400
-------------- ------------- -------------
Net cash provided by financing activities - - 729,400
-------------- ------------- -------------
Net Increase (decrease) in Cash (304,931) - 423,274
Beginning Cash 728,205 - -
-------------- ------------- -------------
Ending Cash $ 423,274 $ - $ 423,274
============== ============= =============
</TABLE>
(The above statements have not been audited and are subject to year-end
adjustments)
32
<PAGE> 33
Nation Energy Inc. fka Excalibur Contracting, Inc.
(A development Stage Company)
Notes to Financial Statements
1. SIGNIFICANT ACCOUNTING POLICIES
Organization
The Company was incorporated on April 19, 1988, in the State of
Florida. The Company has commenced corporate strategic development
whereby the Company has been negotiating potential oil and gas
projects. The Company has conducted no significant operations.
Net loss per share
The net loss per share is computed by dividing the net loss for the
period by the weighted average number of common shares outstanding for
the period.
Estimates
The preparation of the Company's financial statements in conformity
with generally accepted accounting principles requires the Company's
management to make estimates and assumptions that affect the amounts
reported in these financial statements and accompanying notes. Actual
results could differ from those estimates.
Comprehensive Loss
There were no items of other comprehensive loss for the nine months
ended December 31, 1999, and for the nine month period ended December
31, 1998, and the period April 19, 1988 (inception) to December 31,
1999, and thus, net loss is equal to comprehensive loss.
Oil and Gas Properties
The Company follows the full cost method of accounting for oil and gas
operations whereby all costs associated with the exploration for and
development of oil and gas reserves, net of revenues and whether
productive or unproductive, are capitalized. Such expenditures include
land acquisition costs, drilling, completion and costs of well
equipment. Expenditures, which are considered unlikely to be recovered,
are written off. The current oil and gas exploration and development
activities are considered to be in the pre-production stage.
2. CONCENTRATIONS OF CREDIT RISK
The Company's funds are federally insured up to $100,000. As of
December 31, 1999, the funds under deposit exceed this insured amount
by $323,274.
3. STOCKHOLDERS' EQUITY
On May 1, 1988,the Company issued 1,000 shares of its $1.00 par value
common stock for services of $1,000. On September 16, 1998, the State
of Florida approved the Company's restated Articles of Incorporation,
which increased its capitalization from 1,000 common shares to
50,000,000 common shares. The par value was changed from $1.00 par to
$0.001. On September 16, 1998, the Company forward split its common
stock 1,000:1, thus increasing the number of outstanding common stock
shares from 1,000 shares to 1,000,000 shares. On February 10, 1999, the
Company issued 6,070,000
33
<PAGE> 34
shares of its $0.001 par value common stock to various investors at
$0.12 per share. On May 6, 1999, the Company issued 100,000 shares of
the Company's common stock to two former officers of the Company for
payment in full for consulting and legal work performed on behalf of
the Company and invoiced in the aggregate amount of $20,000.
As of December 31, 1999, 7,170,000 shares are outstanding.
4. RELATED PARTY TRANSACTIONS
During the period April 19, 1988 (inception) to December 31, 1999, an
officer and director of the Company, purchased 10,000 shares of common
stock for $10. The Company issued 65,000 shares of the Company's common
stock to an officer and director of the Company for payment in full for
consulting work performed on behalf of the Company and invoiced in the
amount of $13,000. The Company issued 35,000 shares of the Company's
common stock to an officer of the Company for payment in full for legal
work performed on behalf of the Company and invoiced in the amount of
$7,000. As of December 31, 1999 these officers and directors are no
longer part of the Company. The Company paid $1,000 to an officer of
the Company for administration and office services
5. AGREEMENTS
On February 8, 1999, the Company signed an agreement to enter into an
option to purchase certain drilling rigs from an unrelated company. The
option agreement offered two separate options to purchase two separate
drilling rigs. To exercise the option to purchase the first drilling
rig, the Company must tender $31,000 to the unrelated company within 30
days of signing the agreement. To exercise the option to purchase the
second drill rig, the Company must tender cash $173,000 to the
unrelated company within 30 days of signing the agreement. The Company
could exercise either of the options set forth in the option agreement
without the exercise of the remaining option. The Company, however,
chose not to exercise either option.
On August 11, 1999, the Company signed a letter of intent with Saurus
Resources Inc., giving the Company the option to enter into a joint
venture with Saurus under which the Company may acquire up to 50% of
the profits resulting from oil and gas development by the venture in
the Greater Trona Area prospect, located in southwest Wyoming. Saurus
currently has an interest in 11,960 acres and is negotiating to acquire
an interest in an additional 10,155 acres in the Greater Trona Area
prospect. Under the terms of the letter, the Company paid for a study
reporting on the economic and geologic merits of the Trona venture and
had until September 15, 1999, to enter into a joint venture with
Saurus. On October 1, 1999, the Company elected to proceed with the
joint venture, and has advanced the initial payment of $202,131 U.S. On
December 10, 1999 the Company paid $73,214.90 for the acquisition of
leases and prospect fees.
Under the arrangement with Saurus, Saurus and the Company will each pay
50% of the costs of obtaining the necessary rights and drilling
exploratory wells in the Greater Trona prospect. The Company expects to
spend $525,000 US on drilling and completing approximately 10 wells to
a minimum depth of 1,200 feet. The first payment of $199,500 is to be
advanced on or about April 15, 2000. If the cost of drilling and
completing these wells is less than $525,000 US, the Company will spend
the difference on preparing the wells for production and connecting the
wells to a sales line. After spending the $525,000 US, the Company will
be deemed to have the right to 50% of the profits of the Greater Trona
Area joint venture.
6. SUBSEQUENT EVENTS
The Company reincorporated as a Delaware corporation on February 2,
2000 and changed its name to Nation Energy, Inc. on February 15, 2000.
34
<PAGE> 35
The Company has pending a private offering of up to 4,500,000 shares of
its Common Stock at an offering price of $1.00 per share. Net proceeds
from this offering (after deducting expenses of the offering estimated
to be $10,000) is expected to be $4,490,000 if all of the Shares are
sold. The Company intends to use all of the foregoing amounts for
working capital.
PART III
ITEM 1. INDEX TO EXHIBITS
The following exhibits are filed with this Registration Statement:
<TABLE>
<CAPTION>
Exhibit No. Exhibit Name Page
- ----------- ------------ ----
<S> <C> <C>
2.1 Certificate of Incorporation of Company, filed December 16, 1999 36
2.2 Certificate of Amendment of Certificate of Incorporation of Company,
filed February 15, 2000 39
2.3 Bylaws of the Company 40
6.1 Joint Operating Agreement with Saurus Resources, Inc. dated December 1, 1999 53
6.2 1999 Stock Option and Incentive Plan 90
</TABLE>
ITEM 2. DESCRIPTION OF EXHIBITS
See Item 1 above.
SIGNATURES
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.
NATION ENERGY, INC.
(Registrant)
Date: March 31, 2000 By: /s/ Donald A. Sharpe
-------------------------
Donald A. Sharpe, CEO
35
<PAGE> 1
Exhibit 2.1 Certificate of Incorporation of Company
CERTIFICATE OF INCORPORATION
OF
EXCALIBUR CONTRACTING, INC.
Pursuant to the provisions of Section 102 of the General Corporation
Law of the state of Delaware, the following Certificate of Incorporation is
submitted for filing:
ARTICLE 1. NAME
The name of this corporation is Excalibur Contracting, Inc.
ARTICLE 2. REGISTERED OFFICE AND AGENT
The respective names of the County and of the City within the County in
which the registered office of the Corporation is to be located in the state of
Delaware are the county of New Castle and the city of Wilmington. The street and
number of said registered office and the address by street and number of said
registered agent is The Corporation Trust Company Corporation Trust Center, 1209
Orange Street, Wilmington, Delaware 19801.
ARTICLE 3. PURPOSE
This corporation is organized for the purposes of transacting any and
all lawful business for which a corporation may be incorporated under Section
102 of the General Corporation Law of the State of Delaware, as amended.
ARTICLE 4. CAPITAL STOCK
The total number of shares of capital stock which the corporation shall
have authority to issue is Fifty-Five Million (55,000,000) shares of the par
value of one tenth of one cent ($.001) each, divided into (a) Fifty Million
(50,000,000) shares of common stock (the "Common Stock") and (b) Five Million
(5,000,000) shares of preferred stock (the "Preferred Stock"). There is hereby
expressly vested in the Board of Directors the authority to fix in the
resolution or resolutions providing for the issue of each series of Preferred
Stock, the voting power and the designations, preferences and relative,
participating, optional or other rights of each such series, and the
qualifications, limitations or restrictions thereof. Shares of Preferred Stock
may be issued from time to time in one or more series as may from time to time
be determined by the Board of Directors, each such series to be distinctly
designated.
ARTICLE 5. DURATION
This corporation has a perpetual existence.
ARTICLE 6. PREEMPTIVE RIGHTS
Shareholders of this corporation have preemptive rights to acquire
additional shares of stock or securities convertible into shares of stock issued
by the corporation.
36
<PAGE> 2
ARTICLE 7. CUMULATIVE VOTING
Shareholders of this corporation shall not have the right to cumulate
votes in the election of directors.
ARTICLE 8. DIRECTORS
The number of directors of this corporation shall be fixed in the
manner specified by the bylaws of this corporation.
ARTICLE 9. LIMITATION OF DIRECTOR LIABILITY
A director of the corporation shall not be personally liable to the
corporation or its shareholders for monetary damages for conduct as a director,
except for:
a. Any breach of the director's duty of loyalty to the
corporation or its stockholders;
b. for acts or omissions not in good faith or which involve
intentional misconduct or a knowing violation of law;
c. under Section 174 of the Delaware General Corporation Law, as
amended; or
d. for any transaction from which the director derived an
improper personal benefit.
If the Delaware General Corporation Law is amended to authorize
corporate action further eliminating or limiting the personal liability of
directors, then the liability of a director of the corporation shall be
eliminated or limited to the fullest extent permitted by the Delaware General
Corporation Law, as so amended. Any repeal or modification of the foregoing
paragraph by the shareholders of the corporation shall not adversely affect any
right or protection of a director of the corporation with respect to any acts or
omissions of such director occurring prior to such repeal or modification.
ARTICLE 10. BUSINESS COMBINATIONS
The corporation shall not be governed by Section 203 of the Delaware
General Corporation Law or any successor statute thereto or any law subsequently
enacted having substantially similar effects.
37
<PAGE> 3
ARTICLE 11. POWERS OF INCORPORATORS
The powers of the incorporator shall terminate upon the filing of the
Certificate of Incorporation.
The names and mailing addresses of the persons who are to serve as
directors until the first annual meeting of shareholders or until their
successors are elected and qualified are:
John R. Hislop Donald A. Sharpe
P.O. Box 3406, MPO P.O. Box 3406, MPO
Vancouver, BC, Canada Vancouver, BC, Canada
V6B 3Y4 V6B 3Y4
Darrell Brokstein
P.O. Box 3406, MPO
Vancouver, BC, Canada
V6B 3Y4
The undersigned, for the purposes of forming a corporation under the
laws of the state of Delaware, hereby executes this Certificate of Incorporation
as his act and deed under penalty of perjury this 16th day of December, 1999.
/s/ Jonathan J. Fisher
----------------------
Jonathan J. Fisher
Preston Gates & Ellis LLP
701 Fifth Avenue, Suite 5000
Seattle, WA 98104-7078
38
<PAGE> 1
Exhibit 2.2 Certificate of Amendment of Certificate of Incorporation of
Company
CERTIFICATE OF AMENDMENT
OF
CERTIFICATE OF INCORPORATION
OF
EXCALIBUR CONTRACTING, INC.
Pursuant to the provisions of Section 242 of the General Corporation
Law of the State of Delaware, the following Certificate of Amendment of
Certificate of Incorporation is submitted for filing:
The name of the Corporation is Excalibur Contracting, Inc. (the
"Corporation").
Article 1 of the Certificate of Incorporation is amended to read as
follows:
ARTICLE 1. NAME
The name of this corporation is Nation Energy, Inc.
This Certificate of Amendment of Certificate of Incorporation was duly
adopted by the Board of Directors in accordance with Section 242 of the General
Corporation Law of the State of Delaware.
This Certificate of Amendment of Certificate of Incorporation was duly
adopted by unanimous written consent of the stockholders in accordance with the
applicable provisions of Sections 228 and 242 of the General Corporation Law of
the Sate of Delaware.
IN WITNESS WHEREOF, John R. Hislop, Vice President of Excalibur
Contracting, Inc. has signed this Certificate of Amendment of Certificate of
Incorporation on February 14, 2000.
Excalibur Contracting, Inc.
By /s/ John R. Hislop
-------------------------------
John R. Hislop, Vice President
39
<PAGE> 1
Exhibit 2.3 Bylaws of the Company
BYLAWS
OF
EXCALIBUR CONTRACTING, INC.
ARTICLE I
Stockholders
Section 1. Annual Meeting. The annual meeting of the stockholders of
this Corporation shall be held on the date established for such by the Board of
Directors. The failure to hold an annual meeting at the time stated in these
Bylaws does not affect the validity of any corporate action.
Section 2. Special Meetings. Except as otherwise provided by law,
special meetings of stockholders of this Corporation shall be held whenever
called by any officer or by the Board of Directors or one or more stockholders
who hold at least ten percent (10%) of all shares entitled to vote on any issue
proposed to be considered at the meeting.
Section 3. Place of Meetings. Meetings of stockholders shall be held at
such place within or without the State of Delaware as determined by the Board of
Directors, pursuant to proper notice.
Section 4. Notice. Written notice of each stockholders' meeting stating
the date, time, and place and, in case of a special meeting, the purpose(s) for
which such meeting is called, shall be given by the corporation not less than
ten (10) (unless a greater period of notice is required by law in a particular
case) nor more than sixty (60) days prior to the date of the meeting, to each
stockholder of record entitled to vote at such meeting unless required by law to
send notice to all stockholders (regardless of whether or not such stockholders
are entitled to vote), to the stockholder's address as it appears on the current
record of stockholders of this Corporation.
Section 5. Waiver of Notice. A stockholder may waive any notice
required to be given by these Bylaws, or the Certificate of Incorporation of
this Corporation, or any of the corporate laws of the State of Delaware, before
or after the meeting that is the subject of such notice. A valid waiver is
created by any of the following three methods: (a) in writing, signed by the
stockholder entitled to the notice and delivered to the Corporation for
inclusion in its corporate records; (b) attendance at the meeting, unless the
stockholder at the beginning of the meeting objects to holding the meeting or
transacting business at the meeting; or (c) failure to object at the time of
presentation of a matter not within the purpose or purposes described in the
meeting notice.
Section 6. Quorum of Stockholders. At any meeting of the stockholders,
a majority in interest of all the shares entitled to vote on a matter,
represented by stockholders of record in person or by proxy, shall constitute a
quorum of that voting group for action on that matter.
Once a share is represented at a meeting, other than to object to
holding the meeting or transacting business, it is deemed to be present for
quorum purposes for the remainder of the meeting and for any adjournment of that
meeting unless a new record date is or must be set for the adjourned meeting.
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At such reconvened meeting, any business may be transacted that might have been
transacted at the meeting as originally notified.
If a quorum exists, action on a matter is approved by a voting group if
the votes cast within the voting group favoring the action exceed the votes cast
within the voting group opposing the action, unless the question is one upon
which by express provision of law or of the Certificate of Incorporation or of
these Bylaws a different vote is required.
Section 7. Proxies. Stockholders of record may vote at any meeting
either in person or by proxy executed in writing. A proxy is effective when
received by the person authorized to tabulate votes for the Corporation. A proxy
is valid for eleven (11) months unless a longer period is expressly provided in
the proxy.
Section 8. Voting. Subject to the provisions of the laws of the State
of Delaware, and unless otherwise provided in the Certificate of Incorporation,
each outstanding share, regardless of class, is entitled to one (1) vote on each
matter voted on at a stockholders' meeting.
Section 9. Adjournment. A majority of the shares represented at the
meeting, even if less than a quorum, may adjourn the meeting from time to time.
At such reconvened meeting at which a quorum is present any business may be
transacted at the meeting as originally notified. If a meeting is adjourned to a
different date, time, or place, notice need not be given of the new date, time,
or place if a new date, time, or place is announced at the meeting before
adjournment; however, if a new record date for the adjourned meeting is or must
be fixed in accordance with the corporate laws of the State of Delaware, notice
of the adjourned meeting must be given to persons who are stockholders as of the
new record date.
ARTICLE II
Board of Directors
Section 1. Powers of Directors. All corporate powers shall be exercised
by or under the authority of, and the business and affairs of the Corporation
shall be managed under the direction of, the Board of Directors, except as
otherwise provided by its Certificate of Incorporation.
Section 2. Number and Qualifications. The business affairs and property
of this Corporation shall be managed by a Board of not less than one (1)
director nor more than seven (7) directors. The number of directors may at any
time be increased or decreased by the stockholders or by the Board of Directors
at any regular or special meeting. Directors need not be stockholders of this
Corporation or residents of the State of Delaware, but must have reached the age
of majority.
Section 3. Election - Term of Office. The terms of the initial
directors expire at the first stockholders' meeting at which directors are
elected. The directors shall be elected by the stockholders at each annual
stockholders' meeting to hold office until the next annual meeting of the
stockholders and until their respective successors are elected and qualified.
If, for any reason, the directors shall not have been elected at any annual
meeting, they may be elected at a special meeting of stockholders called for
that purpose in the manner provided by these Bylaws.
Section 4. Regular Meetings. Regular meetings of the Board of Directors
shall be held at such places, and at such times as the Board by vote may
determine, and, if so determined, no notice thereof need be given.
Section 5. Special Meetings. Special meetings of the Board of Directors
may be held at any time or place whenever called by any officer or one (1) or
more directors, notice thereof being given to each director by the officer
calling or by the officer directed to call the meeting.
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Section 6. Notice. No notice is required for regular meetings of the
Board of Directors. Notice of special meetings of the Board of Directors,
stating the date, time, and place thereof, shall be given at least two (2) days
prior to the date of the meeting. The purpose of the meeting need not be given
in the notice. Such notice may be oral or written.
Section 7. Waiver of Notice. A director may waive notice of a special
meeting of the Board either before or after the meeting, and such waiver shall
be deemed to be the equivalent of giving notice. The waiver must be in writing,
signed by the director and entitled to the notice and delivered to the
Corporation for inclusion in its corporate records. Attendance of a director at
a meeting shall constitute waiver of notice of that meeting unless said director
attends for the express purpose of objecting to the transaction of business
because the meeting has not been lawfully called or convened.
Section 8. Quorum of Directors. A majority of the members of the Board
of Directors shall constitute a quorum for the transaction of business. When a
quorum is present at any meeting, a majority of the members present thereat
shall decide any question brought before such meeting, except as otherwise
provided by the Certificate of Incorporation or by these Bylaws.
Section 9. Adjournment. A majority of the directors present, even if
less than a quorum, may adjourn a meeting and continue it to a later time.
Notice of the adjourned meeting or of the business to be transacted thereat,
other than by announcement, shall not be necessary. At any adjourned meeting at
which a quorum is present, any business may be transacted which could have been
transacted at the meeting as originally called.
Section 10. Resignation and Removal. Any director of this Corporation
may resign at any time by giving written notice to the Board of Directors, its
Chairman, the President, or Secretary of this Corporation. Any such resignation
is effective when the notice is delivered, unless the notice specifies a later
effective date. The stockholders, at a special meeting called expressly for that
purpose, may remove from office with or without cause one or more directors and
elect their successors. A director may be removed only if the number of votes
cast for removal exceeds the number of votes cast against removal.
Section 11. Vacancies. Unless otherwise provided by law, in case of any
vacancy in the Board of Directors, including a vacancy resulting from an
increase in the number of directors, the remaining directors, whether
constituting a quorum or not, or the stockholders, may fill the vacancy.
Section 12. Compensation. By resolution of the Board of Directors, each
director may be paid expenses, if any, of attendance at each meeting of the
Board of Directors, and may be paid a stated salary as director, or a fixed sum
for attendance at each meeting of the Board of Directors, or both. No such
payment shall preclude any director from serving this Corporation in any other
capacity and receiving compensation therefor.
Section 13. Presumption of Assent. A director of this Corporation who
is present at a meeting of the Board of Directors at which action on any
corporate matter is taken shall be presumed to have assented to the action taken
unless:
a. The director objects at the beginning of the meeting, or
promptly upon the director's arrival, to holding it or transacting
business at the meeting;
b. The director's dissent or abstention from the action taken
is entered in the minutes of the meeting; or
c. The director shall file written dissent or abstention with
the presiding officer of the meeting before its adjournment or to the
Corporation within a reasonable time after adjournment of the meeting.
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The right of dissent or abstention is not available to a director who votes in
favor of the action taken.
Section 14. Committees. The Board of Directors, by resolution adopted
by a majority of the full Board of Directors, may designate from among its
members an Executive Committee and one or more other committees, each of which:
a. Must have two (2) or more members;
b. Must be governed by the same rules regarding meetings,
action without meetings, notice, and waiver of notice, and quorum and
voting requirements as applied to the Board of Directors; and
c. To the extent provided in such resolution, shall have and
may exercise all the authority of the Board of Directors, except no
such committee shall have the authority to:
(1) Authorize or approve a distribution except
according to a general formula or method prescribed by the
Board of Directors;
(2) Approve or propose to stockholders action which
the Delaware General Corporation Law requires to be approved
by stockholders;
(3) Fill vacancies on the Board of Directors or on
any of its committees;
(4) Amend the Certificate of Incorporation;
(5) Adopt, amend, or repeal the Bylaws;
(6) Approve a plan of merger not requiring
stockholder approval; or
(7) Authorize or approve the issuance or sale or
contract for sale of shares, or determine the designation and
relative rights, preferences, and limitations on a class or
series of shares, except that the Board of Directors may
authorize a committee, or a senior executive officer of the
Corporation, to do so within limits specifically prescribed by
the Board of Directors.
ARTICLE III
Special Measures Applying to Both
Stockholders' Meetings and Directors' Meetings
Section 1. Conference Telephone. Meetings of the stockholders and Board
of Directors may be effectuated by means of a conference telephone or similar
communications equipment by means of which all persons participating in the
meeting can hear each other during the meeting. Participation by such means
shall constitute presence in person at such meeting.
Section 2. Oral and Written Notice. Oral notice may be communicated in
person or by telephone, wire or wireless equipment that does not transmit a
facsimile of the notice. Oral notice is effective when communicated.
Written notice may be transmitted by mail, private carrier, or personal
delivery; telegraph or teletype; or telephone, wire, or wireless equipment that
transmits a facsimile of the notice. Written notice is effective at the earliest
of the following: (a) when received; (b) five (5) days after its deposit in the
U.S. mail if mailed with first-class postage; (c) on the date shown on the
return receipt, if sent by
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registered or certified mail, return receipt requested, and the receipt is
signed by or on behalf of the addressee.
ARTICLE IV
Officers
Section 1. Positions. The officers of this Corporation may be a
President, one or more Vice Presidents, a Secretary, and a Treasurer, as
appointed by the Board. Such other officers and assistant officers as may be
necessary may be appointed by the Board of Directors or by a duly appointed
officer to whom such authority has been delegated by Board resolution. No
officer need be a stockholder or a director of this Corporation. Any two or more
offices may be held by the same person.
The Board of Directors in its discretion may elect a Chairman from
amongst its members to serve as Chairman of the Board of Directors, who, when
present shall preside at all meetings of the Board of Directors, and who shall
have such other powers as the Board may determine.
Section 2. Appointment and Term of Office. The officers of this
Corporation shall be appointed annually by the Board of Directors at the first
meeting of the Board of Directors held after each annual meeting of the
stockholders. If officers are not appointed at such meeting, such appointment
shall occur as soon as possible thereafter. Each officer shall hold office until
a successor shall have been appointed and qualified or until said officer's
earlier death, resignation, or removal.
Section 3. Powers and Duties. If the Board appoints persons to fill the
following officer positions, such officer shall have the powers and duties set
forth below:
a. President. The President shall be the chief executive
officer of this Corporation and, subject to the direction and control
of the Board of Directors, shall have general supervision of the
business of this Corporation. Unless a Chairman of the Board of
Directors has been elected and is present, the President shall preside
at meetings of the Board of Directors.
The President, or any Vice President or such other person(s)
as are specifically authorized by vote of the Board of Directors, shall
sign all bonds, deeds, mortgages, and any other agreements, and such
signature(s) shall be sufficient to bind this Corporation. The
President shall perform such other duties as the Board of Directors
shall designate.
b. Vice President. During the absence or disability of the
President, the Vice President (or in the event that there be more than
one Vice President, the Vice Presidents in the order designated by the
Board of Directors) shall exercise all functions of the President,
except as limited by resolution of the Board of Directors. Each Vice
President shall have such powers and discharge such duties as may be
assigned from time to time to such Vice President by the President or
by the Board of Directors.
c. Secretary. The Secretary shall:
(1) Prepare minutes of the directors' and
stockholders' meetings and keep them in one or more books
provided for that purpose;
(2) Authenticate records of the Corporation;
(3) See that all notices are duly given in accordance
with the provisions of these Bylaws or as required by law;
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(4) Be custodian of the corporate records and of the
seal of the Corporation (if any), and affix the seal of the
Corporation to all documents as may be required;
(5) Keep a register of the post office address of
each stockholder which shall be furnished to the Secretary by
such stockholder;
(6) 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;
(7) Have general charge of the stock transfer books
of the Corporation; and
(8) In general, perform all the 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. In the Secretary's absence, an Assistant
Secretary shall perform the Secretary's duties.
d. Treasurer. The Treasurer shall have the care and custody of
the money, funds, and securities of the Corporation, shall account for
the same, and shall have and exercise, under the supervision of the
Board of Directors, all the powers and duties commonly incident to this
office.
Section 4. Salaries and Contract Rights. The salaries and other
benefits, if any, of the officers shall be fixed from time to time by the Board
of Directors. The appointment of an officer shall not of itself create contract
rights.
Section 5. Resignation or Removal. Any officer of this Corporation may
resign at any time by giving written notice to the Board of Directors. Any such
resignation is effective when the notice is delivered, unless the notice
specifies a later date, and shall be without prejudice to the contract rights,
if any, of such officer. The Board of Directors, by majority vote of the entire
Board, may remove any officer or agent appointed by it, with or without cause.
Section 6. Vacancies. If any office becomes vacant by any reason, the
directors may appoint a successor or successors who shall hold office for the
unexpired term.
ARTICLE V
Certificates of Shares and Their Transfer
Section 1. Issuance; Certificates of Shares. No shares of this
Corporation shall be issued unless authorized by the Board. Such authorization
shall include the maximum number of shares to be issued, the consideration to be
received, and a statement that the Board considers the consideration to be
adequate. Certificates for shares of the Corporation shall be in such form as is
consistent with the provisions of the Delaware General Corporation Law and shall
state:
a. The name of the Corporation and that the Corporation is
organized under the laws of the State of Delaware;
b. The name of the person to whom issued; and
c. The number and class of shares and the designation of the
series, if any, which such certificate represents.
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The certificate shall be signed by original or facsimile signature of
two officers of the Corporation, and the seal of the Corporation may be affixed
thereto.
Section 2. Transfer of Stock. Shares of stock may be transferred by
delivery of the certificate accompanied by either an assignment in writing on
the back of the certificate or by a written power of attorney to assign and
transfer the same on the books of this Corporation, signed by the record holder
of the certificate. The shares shall be transferable on the books of this
Corporation upon surrender thereof so assigned or endorsed.
Section 3. Loss or Destruction of Certificates. In case of the loss,
mutilation, or destruction of a certificate of stock, a duplicate certificate
may be issued upon such terms as the Board of Directors shall prescribe.
Section 4. Record Date and Transfer Books. For the purpose of
determining stockholders who are entitled to notice of or to vote at any meeting
of stockholders or any adjournment thereof, or entitled to receive payment of
any dividend, or in order to make a determination of stockholders for any other
proper purpose, the Board of Directors may fix in advance a record date for any
such determination of stockholders, such date in any case to be not more than
seventy (70) days and, in case of a meeting of stockholders, not less than ten
(10) days prior to the date on which the particular action, requiring such
determination of stockholders, is to be taken.
If no record date is fixed for such purposes, the date on which notice
of the meeting is mailed or the date on which the resolution of the Board of
Directors declaring such dividend is adopted, as the case may be, shall be the
record date for such determination of stockholders.
When a determination of stockholders entitled to vote at any meeting of
stockholders has been made as provided in this section, such determination shall
apply to any adjournment thereof, unless the Board of Directors fixes a new
record date, which it must do if the meeting is adjourned more than one hundred
twenty (120) days after the date is fixed for the original meeting.
Section 5. Voting Record. The officer or agent having charge of the
stock transfer books for shares of this Corporation shall make at least ten (10)
days before each meeting of stockholders a complete record of the stockholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each.
Such record shall be produced and kept open at the time and place of the meeting
and shall be subject to the inspection of any stockholder during the whole time
of the meeting for the purposes thereof.
ARTICLE VI
Books and Records
Section 1. Books of Accounts, Minutes, and Share Register. The
corporation:
a. Shall keep as permanent records minutes of all meetings of
its stockholders and Board of Directors, a record of all actions taken
by the stockholders or Board of Directors without a meeting, and a
record of all actions taken by a committee of the Board of Directors
exercising the authority of the Board of Directors on behalf of the
Corporation;
b. Shall maintain appropriate accounting records;
c. Or its agent shall maintain a record of its stockholders,
in a form that permits preparation of a list of the names and addresses
of all stockholders, in alphabetical order by class of shares showing
the number and class of shares held by each; and
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d. Shall keep a copy of the following records at its principal
office:
(1) The Certificate of Incorporation or Restated
Certificate of Incorporation and all amendments to them
currently in effect;
(2) The Bylaws or Restated Bylaws and all amendments
to them currently in effect;
(3) The minutes of all stockholders' meetings, and
records of all actions taken by stockholders without a
meeting;
(4) Its financial statements, including balance
sheets showing in reasonable detail the financial condition of
the Corporation as of the close of each fiscal year, and an
income statement showing the results of its operations during
each fiscal year prepared on the basis of generally accepted
accounting principles or, if not, prepared on a basis
explained therein;
(5) All written communications to stockholders
generally within the past three (3) years;
(6) A list of the names and business addresses of its
current directors and officers; and
(7) Its most recent annual report delivered to the
Secretary of State of Delaware.
Section 2. Copies of Resolutions. Any person dealing with the
Corporation may rely upon a copy of any of the records of the proceedings,
resolutions, or votes of the Board of Directors or stockholders, when certified
by the President or Secretary.
ARTICLE VII
Indemnification of Officers, Directors, Employees and Agents
Section 1. Definitions. As used in this Article:
a. "Act" means the Delaware General Corporation Law, now or
hereafter in force.
b. "Agent" means an individual who is or was an agent of the
Corporation or an individual who, while an agent of the Corporation, is
or was serving at the Corporation's request as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise. "Agent" includes, unless the context requires
otherwise, the estate or personal representative of an agent.
c. "Corporation" means this Corporation, and any domestic or
foreign predecessor entity which, in a merger or other transaction,
ceased to exist.
d. "Director" means an individual who is or was a director of
the Corporation or an individual who, while a director of the
Corporation, is or was serving Corporation's request as a director,
officer, partner, trustee, employee, or agent of another foreign or
domestic corporation, partnership, joint venture, trust, employee
benefit plan, or other enterprise. "Director" includes, unless the
context requires otherwise, the estate or personal representative of a
director.
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e. "Employee" means an individual who is or was an employee of
the Corporation or an individual, while an employee of the Corporation,
is or was serving at the Corporation's request as a director, officer,
partner, trustee, employee, or agent of another foreign or domestic
corporation, partnership, joint venture, trust, employee benefit plan,
or other enterprise. "Employee" includes, unless the context requires
otherwise, the estate or personal representative of an employee.
f. "Expenses" include counsel fees.
g. "Indemnitee" means an individual made a party to a
proceeding because the individual is or was a Director, Officer,
Employee, or Agent of the Corporation, and who possesses
indemnification rights pursuant to the Certificate of Incorporation,
these Bylaws, or other corporate action. "Indemnitee" shall also
include the heirs, executors, and other successors in interest of such
individuals.
h. "Liability" means the obligation to pay a judgment,
settlement, penalty, fine, including an excise tax assessed with
respect to an employee benefit plan, or reasonable expenses incurred
with respect to a proceeding.
i. "Officer" means an individual who is or was an officer of
the Corporation or an individual who, while an officer of the
Corporation, is or was serving at the Corporation's request as a
director, officer, partner, trustee, employee, or agent of another
foreign or domestic corporation, partnership, joint venture, trust,
employee benefit plan, or other enterprise. "Officer" includes, unless
the context requires otherwise, the estate or personal representative
of an officer.
j. "Party" includes an individual who was, is, or is
threatened to be named a defendant or respondent in a proceeding.
k. "Proceeding" means any threatened, pending, or completed
action, suit, or proceeding, whether civil, criminal, administrative,
or investigative, and whether formal or informal.
Section 2. Indemnification Rights of Directors, Officers, Employees and
Agents. The Corporation shall indemnify its Directors, Officers, Employees and
Agents to the full extent permitted by applicable law as then in effect against
liability arising out of a proceeding to which such individual was made a party
because the individual is or was a Director, Officer, Employee or Agent of the
Corporation. The Corporation shall advance expenses incurred by such persons who
are parties to a proceeding in advance of final disposition of the proceeding,
as provided herein.
Section 3. Procedure for Seeking Indemnification and/or Advancement of
Expenses.
a. Notification and Defense of Claim. Indemnitee shall
promptly notify the Corporation in writing of any proceeding for which
indemnification could be sought under this Article. In addition,
Indemnitee shall give the Corporation such information and cooperation
as it may reasonably require and as shall be within Indemnitee's power.
With respect to any such proceeding as to which Indemnitee has
notified the Corporation:
(1) The Corporation will be entitled to participate
therein at its own expense;
(2) Except as otherwise provided below, to the extent
that it may wish, the Corporation, jointly with any other
indemnifying party similarly notified, will be entitled to
assume the defense thereof, with counsel satisfactory to
Indemnitee. Indemnitee's consent to such counsel may not be
unreasonably withheld.
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After notice from the Corporation to Indemnitee of its
election to assume the defense, the Corporation will not be liable to
Indemnitee under this Article for any legal or other expenses
subsequently incurred by Indemnitee in connection with such defense.
However, Indemnitee shall continue to have the right to employ its
counsel in such proceeding, at Indemnitee's expense; and if:
(a) The employment of counsel by Indemnitee has been
authorized by the Corporation;
(b) Indemnitee shall have reasonably concluded that
there may be a conflict of interest between the Corporation
and Indemnitee in the conduct of such defense; or
(c) The Corporation shall not in fact have employed
counsel to assume the defense of such proceeding,
the fees and expenses of Indemnitee's counsel shall be at the expense
of the Corporation.
b. Information to be Submitted and Method of Determination and
Authorization of Indemnification. For the purpose of pursuing rights to
indemnification under this Article, the Indemnitee shall submit to the
Board a sworn statement requesting indemnification and reasonable
evidence of all amounts for which such indemnification is requested
(together, the sworn statement and the evidence constitutes an
"Indemnification Statement").
Submission of an Indemnification Statement to the Board shall
create a presumption that the Indemnitee is entitled to indemnification
hereunder, and the Corporation shall, within sixty (60) calendar days
thereafter, make the payments requested in the Indemnification
Statement to or for the benefit of the Indemnitee, unless: (1) within
such sixty (60) calendar day period it shall be determined by the
Corporation that the Indemnitee is not entitled to indemnification
under this Article; (2) such determination shall be based upon clear
and convincing evidence (sufficient to rebut the foregoing
presumption); and (3) the Indemnitee shall receive notice in writing of
such determination, which notice shall disclose with particularity the
evidence upon which the determination is based.
At the election of the President, the foregoing determination
may be made by either: (1) the written consent of the stockholders
owning a majority of the stock in the Corporation; (2) a committee
chosen by written consent of a majority of the directors of the
Corporation, and consisting solely of two (2) or more directors not at
the time parties to the proceeding; or (3) as provided by Section 145
of the Delaware General Corporation Law.
Any determination that the Indemnitee is not entitled to
indemnification, and any failure to make the payments requested in the
Indemnification Statement, shall be subject to judicial review by any
court of competent jurisdiction.
c. Special Procedure Regarding Advance for Expenses. An
Indemnitee seeking payment of expenses in advance of a final
disposition of the proceeding must furnish the Corporation, as part of
the Indemnification Statement:
(1) A written affirmation of the Indemnitee's good
faith belief that the Indemnitee has met the standard of
conduct required to be eligible for indemnification as set
forth in the Delaware General Corporation Law; and
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(2) A written undertaking, constituting an unlimited
general obligation of the Indemnitee, to repay the advance if
it is ultimately determined that the Indemnitee did not meet
the required standard of conduct.
If the Corporation determines that indemnification is
authorized, the Indemnitee's request for advance of expenses shall be
granted.
d. Settlement. The Corporation is not liable to indemnify
Indemnitee for any amounts paid in settlement of any proceeding without
Corporation's written consent. The Corporation shall not settle any
proceeding in any manner which would impose any penalty or limitation
on Indemnitee without Indemnitee's written consent. Neither the
Corporation nor Indemnitee may unreasonably withhold its consent to a
proposed settlement.
Section 4. Contract and Related Rights.
a. Contract Rights. The right of an Indemnitee to
indemnification and advancement of expenses is a contract right upon
which the Indemnitee shall be presumed to have relied in determining to
serve or to continue to serve in his or her capacity with the
Corporation. Such right shall continue as long as the Indemnitee shall
be subject to any possible proceeding. Any amendment to or repeal of
this Article shall not adversely affect any right or protection of an
Indemnitee with respect to any acts or omissions of such Indemnitee
occurring prior to such amendment or repeal.
b. Optional Insurance, Contracts, and Funding. The Corporation
may:
(1) Maintain insurance, at its expense, to protect
itself and any Indemnitee against any liability, whether or
not the Corporation would have power to indemnify the
individual against the same liability;
(2) Enter into contracts with any Indemnitee in
furtherance of this Article and consistent with the Act; and
(3) Create a trust fund, grant a security interest,
or use other means (including without limitation a letter of
credit) to ensure the payment of such amounts as may be
necessary to effect indemnification as provided in this
Article.
c. Severability. If any provision or application of this
Article shall be invalid or unenforceable, the remainder of this
Article and its remaining applications shall not be affected thereby,
and shall continue in full force and effect.
d. Right of Indemnitee to Bring Suit. If (1) a claim under
this Article for indemnification is not paid in full by the Corporation
within sixty (60) days after a written claim has been received by the
Corporation; or (2) a claim under this Article for advancement of
expenses is not paid in full by the Corporation within twenty (20) days
after a written claim has been received by the Corporation, then the
Indemnitee may, but need not, at any time thereafter bring suit against
the Corporation to recover the unpaid amount of the claim. To the
extent successful in whole or in part, the Indemnitee shall be entitled
to also be paid the expense (to be proportionately prorated if the
Indemnitee is only partially successful) of prosecuting such claim.
Neither: (1) the failure of the Corporation (including its
Board of Directors, its stockholders, or independent legal counsel) to
have made a determination prior to the commencement of such proceeding
that indemnification or reimbursement or advancement of expenses to the
Indemnitee is proper in the circumstances; nor (2) an actual
determination by the Corporation (including its Board of Directors, its
stockholders, or independent legal counsel) that
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the Indemnitee is not entitled to indemnification or to the
reimbursement or advancement of expenses, shall be a defense to the
proceeding or create a presumption that the Indemnitee is not so
entitled.
Section 5. Exceptions. Any other provision herein to the contrary
notwithstanding, the Corporation shall not be obligated pursuant to the terms of
these Bylaws to indemnify or advance expenses to Indemnitee with respect to any
proceeding:
a. Claims Initiated by Indemnitee. Initiated or brought
voluntarily by Indemnitee and not by way of defense, except with
respect to proceedings brought to establish or enforce a right to
indemnification under these Bylaws or any other statute or law or as
otherwise required under the statute; but such indemnification or
advancement of expenses may be provided by the Corporation in specific
cases if the Board of Directors finds it to be appropriate.
b. Lack of Good Faith. Instituted by Indemnitee to enforce or
interpret this Agreement, if a court of competent jurisdiction
determines that each of the material assertions made by Indemnitee in
such proceeding was not made in good faith or was frivolous.
c. Insured Claims. For which any of the expenses or
liabilities for indemnification is being sought have been paid directly
to Indemnitee by an insurance carrier under a policy of officers' and
directors' liability insurance maintained by the Corporation.
d. Prohibited by Law. If the Corporation is prohibited by the
Delaware General Corporation Law or other applicable law as then in
effect from paying such indemnification and/or advancement of expenses.
For example, the Corporation and Indemnitee acknowledge that the
Securities and Exchange Commission ("SEC") has taken the position that
indemnification is not possible for liabilities arising under certain
federal securities laws, and federal legislation prohibits
indemnification for certain ERISA violations. Indemnitee understands
and acknowledges that the Corporation has undertaken or may be required
in the future to undertake with the SEC to submit the question of
indemnification to a court in certain circumstances for a determination
of the Corporation's right to indemnify Indemnitee.
51
<PAGE> 13
ARTICLE VIII
Amendment of Bylaws
Section 1. By the Stockholders. These Bylaws may be amended or repealed
at any regular or special meeting of the stockholders if notice of the proposed
amendment is contained in the notice of the meeting.
Section 2. By the Board of Directors. These Bylaws may be amended or
repealed by the affirmative vote of a majority of the whole Board of Directors
of any meeting of the Board, if notice of the proposed amendment is contained in
the notice of the meeting. However, the directors may not modify the Bylaws
fixing their qualifications, classifications, or term of office.
52
<PAGE> 1
Exhibit 6.1 Joint Operating Agreement with Saurus Resources, Inc.
[LOGO]
A.A.P.L. FORM 610 -- 1989
MODEL FORM OPERATING AGREEMENT
OPERATING AGREEMENT
DATED
December 1, 1999,
---------- ----
OPERATOR Saurus Resources Inc.
--------------------------------------------------
CONTRACT AREA R111W-R106W AND T16N-T22N
---------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
- -----------------------------------------------------------
COUNTY OR PARISH OF Sweetwater , STATE OF Wyoming
-------------------- -------
53
<PAGE> 2
A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE TITLE PAGE
- ------- ----- ----
<S> <C> <C>
I. DEFINITIONS........................................................ 1
II. EXHIBITS........................................................... 1
III. INTERESTS OF PARTIES............................................... 2
A. OIL AND GAS INTERESTS:.......................................... 2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION:................... 2
C. SUBSEQUENTLY CREATED INTERESTS:................................. 2
IV. TITLES............................................................. 2
A. TITLE EXAMINATION:.............................................. 2
B. LOSS OR FAILURE OF TITLE:....................................... 3
1. Failure of Title............................................. 3
2. Loss by Non-Payment or Erroneous Payment of Amount Due....... 3
3. Other Losses................................................. 3
4. Curing Title................................................. 3
V. OPERATOR........................................................... 4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:................... 4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR:.. 4
1. Resignation or Removal of Operator........................... 4
2. Selection of Successor Operator.............................. 4
3. Effect of Bankruptcy......................................... 4
C. EMPLOYEES AND CONTRACTORS:...................................... 4
D. RIGHTS AND DUTIES OF OPERATOR:.................................. 4
1. Competitive Rates and Use of Affiliates...................... 4
2. Discharge of Joint Account Obligations....................... 4
3. Protection from Liens........................................ 4
4. Custody of Funds............................................. 5
5. Access to Contract Area and Records.......................... 5
6. Filing and Furnishing Governmental Reports................... 5
7. Drilling and Testing Operations.............................. 5
8. Cost Estimates............................................... 5
9. Insurance.................................................... 5
VI. DRILLING AND DEVELOPMENT........................................... 5
A. INITIAL WELL:................................................... 5
B. SUBSEQUENT OPERATIONS:.......................................... 5
1. Proposed Operations.......................................... 5
2. Operations by Less Than All Parties.......................... 6
3. Stand-by Costs............................................... 7
4. Deepening.................................................... 8
5. Sidetracking................................................. 8
6. Order of Preference of Operations............................ 8
7. Conformity to Spacing Pattern................................ 9
8. Paying Wells................................................. 9
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:............... 9
1. Completion................................................... 9
2. Rework, Recomplete or Plug Back.............................. 9
D. OTHER OPERATIONS:............................................... 9
E. ABANDONMENT OF WELLS:........................................... 9
1. Abandonment of Dry Holes..................................... 9
2. Abandonment of Wells That Have Produced...................... 10
3. Abandonment of Non-Consent Operations........................ 10
F. TERMINATION OF OPERATIONS:...................................... 10
G. TAKING PRODUCTION IN KIND....................................... 10
(Option 1) Gas Balancing Agreement.............................. 10
(Option 2) No Gas Balancing Agreement.......................... 11
VII. EXPENDITURES AND LIABILITY OF PARTIES.............................. 11
A. LIABILITY OF PARTIES:........................................... 11
B. LIENS AND SECURITY INTERESTS:................................... 11
C. ADVANCES:....................................................... 12
D. DEFAULTS AND REMEDIES:.......................................... 12
1. Suspension of Rights......................................... 13
2. Suit for Damages............................................. 13
3. Deemed Non-Consent........................................... 13
4. Advance Payment.............................................. 13
5. Costs and Attorneys' Fees.................................... 13
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:........... 13
F. TAXES:.......................................................... 13
VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST................... 14
A. SURRENDER OF LEASES:............................................ 14
B. RENEWAL OR EXTENSION OF LEASES:................................. 14
C. ACREAGE OR CASH CONTRIBUTIONS:.................................. 14
</TABLE>
<PAGE> 3
A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
TABLE OF CONTENTS
<TABLE>
<CAPTION>
ARTICLE TITLE PAGE
- ------- ----- ----
<S> <C> <C>
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:.................... 15
E. WAIVER OF RIGHTS TO PARTITION:.................................. 15
F. PREFERENTIAL RIGHT TO PURCHASE:................................. 15
IX. INTERNAL REVENUE CODE ELECTION..................................... 15
X. CLAIMS AND LAWSUITS................................................ 15
XI. FORCE MAJEURE...................................................... 16
XII. NOTICES............................................................ 16
XIII. TERM OF AGREEMENT.................................................. 16
XIV. COMPLIANCE WITH LAWS AND REGULATIONS............................... 16
A. LAWS, REGULATIONS AND ORDERS:................................... 16
B. GOVERNING LAW:.................................................. 16
C. REGULATORY AGENCIES:............................................ 16
XV. MISCELLANEOUS...................................................... 17
A. EXECUTION:...................................................... 17
B. SUCCESSORS AND ASSIGNS:......................................... 17
C. COUNTERPARTS:................................................... 17
D. SEVERABILITY:................................................... 17
XVI. OTHER PROVISIONS................................................... 17
</TABLE>
<PAGE> 4
A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
OPERATING AGREEMENT
THIS AGREEMENT, entered into by and between Saurus Resources Inc.
hereinafter designated and referred to as "Operator," and the signatory party or
parties other than Operator, sometimes hereinafter referred to individually 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 "AFE" shall mean an Authority for Expenditure prepared by a
party to this agreement for the purpose of estimating the costs to be incurred
in conducting an operation hereunder.
B. The term "Completion" or "Complete" shall mean a single operation
intended to complete a well as a producer of Oil and Gas in one or more Zones,
including, but not limited to, the setting of production casing, perforating,
well stimulation and production testing conducted in such operation.
C. The term "Contract Area" shall mean all of the lands, Oil and Gas Leases
and/or Oil and Gas Interests intended to be developed and operated for Oil and
Gas purposes under this agreement. Such lands, Oil and Gas Leases and Oil and
Gas Interests are described in Exhibit "A"
D. The term "Deepen" shall mean a single operation whereby a well is
drilled to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated AFE,
whichever is the lesser.
E. 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.
F. 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
unless fixed by express agreement of the Drilling Parties.
G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be located.
H. The term "Initial Well" shall mean the well required to be drilled by
the parties hereto as provided in Article VI.A.
I. The term "Non-Consent Well" shall mean a well in which less than all
parties have conducted an operation as provided in Article VI.B.2.
J. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a
party who elects not to participate in a proposed operation.
K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas
condensate, and/or 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.
L. The term "Oil and Gas Interests" or "Interests" shall mean unleased fee
and mineral interests in Oil and Gas in tracts of land lying within the Contract
Area which are owned by parties to this agreement.
M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean the
oil and gas leases or interests therein covering tracts of land lying within the
Contract Area which are owned by the parties to this agreement.
N. The term "Plug Back" shall mean a single operation whereby a deeper Zone
is abandoned in order to attempt a Completion in a shallower Zone.
O. The term "Recompletion" or "Recomplete" shall mean an operation whereby
a Completion in one Zone is abandoned in order to attempt a Completion in a
different zone within the existing wellbore.
P. The term "Rework" shall mean an operation conducted in the wellbore of
a well after it is Completed to secure, restore, or improve production in a Zone
which is currently open to production in the wellbore. Such operations include,
but are not limited to, well stimulation operations but exclude any routine
repair or maintenance work or drilling, Sidetracking, Deepening, Completing,
Recompleting, or Plugging Back of a well.
Q. The term "Sidetrack" shall mean the directional control and intentional
deviation of a well from vertical so as to change the bottom hole location
unless done to straighten the hole or to drill around junk in the hole to
overcome other mechanical difficulties.
R. The term"Zone" shall mean a stratum of earth containing or thought to
contain a common accumulation of Oil and Gas separately producible from any
other common accumulation of Oil and Gas.
Unless the context otherwise clearly indicates, words used in the singular
include the plural, the work "person" includes natural and artificial persons,
the plural includes the singular, and any gender includes the masculine,
feminine, and neuter.
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) Description of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Parties to agreement with addresses and telephone numbers for
notice purposes,
(4) Percentages or fractional interests of parties to this agreement,
(5) Oil and Gas Leases and/or Oil and Gas Interests subject to this
agreement,
(6) Burdens on production,
B. Exhibit "B," Form of Lease.
- -------
X C. Exhibit "C," Accounting Procedure.
- -------
D. Exhibit "D," Insurance.
- -------
X E. Exhibit "E," Gas Balancing Agreement.
- -------
F. Exhibit "F," Non-Discrimination and Certification of Non-Segregated
- ------- Facilities.
G. "G," Tax Partnership.
- -------
X H. Other: FMC Joint Use Agreement
- -------
-1-
<PAGE> 5
A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
If any provision of any exhibit, except Exhibits "E," "F" and "G", is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
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
royalty interest 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, however, to the payment of royalties and other burdens on production
as described hereafter.
Regardless of which party has contributed any Oil and Gas Lease or Oil and
Gas Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, each party shall pay or
deliver, or cause to be paid or delivered, all burdens on its share of the
production from the Contract Area up to, but not in excess of, actual title and
shall indemnify, defend and hold the other parties free from any liability
therefor. Except as otherwise expressly provided in this agreement, if any
party has contributed hereto any Lease or Interest which is burdened with any
royalty, overriding royalty, production payment or other burden on production
in excess of the amounts stipulated above, such party so burdened shall assume
and alone bear all such excess obligations and shall indemnify, defend and hold
the other parties hereto harmless from any and all claims attributable to such
excess burden. However, so long as the Drilling Unit for the productive Zone(s)
is identical with the Contract Area, each party shall pay or deliver, or cause
to be paid or delivered, all burdens on production from the Contract Area due
under the terms of the Oil and Gas Lease(s) which such party has contributed to
this agreement, and shall indemnify, defend and hold the other parties free
from any liability therefor.
No party shall ever be responsible, on a price basis higher than the price
received by such party, to any other party's lessor or royalty owner, and if
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, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.
C. SUBSEQUENTLY CREATED INTERESTS:
If any party has contributed hereto a Lease or Interest that is burdened
with an assignment of production given as security for the payment of money, or
if, after the date of this agreement, any party creates an overriding royalty,
production payment, net profits interest, or other burden payable out of
production created prior to the date of this agreement, and such burden is not
shown on Exhibit "A", such burden also shall be deemed a Subsequently Created
Interest to the extent such burden causes the burdens on such party's Lease or
Interest to exceed the amount stipulated in Article III.B. above.
The party whose interest is burdened with the Subsequently Created
Interest (the "Burdened Party") shall assume and alone bear, pay and discharge
the Subsequently Created Interest and shall indemnify, defend and hold harmless
the other parties from and against any liability therefor. Further, 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. 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, defend and hold harmless said
other party, or parties, from any and all claims and demands for payment
asserted by owners of the Subsequently 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 and, if a majority in interest of
the Drilling Parties so request or Operator so elects, title examination shall
be made on the entire Drilling Unit, or maximum anticipated Drilling Unit, of
the well. The opinion will include the ownership of the working interest,
minerals, royalty, overriding royalty and production payments under the
applicable Leases. Each party contributing Leases and/or Oil and Gas Interests
to be included in the Drillsite or Drilling Unit, if appropriate, 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 Drilling Party. Costs incurred by Operator in procuring abstracts, fees
paid outside attorneys for title examination (including preliminary,
supplemental, shut-in royalty opinions and division order title opinions) and
other direct charges as provided in Exhibit "C" 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 and
communitization agreements as well as the conduct of hearings before
governmental agencies for the securing of spacing or pooling orders or any
other orders necessary or appropriate to the conduct of operations hereunder.
This shall not prevent any party from appearing on its own behalf at such
hearings. Costs incurred by Operator, including fees paid to outside attorneys,
which are associated with hearings before governmental agencies, and which costs
are necessary and proper for the activities contemplated under this agreement,
shall be direct charges to the joint account and shall not be covered by the
administrative overhead charges as provided in Exhibit "C."
- 2 -
<PAGE> 6
A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
Operator shall make no charge for services rendered by its staff attorneys or
other personnel in the performance of the above functions.
No well shall be drilled on the Contract Area until after (1) the title to
the Drillsite or Drilling Unit, if appropriate, 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 Drilling Parties in such well.
B. LOSS OR FAILURE OF TITLE:
1. Failure of Title: Should any Oil and Gas Interest or Oil and Gas Lease
be lost through failure of title, which results in a reduction of interest from
that shown on Exhibit "A," the party credited with contributing the affected
Lease or Interest (including, if applicable, a successor in interest to such
party) shall have ninety (90) days from final determination of title failure to
acquire a new lease or other instrument curing the entirety of the title
failure, which acquisition will not be subject to Article VIII.B., and failing
to do so, this agreement, nevertheless, shall continue in force as to all
remaining Oil and Gas Leases and Interests; and,
(a) The party credited with contributing the Oil and Gas Lease or
Interest affected by the title failure (including, if applicable, a
successor in interest to such party) shall bear alone the entire loss and
it shall not be entitled to recover from Operator or the other parties any
development or operating costs which it may have previously paid or
incurred, but there shall be no additional liability on its part to the
other parties hereto by reason of such title failure;
(b) There shall be no retroactive adjustment of expenses incurred or
revenues received from the operation of the Lease or Interest which has
failed, but the interests of the parties contained on Exhibit "A" shall be
revised on an acreage basis, as of the time it is determined finally that
title failure has occurred, so that the interest of the party whose Lease
or Interest is affected by the title failure will thereafter be reduced in
the Contract Area by the amount of the Lease or Interest failed;
(c) If the proportionate interest of the other parties hereto in any
producing well previously drilled on the Contract Area is increased by
reason of the title failure, the party who bore the costs incurred in
connection with such well attributable to the Lease or Interest which has
failed shall receive the proceeds attributable to the increase in such
interest (less costs and burdens attributable thereto) until it has been
reimbursed for unrecovered costs paid by it in connection with such well
attributable to such failed Lease or Interest;
(d) Should any person not a party to this agreement, who is determined
to be the owner of any Lease or Interest which has failed, pay in any
manner any part of the cost of operation, development, or equipment, such
amount shall be paid to the party or parties who bore the costs which are
so refunded;
(e) Any liability to account to a person not a party to this agreement
for prior production of Oil and Gas which arises by reason of title failure
shall be borne severally by each party (including a predecessor to a
current party) who received production for which such accounting is
required based on the amount of such production received, and each such
party shall severally indemnify, defend and hold harmless all other parties
hereto for any such liability to account;
(f) No charge shall be made to the joint account for legal expenses,
fees or salaries in connection with the defense of the Lease or Interest
claimed to have failed, but if the party contributing such Lease or
Interest hereto elects to defend its title it shall bear all expenses in
connection therewith; and
(g) If any party is given credit on Exhibit "A" to a Lease or Interest
which is limited solely to ownership of an interest in the wellbore of any
well or wells and the production therefrom, such party's absence of
interest in the remainder of the Contract Area shall be considered a
Failure of Title as to such remaining Contract Area unless that absence of
interest is reflected on Exhibit "A".
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, or other payment necessary to maintain all or a portion of an
Oil and Gas Lease or Interest is not paid or is erroneously paid, and as a
result a Lease or interest 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 or Interest 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 reflected on Exhibit "A" shall be revised on an acreage
basis, effective as of the date of termination of the Lease or Interest
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. If 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 Lease or
Interest, calculated on an acreage basis, for the development and operating
costs previously paid on account of such Lease or Interest, it shall be
reimbursed for unrecovered actual costs previously 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 produced prior to termination of the Lease
or Interest, less operating expenses and lease burdens chargeable hereunder
to the person who failed to make payment, previously accrued to the credit
of the lost Lease or Interest, on an acreage basis, up to the amount of
unrecovered costs;
(b) Proceeds of Oil and Gas, less operating expenses and lease burdens
chargeable hereunder to the person who failed to make payment, up to the
amount of unrecovered costs attributable to that portion of Oil and Gas
thereafter produced and marketed (excluding production from any wells
thereafter drilled) which, in the absence of such Lease or Interest
termination, would be attributable to the lost Lease or Interest on an
acreage basis and which as a result of such Lease or Interest termination
is credited to other parties, the proceeds of said portion of the Oil and
Gas to be contributed by the other parties in proportion to their
respective interests reflected on Exhibit "A"; 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 Lease or Interest
lost, for the privilege of participating in the Contract Area or becoming a
party to this agreement.
3. Other Losses: All losses of Leases or Interests committed to this
agreement, other than those set forth in Articles IV.B.1. and IV.B.2. above,
shall be joint losses and shall be borne by all parties in proportion to their
interests shown on Exhibit "A." This shall include but not be limited to the
loss of any Lease or Interest through failure to develop or because express or
implied covenants have not been performed (other than performance which requires
only the payment of money), and the loss of any Lease by expiration at the end
of its primary term if it is not renewed or extended. There shall be no
readjustment of interests in the remaining portion of the Contract Area on
account of any joint loss.
4. Curing Title: In the event of a Failure of Title under Article IV.B.1.
or a loss of title under Article IV.B.2. above, any Lease or Interest acquired
by any party hereto (other than the party whose interest has failed or was lost)
during the ninety (90) day period provided by Article IV.B.1. and Article
IV.B.2. above covering all or a portion of the interest that has failed or was
lost shall be offered at cost to the party whose interest has failed or was
lost, and the provisions of Article VIII.B. shall not apply to such acquisition.
-3-
<PAGE> 7
A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
ARTICLE V.
OPERATOR
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR:
Saurus Resources Inc. shall be the Operator of the Contract Area, and shall
conduct and direct and have full control of all operations on the Contract Area
as permitted and required by, and within the limits of this agreement. In its
performance of services hereunder for the Non-Operators, Operator shall be an
independent contractor not subject to the control or direction of the
Non-Operators except as to the type of operation to be undertaken in accordance
with the election procedures contained in this agreement. Operator shall not be
deemed, or hold itself out as, the agent of the Non-Operators with authority to
bind them to any obligation or liability assumed or incurred by Operator as to
any third party. Operator shall conduct its activities under this agreement as a
reasonable prudent operator, in a good and workmanlike manner, with due
diligence and dispatch, in accordance with good oilfield practice, and in
compliance with applicable law and regulation, but in no event shall it have any
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 only for good cause by the affirmative vote of
Non-Operators owning a majority interest based on ownership as shown on Exhibit
"A" remaining after excluding the voting interest of Operator; such vote shall
not be deemed effective until a written notice has been delivered to the
Operator by a Non-Operator detailing the alleged default and Operator has failed
to cure the default within thirty (30) days from its receipt of the notice or,
if the default concerns an operation then being conducted, within forty-eight
(48) hours of its receipt of the notice. For purposes hereof, "good cause" shall
mean not only gross negligence or willful misconduct but also the material
breach of or inability to meet the standards of operation contained in Article
V.A. or material failure or inability to perform its obligations under this
agreement.
Subject to Article VII.D.1., such resignation or removal shall not become
effective until 7:00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of Operator
at an earlier date. Operator, after effective date of resignation or removal,
shall be bound by the terms hereof as a Non-Operator. A change of a corporate
name or structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation shall not be the basis for removal
of Operator.
2. Selection of Successor Operator: Upon the resignation or removal of
Operator under any provision of this agreement, 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 or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative vote
of the party or 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 or resigned. The former Operator shall promptly deliver to the
successor Operator all records and data relating to the operations conducted by
the former Operator to the extent such records and data are not already in the
possession of the successor operator. Any cost of obtaining or copying the
former Operator's records and data shall be charged to the joint account.
3. Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is
placed in receivership, it shall be deemed to have resigned without any action
by Non-Operators, except the selection of a successor. If a petition for relief
under the federal bankruptcy laws is filed by or against Operator, and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant to
the Bankruptcy Code, and an election to reject this agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall require the approval of two (2) or more
parties owning a majority interest based on ownership as shown on Exhibit "A."
In the event there are only two (2) parties to this agreement, during the period
of time the operating committee controls operations, a third party acceptable to
Operator, Non-Operator and the federal bankruptcy court shall be selected as a
member of the operating committee, and all actions shall require the approval of
two (2)members of the operating committee without regard for their interest in
the Contract Area based on Exhibit "A":
C. EMPLOYEES AND CONTRACTORS:
The number of employees or contractors 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 or contractors shall be the employees or contractors of Operator.
D. RIGHTS AND DUTIES OF OPERATOR:
1. Competitive Rates and Use of Affiliates: 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. All work performed or materials supplied
by affiliates or related parties of Operator shall be performed or supplied at
competitive rates, pursuant to written agreement, and in accordance with customs
and standards prevailing in the industry.
2. Discharge of Joint Account Obligations: 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.
3. Protection from Liens: Operator shall pay, or cause to be paid, as and
when they become due and payable, all accounts of contractors and suppliers and
wages and salaries for services rendered or performed, and for materials
supplied on, to or in respect of the Contract Area or any operations for the
joint account thereof, and shall keep the Contract Area free from
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A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
liens and encumbrances resulting therefrom except for those resulting from a
bona fide dispute as to services rendered or materials supplied.
4. Custody of Funds: Operator shall hold for the account of the
Non-Operators any funds of the Non-Operators advanced or paid to the Operator,
either for the conduct of operations hereunder or as a result of the sale of
production from the Contract Area, and such funds shall remain the funds of the
Non-Operators on whose account they are advanced or paid until used for their
intended purpose or otherwise delivered to the Non-Operators or applied toward
the payment of debts as provided in Article VII.B. Nothing in this paragraph
shall be construed to establish a fiduciary relationship between Operator and
Non-Operators for any purpose other than to account for Non-Operator funds as
herein specifically provided. Nothing in this paragraph shall require the
maintenance by Operator of separate accounts for the funds of Non-Operators
unless the parties otherwise specifically agree.
5. Access to Contract Area and Records: Operator shall, except as otherwise
provided herein, permit each Non-Operator or its duly authorized representative,
at the Non-Operator's sole risk and cost, full and free access at all reasonable
times to all operations of every kind and character being conducted for the
joint account on the Contract Area and to the records of operations conducted
thereon or production therefrom, including Operator's books and records relating
thereto. Such access rights shall not be exercised in a manner interfering with
Operator's conduct of an operation hereunder and shall not obligate Operator to
furnish any geologic or geophysical data of an interpretive nature unless the
cost of preparation of such interpretive data was charged to the joint account.
Operator will furnish to each Non-Operator upon request copies of any and all
reports and information obtained by Operator in connection with production and
related items, including, without limitation, meter and chart reports,
production purchaser statements, run tickets and monthly gauge reports, but
excluding purchase contracts and pricing information to the extent not
applicable to the production of the Non-Operator seeking the information. Any
audit of Operator's records relating to amounts expended and the appropriateness
of such expenditures shall be conducted in accordance with the audit protocol
specified in Exhibit "C."
6. Filing and Furnishing Governmental Reports: Operator will file, and upon
written request promptly furnish copies to each requesting Non-Operator not in
default of its payment obligations, all operational notices, reports or
applications required to be filed by local, State, Federal or Indian agencies or
authorities having jurisdiction over operations hereunder. Each Non-Operator
shall provide to Operator on a timely basis all information necessary to
Operator to make such filings.
7. Drilling and Testing Operations: The following provisions shall apply to
each well drilled hereunder, including but not limited to the Initial Well:
(a) Operator will promptly advise Non-Operators of the date on which
the well is spudded, or the date on which drilling operations are
commenced.
(b) Operator will send to Non-Operators such reports, test results and
notices regarding the progress of operations on the well as the
Non-Operators shall reasonably request, including, but not limited to,
daily drilling reports, completion reports, and well logs.
(c) Operator shall adequately test all Zones encountered which may
reasonably be expected to be capable of producing Oil and Gas in paying
quantities as a result of examination of the electric log or any other logs
or cores or tests conducted hereunder.
8. Cost Estimates: Upon request of any Consenting Party, Operator shall
furnish estimates of current and cumulative costs incurred for the joint account
at reasonable intervals during the conduct of any operation pursuant to this
agreement. Operator shall not be held liable for errors in such estimates so
long as the estimates are made in good faith.
9. Insurance: At all times while operations are conducted hereunder,
Operator shall comply with the workers 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 hereto and made a
part hereof. Operator shall require all contractors engaged in work on or for
the Contract Area to comply with the workers 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 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 VI.
DRILLING AND DEVELOPMENT
A. INITIAL WELL:
On or before the 10th day of January, 2000, Operator shall commence the
drilling of the Initial Well at the following location:
unless delayed by outside constraints, any inconsistent provision(s) between
the J.O.A. and the Letter Agreement shall prevail with the language in the
Letter Agreement. Locations to be mutually agreed upon.
and shall thereafter continue the drilling of the well with due diligence to
test the Green River formation.
The drilling of the Initial Well and the participation therein by all parties
is obligatory, subject to Article VI.C.1. as to participation in Completion
operations and Article VI.F. as to termination of operations and Article XI as
to occurrence of force majeure.
B. SUBSEQUENT OPERATIONS:
1. Proposed Operations: If any party hereto should desire to drill any well
on the Contract Area other than the Initial Well, or if any party should desire
to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hole or a well no
longer capable of producing in paying quantities in which such party has not
otherwise relinquished its interest in the proposed objective Zone under this
agreement, the party desiring to drill, Rework, Sidetrack, Deepen, Recomplete or
Plug Back such a well shall give written notice of the proposed operation to the
parties who have not otherwise relinquished their interest in such objective
Zone
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<PAGE> 9
under this agreement and to all other parties in the case of a proposal for
Sidetracking or Deepening, specifying the work to be performed, the location,
proposed depth, objective Zone and the estimated cost of the operation. The
parties to whom such a notice is delivered shall have thirty (30) days after
receipt of the notice within which to notify the party proposing 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, Sidetrack,
Recomplete, Plug Back or Deepen may be given by telephone and the response
period shall be limited to forty-eight (48) hours, exclusive of Saturday, Sunday
and legal holidays. Failure of a party to whom such notice is delivered 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 proposal by a party to
conduct an operation conflicting with the operation initially proposed shall be
delivered to all parties within the time and in the manner provided in Article
VI.B.6.
If all parties to whom such notice is delivered elect to participate in
such a proposed operation, the parties shall be contractually committed to
participate therein provided such operations are commenced within the time
period hereafter set forth, and Operator shall, no later than ninety (90) days
after expiration of the notice period of thirty (30) days (or as promptly as
practicable 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 thereafter complete it with due diligence at the risk and expense
of the parties participating therein; provided, however, said commencement date
may be extended upon written notice of same by Operator to the other parties,
for a period of up to thirty (30) additional days if, in the sole opinion of
Operator, such additional time is reasonably necessary to obtain permits from
governmental authorities, surface rights (including rights-of-way) or
appropriate drilling equipment, or to complete title examination or curative
matter required for title approval or acceptance. If the actual operation has
not been commenced within the time provided (including any extension thereof as
specifically permitted herein or in the force majeure provisions of Article XI)
and if any party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance herewith
as if no prior proposal had been made. Those parties that did not participate in
the drilling of a well for which a proposal to Deepen or Sidetrack is made
hereunder shall, if such parties desire to participate in the proposed Deepening
or Sidetracking operation, reimburse the Drilling Parties in accordance with
Article VI.B.4. in the event of a Deepening operation and in accordance with
Article VI.B.5. in the event of a Sidetracking operation.
2. OPERATIONS BY LESS THAN ALL PARTIES:
(a) Determination of Participation. If any party to whom such notice
is delivered as provided in Article VI.B.1. or VI.C.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, no later than ninety (90) days after the expiration of the
notice period of thirty (30) days (or as promptly as practicable 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; (i) request Operator to perform the
work required by such proposed operation for the account of the Consenting
Parties, or (ii) designate one of the Consenting Parties as Operator to
perform such work. The rights and duties granted to and imposed upon the
Operator under this agreement are granted to and imposed upon the party
designated as Operator for an operation in which the original Operator is a
Non-Consenting Party. 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 all 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 delivery of such
notice, shall advise the proposing party of its desire to (i) limit
participation to such party's interest as shown on Exhibit "A" or (ii) carry
only its proportionate part (determined by dividing such party's interest in the
Contract Area by the interests of all Consenting Parties in the Contract Area)
of Non-Consenting Parties' interests, or (iii) carry its proportionate part
(determined as provided in (ii)) of Non-Consenting Parties' interests together
with all or a portion of its proportionate part of any Non-Consenting Parties'
interests that any Consenting Party did not elect to take. Any interest of
Non-Consenting Parties that is not carried by a Consenting Party shall be deemed
to be carried by the party proposing the operation if such party does not
withdraw its proposal. Failure to advise the proposing party within the time
required shall be deemed an election under (i). In the event a drilling rig is
on location, notice may be given by telephone, and the time permitted for such a
response shall not exceed a total of forty-eight (48) hours (exclusive of
Saturday, Sunday and legal holidays). The proposing party, at its election, may
withdraw such proposal if there is less than 100% participation and shall notify
all parties of such decision within ten (10) days, or within twenty-four (24)
hours if a drilling rig is on location, following expiration of the applicable
response period. If 100% subscription to the proposed operation is obtained, the
proposing party shall promptly notify the Consenting Parties of their
proportionate interests in the operation and the party serving as Operator shall
commence such operation within the period provided in Article VI.B.1., subject
to the same extension right as provided therein.
(b) Relinquishment of Interest for Non-Participation. 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, then
subject to Articles VI.B.6. and VI.E.3., the Consenting Parties shall plug
and abandon the well and restore the surface location at their sole cost,
risk and expense; provided, however, that those Non-Consenting Parties that
participated in the drilling, Deepening or Sidetracking of the well shall
remain liable for, and shall pay, their proportionate shares of the cost of
plugging and abandoning the well and restoring the surface location insofar
only as those costs were not increased by the subsequent operations of the
Consenting Parties. If any well drilled, Reworked, Sidetracked, Deepened,
Recompleted or Plugged Back under the provisions of this Article results in
a well capable of producing Oil and/or Gas in paying quantities, the
Consenting Parties shall Complete and equip the well to produce at their
sole cost and risk, and the well shall then be turned over to Operator (if
the Operator did not conduct the operation) 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, Sidetracking,
Recompleting, 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 or, in the
case of a Reworking, Sidetracking,
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A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article
VI.C.1. Option No. 2, all such Non-Consenting Party's interest in the production
obtained from the operation in which the Non-Consenting Party did not elect to
participate. Such relinquishment shall be effective 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 applicable ad valorem, production, severance,
and excise taxes, royalty, overriding royalty and other interests not excepted
by Article III.C. 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:
(i) 300% 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
(ii) 300% of (a) that portion of costs and expenses of drilling,
Reworking, Sidetracking, Deepening, Plugging Back, testing,
Completing, and Recompleting, after deducting any cash contributions
received under Article VIII.C., and of (b) 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.
Notwithstanding anything to the contrary in this Article VI.B., if the well
does not reach the deepest objective Zone described in the notice proposing the
well for reasons other than the encountering of granite or practically
impenetrable substance or other condition in the hole rendering further
operations impracticable, Operator shall give notice thereof to each
Non-Consenting Party who submitted or voted for an alternative proposal under
Article VI.B.6. to drill the well to a shallower Zone than the deepest objective
Zone proposed in the notice under which the well was drilled, and each such
Non-Consenting Party shall have the option to participate in the initial
proposed Completion of the well by paying its share of the cost of drilling the
well to its actual depth, calculated in the manner provided in Article VI.B.4.
(a). If any such Non-Consenting Party does not elect to participate in the first
Completion proposed for such well, the relinquishment provisions of this Article
VI.B.2. (b) shall apply to such party's interest.
(c) Reworking, Recompleting or Plugging Back. An election not to
participate in the drilling, Sidetracking or Deepening of a well shall be
deemed an election not to participate in any Reworking or Plugging Back
operation proposed in such a well, or portion thereof, to which the initial
non-consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
amount. Similarly, an election not to participate in the Completing or
Recompleting of a well shall be deemed an election not to participate in
any Reworking 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 amount. Any such Reworking, Recompleting 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 300% of that portion of the costs
of the Reworking, Recompleting or Plugging Back operation which would have
been chargeable to such Non-Consenting Party had it participated therein.
If such a Reworking, Recompleting 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.
(d) Recoupment Matters. 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 ad valorem, 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.C.
In the case of any Reworking, Sidetracking, Plugging Back, Recompleting or
Deepening 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, Sidetracking, Plugging Back, Recompleting or Deepening, 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 ninety (90) 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,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, 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.
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 as of 7:00 a.m. on
the day following the day on which such recoupment occurs, 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, sidetracking, Reworking, Deepening, Recompleting
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
Exhibit "C" attached hereto.
3. Stand-By Costs: 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, of when operations on the well have been
otherwise terminated pursuant to Article VI.F., stand-by costs incurred pending
response to a party's notice proposing a Reworking,
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
Sidetracking, Deepening, Recompleting, Plugging Back or Completing operation in
such a well (including the period required under Article VI.B.6. to resolve
competing proposals) 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. (a), 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.
In the event that notice for a Sidetracking operation is given while the
drilling rig to be utilized is on location, any party may request and receive
up to five (5) additional days after expiration of the forty-eight hour
response period specified in Article VI.B.1 within which to respond by paying
for all stand-by costs and other costs incurred during such extended response
period; Operator may require such party to pay the estimated stand-by time in
advance as a condition to extending the response period. If more than one party
elects to take such additional time to respond to the notice, standby costs
shall be allocated between the parties taking additional time to respond on a
day-to-day basis in the proportion each electing party's interest as shown on
Exhibit "A" bears to the total interest as shown on Exhibit "A" of all the
electing parties.
4. Deepening: If less that all the parties elect to participate in a
drilling, Sidetracking, or Deepening operation proposed pursuant to Article
VI.B.1., the interest relinquished by the Non-Consenting Parties to the
Consenting Parties under Article VI.B.2. shall relate only and be limited to the
lesser of (i) the total depth actually drilled or (ii) the objective depth or
Zone of which the parties were given notice under Article VI.B.1. ("Initial
Objective"). Such well shall not be Deepened beyond the Initial Objective
without first complying with this Article to afford the Non-Consenting Parties
the opportunity to participate in the Deepening operation.
In the event any Consenting Party desires to drill or Deepen a Non-Consent
Well to a depth below the Initial Objective, such party shall give notice
thereof, complying with the requirements of Article VI.B.1., to all parties
(including Non-Consenting Parties). Thereupon, Articles VI.B.1 and 2. shall
apply and all parties receiving such notice shall have the right to participate
or not participate in the Deepening of such well pursuant to said Articles
VI.B.1. and 2. If a Deepening operation is approved pursuant to such provisions,
and if any Non-Consenting Party elects to participate in the Deepening
operation, such Non-Consenting party shall pay or make reimbursement (as the
case may be) of the following costs and expenses:
(a) If the proposal to Deepen is made prior to the Completion of such
well as a well capable of producing in paying quantities, such
Non-Consenting party shall pay (or reimburse Consenting Parties for, as the
case may be) that share of costs and expenses incurred in connection with
the drilling of said well from the surface to the Initial Objective which
Non-Consenting Party would have had such Non-Consenting Party agreed to
participate therein, plus the Non-Consenting party's share of the cost of
Deepening and of participating in any further operations on the well in
accordance with the other provisions of this Agreement; provided, however,
all costs for testing and Completion or attempted Completion of the well
incurred by Consenting Parties prior to the point of actual operations to
Deepen beyond the Initial Objective shall be for the sole account of
Consenting Parties.
(b) If the proposal is made for a Non-Consent Well that has been
previously Completed as a well capable of producing in paying quantities,
but is no longer capable of producing in paying quantities, such
Non-Consenting Party shall pay (or reimburse Consenting Parties for, as the
case may be) its proportionate share of all costs of drilling, Completing,
and equipping said well from the surface to the Initial Objective,
calculated in the manner provided in paragraph (a) above, less those costs
recouped by the Consenting Parties from the sale of production from the
well. The Non-Consenting Party shall also pay its proportionate share of
all costs of re-entering said well. The Non-Consenting Parties'
proportionate part (based on the percentage of such well Non-Consenting
Party would have owned had it previously participated in such Non-Consent
Well) of the costs of salvable materials and equipment remaining in the
hole and savable surface equipment used in connection with such well shall
be determined in accordance with Exhibit "C". If the Consenting Parties
have recouped the cost of drilling, Completing, and equipping the well at
the time such Deepening operation is conducted, then a Non-Consenting party
may participate in the Deepening of the well with no payment for costs
incurred prior to re-entering the well for Deepening.
The foregoing shall not imply a right of any Consenting Party to propose
any Deepening for a Non-Consent Well prior to the drilling of such well to its
Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.F.
5. Sidetracking: Any party having the right to participate in a proposed
Sidetracking operation that does not own an interest in the affected wellbore at
the time of the notice shall, upon electing to participate, tender to the
wellbore owners its proportionate share (equal to its interest in the
Sidetracking operation) of the value of that portion of the existing wellbore 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 such party's proportionate
share of drilling and equipping costs incurred in the initial drilling of
the well down to the depth at which the Sidetracking operation is
conducted, calculated in the manner described in Article VI.B.4(b) above.
Such party's proportionate share of the cost of the well's salvable
materials and equipment down to the depth at which the Sidetracking
operation is initiated shall be determined in accordance with the
provisions of Exhibit "C".
6. Order of Preference of Operations. Except as otherwise specifically
provided in this agreement, if any party desires to propose the conduct of an
operation that conflicts with a proposal that has been made by a party under
this Article VI, such party shall have fifteen (15) days from delivery of the
initial proposal, in the case of a proposal to drill a well or to perform an
operation on a well where no drilling rig is on location, or twenty-four (24)
hours, exclusive of Saturday, Sunday and legal holidays, from delivery of the
initial proposal, if a drilling rig is on location for the well on which such
operation is to be conducted, to deliver to all parties entitled to participate
in the proposed operation such party's alternative proposal, such alternate
proposal to contain the same information required to be included in the initial
proposal. Each party receiving such proposals shall elect by delivery of notice
to Operator within five (5) days after expiration of the proposal period, or
within twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays)
if a drilling rig is on location for the well that is the subject of the
proposals, to participate in one of the competing proposals. Any party not
electing within the time required shall be deemed not to have voted. The
proposal receiving the vote of parties owning the largest aggregate percentage
interest of the parties voting shall have priority over all other competing
proposals; in the case of a tie vote, the
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A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
initial proposal shall prevail. Operator shall deliver notice of such result to
all parties entitled to participate in the operation within five (5) days after
expiration of the election period (or within twenty-four (24) hours, exclusive
of Saturday, Sunday and legal holidays, if a drilling rig is on location). Each
party shall then have two (2) days (or twenty-four (24) hours if a rig is on
location) from receipt of such notice to elect by delivery of notice to Operator
to participate in such operation or to relinquish interest in the affected well
pursuant to the provisions of Article VI.B.2.; failure by a party to deliver
notice within such period shall be deemed an election not to participate in the
prevailing proposal.
7. Conformity to Spacing Pattern. Notwithstanding the provisions of this
Article VI.B.2., it is agreed that no wells shall be proposed to be drilled to
or Completed in or produced from a Zone from which a well located elsewhere on
the Contract Area is producing, unless such well conforms to the then-existing
well spacing pattern for such Zone.
8. Paying Wells. No party shall conduct any Reworking, Deepening, Plugging
Back, Completion, Recompletion, or Sidetracking operation under this agreement
with respect to any well then capable of producing in paying quantities except
with the consent of all parties that have not relinquished interests in the well
at the time of such operation.
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:
1. Completion: Without the consent of all parties, no well shall be
drilled, Deepened or Sidetracked, except any well drilled, Deepened or
Sidetracked pursuant to the provisions of Article VI.B.2. of this agreement.
Consent to the drilling, Deepening or Sidetracking shall include:
[X] Option No. 1: All necessary expenditures for the drilling, Deepening
or Sidetracking, testing, Completing and equipping of the well,
including necessary tankage and/or surface facilities.
[ ] Option No. 2: All necessary expenditures for the drilling, Deepening
or Sidetracking and testing of the well. When such well has reached
its authorized depth, and all logs, cores and other tests have been
completed, and the results thereof furnished to the parties, Operator
shall give immediate notice to the Non-Operators having the right to
participate in a Completion attempt whether or not Operator recommends
attempting to Complete the well, together with Operator's AFE for
Completion costs if not previously provided. The parties receiving
such notice shall have forty-eight (48) hours (exclusive of Saturday,
Sunday and legal holidays) in which to elect by delivery of notice to
Operator to participate in a recommended Completion attempt or to make
a Completion proposal with an accompanying AFE. Operator shall deliver
any such Completion proposal, or any Completion proposal conflicting
with Operator's proposal, to the other parties entitled to participate
in such Completion in accordance with the procedures specified in
Article VI.B.6. Election to participate in a Completion attempt shall
include consent to all necessary expenditures for the Completing and
equipping of such well, including necessary tankage and/or surface
facilities but excluding any stimulation operation not contained on
the Completion AFE. 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;
provided, that Article VI.B.6. shall control in the case of
conflicting Completion proposals. If one or more, but less than all of
the parties, elect to attempt a Completion, the provisions of Article
VI.B.2. hereof (the phrase "Reworking, Sidetracking, Deepening,
Recompleting 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; provided, however, that
Article VI.B.2. shall apply separately to each separate Completion or
Recompletion attempt undertaken hereunder, and an election to become a
Non-Consenting Party as to one Completion or Recompletion attempt
shall not prevent a party from becoming a Consenting Party in
subsequent Completion or Recompletion attempts regardless whether the
Consenting Parties as to earlier Completions or Recompletions have
recouped their costs pursuant to Article VI.B.2.; provided further,
that any recoupment of costs by a Consenting Party shall be made
solely from the production attributable to the Zone in which the
Completion attempt is made. Election by a previous Non-Consenting
Party to participate in a subsequent Completion or Recompletion
attempt shall require such party to pay its proportionate share of the
cost of salvable materials and equipment installed in the well
pursuant to the previous Completion or Recompletion attempt, insofar
and only insofar as such materials and equipment benefit the Zone in
which such party participates in a Completion attempt.
2. Rework, Recomplete or Plug Back: No well shall be Reworked, Recompleted
or Plugged Back except a well Reworked, Recompleted, or Plugged Back pursuant to
the provisions of Article VI.B.2. of this agreement. Consent to the Reworking,
Recompleting 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.
D. OTHER OPERATIONS:
Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of ten thousand Dollars ($10,000.00) except in
connection with the drilling, Sidetracking, Reworking, Deepening, Completing,
Recompleting or Plugging Back of a well that has been previously authorized by
or pursuant to this agreement; provided, however, that, in case of explosion,
fire, flood or other sudden emergency, whether of the same or different nature,
Operator may take such steps and incur such expenses as in its opinion are
required to deal with the emergency to safeguard life and property but Operator,
as promptly as possible, shall report the emergency to the other parties. If
Operator prepares an AFE for its own use, Operator shall furnish any
Non-Operator so requesting an information copy thereof for any single project
costing in excess of ten thousand Dollars ($10,000.00). Any party who has not
relinquished its interest in a well shall have the right to propose that
Operator perform repair work or undertake the installation of artificial life
equipment or ancillary production facilities such as salt water disposal wells
or to conduct additional work with respect to a well drilled hereunder or other
similar project (but not including the installation of gathering lines or other
transportation or marketing facilities, the installation of which shall be
governed by separate agreement between the parties) reasonably estimated to
require an expenditure in excess of the amount first set forth above in this
Article VI.D. (except in connection with an operation required to be proposed
under Articles VI.B.1. or VI.C.1. Option No. 2, which shall be governed
exclusively by those Articles). Operator shall deliver such proposal to all
parties entitled to participate therein. If within ten days thereof Operator
secures the written consent of any party or parties owning at least 51% of the
interests of the parties entitled to participate in such operation, each party
having the right to participate in such project shall be bound by the terms of
such proposal and shall be obligated to pay its proportionate share of the costs
of the proposed project as if it had consented to such project pursuant to the
terms of the proposal.
E. ABANDONMENT OF WELLS:
1. Abandonment of Dry Holes: Except for any well drilled or Deepened
pursuant to Article VI.B.2., any well which has been drilled or Deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be
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A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
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 delivery 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 by notice delivered to Operator within forty-eight (48)
hours (exclusive of Saturday, Sunday and legal holidays) after delivery of
notice of the proposed plugging shall take over the well as of the end of such
forty-eight (48) hour notice period and conduct further operations in search of
Oil and/or Gas subject to the provisions of Article VI.B.; failure of such party
to provide proof reasonably satisfactory to Operator of its financial capability
to conduct such operations or to take over the well within such period or
thereafter to conduct operations on such well or plug and abandon such well
shall entitle Operator to retain or take possession of the well and plug and
abandon the well. The party taking over the well shall indemnify Operator (if
Operator is an abandoning party) and the other abandoning parties against
liability for any further operations conducted on such well except for the costs
of plugging and abandoning the well and restoring the surface, for which the
abandoning parties shall remain proportionately liable.
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. Failure of a party to
reply within (60) days of delivery of notice of proposed abandonment shall be
deemed an election to consent to the proposal. If, within sixty (60) days after
delivery 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 Zone then open to production shall be obligated to take over the well
as of the expiration of the applicable notice period and shall indemnify
Operator (if Operator is an abandoning party) and the other abandoning parties
against liability for any further operations on the well conducted by such
parties. Failure of such party or parties to provide proof reasonably
satisfactory to Operator of their financial capability to conduct such
operations or to take over the well within the required period or thereafter to
conduct operations on such well shall entitle Operator to retain or take
possession of such well and plug and abandon the well.
Parties taking over a well as provided herein 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 and restoring the surface; provided, however, that in the event the
estimated plugging and abandoning and surface restoration costs and the
estimated cost of salvaging are higher than the value of the well's salvable
material and equipment, each of the abandoning parties shall tender to the
parties continuing operations their proportionate shares of the estimated excess
cost. Each abandoning party shall assign to 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 wellbore of the well
and related equipment, together with its interest in the Leasehold insofar and
only insofar as such Leasehold covers the right to obtain production from what
wellbore in the Zone then open to production. If the interest of the abandoning
party is or includes an Oil and Gas Interest, such party shall execute and
deliver to the non-abandoning party or parties an oil and gas lease, limited to
the wellbore and the Zone then open to production, for a term of one (1) year
and so long thereafter as Oil and/or Gas is produced from the Zone covered
thereby, such lease to be on the form attached as Exhibit "B." The assignments
or leases so limited shall encompass the Drilling Unit upon which the well is
located. The payments by, and the assignments or leases to, the assignees shall
be in a ratio based upon the relationship of their respective percentage of
participation in the Contract Area to the aggregate of the percentages of
participation in the Contract Area of all assignees. There shall be no
readjustment of interests in the remaining portions of the Contract Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
Zone 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 Zone 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.; and
provided further, that Non-Consenting Parties who own an interest in a portion
of the well shall pay their proportionate shares of abandonment and surface
restoration costs for such well as provided in Article VI.B.2.(b).
F. TERMINATION OF OPERATIONS:
Upon the commencement of an operation for the drilling, Reworking, Sidetracking,
Plugging Back, Deepening, testing, Completion or plugging of a well, including
but not limited to the Initial Well, such operation shall not be terminated
without consent of parties bearing 51% of the costs of such operation;
provided, however, that in the event granite or other practically impenetrable
substance or condition in the hole is encountered which renders further
operations impractical, Operator may discontinue operations and give notice of
such condition in the manner provided in Article VI.B.1. and the provisions of
Article VI.B. or VI.E. shall thereafter apply to such operation, as appropriate.
G. TAKING PRODUCTION IN KIND
[x] Option No. 1: Gas Balancing Agreement Attached
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 and 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 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
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A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
directly from the purchaser thereof for its share of all production.
If any party fails 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. Any such
purchase or sale by Operator may be terminated by Operator upon at
least ten (10) days written notice to the owner of said production and
shall be subject always to the right of the owner of the production
upon at least ten (10) days written notice to Operator 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.
Any such sale by Operator shall be in a manner commercially
reasonable under the circumstances but Operator shall have no duty to
share any existing market or to obtain a price equal to that received
under any existing market. The sale or delivery by Operator of a
non-taking party's share of Oil under the terms of any existing
contract of Operator shall not give the non-taking party any interest
in or make the non-taking party a party to said contract. No purchase
shall be made by Operator without first giving the non-taking party at
least ten (10) days written notice of such intended purchase and the
price to be paid or the pricing basis to be used.
All parties shall give timely written notice to Operator of their
Gas marketing arrangements for the following month, excluding price,
and shall notify Operator immediately in the event of a change in such
arrangements. Operator shall maintain records of all marketing
arrangements, and of volumes actually sold or transported, which
records shall be made available to Non-Operators upon reasonable
request.
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 be allocated to it, the balancing or accounting between the
parties shall be in accordance with any Gas balancing agreement
between the parties hereto, whether such an agreement is attached as
Exhibit "E" or is a separate agreement. Operator shall give notice to
all parties of the first sales of Gas from any well under this
agreement.
[ ] Option No. 2: No Gas Balancing Agreement:
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 an
producing operations and in preparing and 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 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.
If any party fails to make the arrangements necessary to take in
kind or separately dispose of its proportionate share of the Oil
and/or Gas produced from the Contract Area, Operator shall have the
right, subject to the revocation at will by the party owning it, but
not the obligation, to purchase such Oil and/or Gas or sell it to
others at any time and from time to time, for the account of the
non-taking party. Any such purchase or sale by Operator may be
terminated by Operator upon at least ten (10) days written notice to
the owner of said production and shall be subject always to the right
of the owner of the production upon at least ten (10) days written
notice to Operator to exercise its right to take in kind, or
separately dispose of, its share of all Oil and/or Gas not previously
delivered to a purchaser; provided, however, that the effective date
of any such revocation may be deferred at Operator's election for a
period not to exceed ninety (90) days if Operator has committed such
production to a purchase contract having a term extending beyond such
ten (10) -day period. Any purchase or sale by Operator of any other
party's share of Oil and/or 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.
Any such sale by Operator shall be in a manner commercially
reasonable under the circumstances, but Operator shall have no duty to
share any existing market or transportation arrangement or to obtain a
price or transportation fee equal to that received under any existing
market or transportation arrangement. The sale or delivery by Operator
of a non-taking party's share of production under the terms of any
existing contract of Operator shall not give the non-taking party any
interest in or make the non-taking party a party to said contract. No
purchase of Oil and Gas and no sale of gas shall be made by Operator
without first giving the non-taking party ten days written notice of
such intended purchase or sale and the price to be paid or the pricing
basis to be used. Operator shall give notice to all parties of the
first sale of Gas from any well under this Agreement.
All parties shall give timely written notice to Operator of their
gas marketing arrangements for the following month, excluding price,
and shall notify Operator immediately in the event of a change in such
arrangements. Operator shall maintain records of all marketing
arrangements, and of volumes actually sold or transported, which
records shall be made available to Non-Operators upon reasonable
request.
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, and no party shall
have any liability to third parties hereunder to satisfy the default of any
other party in the payment of any expense or obligation hereunder. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership, joint venture, agency relationship or
association, or to render the parties liable as partners, co-venturers, or
principals. In their relations with each other under this agreement, the
parties shall not be considered fiduciaries or to have established a
confidential relationship but rater shall be free to act on an arm's-length
basis in accordance with their own respective self-interest, subject, however,
to the obligation of the parties to act in good faith in their dealings with
each other with respect to activities hereunder.
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<PAGE> 15
B. LIENS AND SECURITY INTERESTS:
Each party grant to the other parties hereto a lien upon any interest it
now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas Interests
in the Contact Area, and a security interest and/or purchase money security
interest in any interest it now owns or hereafter acquires in the personal
property and fixtures on or used or obtained for use in connection therewith, to
secure performance of all of its obligations under this agreement including but
not limited to payment of expense, interest and fees, the proper disbursement of
all monies paid hereunder, the assignment or relinquishment of interest on Oil
and Gas Leases as required hereunder, and the proper performance of operations
hereunder. Such lien and security interest granted by each party hereto shall
include such party's leasehold interests, working interests, operating rights,
and royalty and overriding royalty interests in the Contract Area now owned or
hereafter acquired and in lands pooled or unitized therewith or otherwise
becoming subject to this agreement, the Oil and Gas when extracted therefrom and
equipment situated thereon or used or obtained for use in connection therewith
(including, without limitation, all wells, tools, and tubular goods), and
accounts (including, without limitation, accounts arising from gas imbalances or
from the sale of Oil and/or Gas at the wellhead), contract rights, inventory and
general intangibles relating or arising therefrom, and all proceeds and products
of the foregoing.
To perfect the lien and security agreement provided herein, each party
hereto shall execute and acknowledge the recording supplement and/or any
financing statement prepared and submitted by any party hereto in conjunction
herewith or at any time following execution hereof, and Operator is authorized
to file this agreement or the recording supplement executed herewith as a lien
or mortgage in the applicable real estate records and as a financing statement
with the proper officer under the Uniform Commercial Code in the state in which
the Contract Area is situated and such other states as Operator shall deem
appropriate to perfect the security interest granted hereunder. Any party may
file this agreement, the recording supplement executed herewith, or such other
documents as it deems necessary as a lien or mortgage in the applicable real
estate records and/or a financing statement with the proper officer under the
Uniform Commercial Code.
Each party represents and warrants to the other parties hereto that the
lien and security interest granted by such party to the other parties shall be a
first and prior lien, and each party hereby agrees to maintain the priority of
said lien and security interest against all persons acquiring an interest in Oil
and Gas Leases and Interests covered by this agreement by, through or under such
party. All parties acquiring an interest in Oil and Gas Leases and Oil and Gas
Interests covered by this agreement, whether by assignment, merger, mortgage,
operation of law, or otherwise, shall be deemed to have taken subject to the
lien and security interest granted by this Article VII.B. as to all obligations
attributable to such interest hereunder whether or not such obligations arise
before or after such interest is acquired.
To the extent that parties have a security interest under the Uniform
Commercial Code of the state in which the Contract Area is situated, they 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 a party 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 party in the payment of its share of expenses,
interests or fees, or upon the improper use of funds by the Operator, the other
parties shall have the right, without prejudice to other rights or remedies, to
collect from the purchaser the proceeds from the sale of such defaulting party's
share of Oil and Gas until the amount owed by such party, plus interest as
provided in "Exhibit C," has been received, and shall have the right to offset
the amount owed against the proceeds from the sale of such defaulting party's
share of Oil and Gas. All purchasers of production may rely on a notification of
default from the non-defaulting party or parties stating the amount due as a
result of the default, and all parties waive any recourse available against
purchasers for releasing production proceeds as provided in this paragraph.
If any party fails to pay its share of cost within one hundred twenty (120)
days after rendition of a statement therefor by Operator, the non-defaulting
parties, including Operator, shall, upon request by Operator, pay the unpaid
amount in the proportion that the interest of each such party bears to the
interest of all such parties. The amount paid by each party so paying its share
of the unpaid amount shall be secured by the liens and security rights described
in Article VII.B., and each paying party may independently pursue any remedy
available hereunder or otherwise.
If any party does not perform all of its obligations hereunder, and the
failure to perform subjects such party to foreclosure or execution proceedings
pursuant to the provisions of this agreement, to the extent allowed by governing
law, the defaulting party waives any available rights of redemption from and
after the date of judgment, and required valuation or appraisement of the
mortgaged or secured property prior to sale, any available right to stay
execution or to require a marshalling of assets and any required bond in the
event a receiver is appointed. In addition, to the extent permitted by
applicable law, each party hereby grants to the other parties a power of sale as
to any property that is subject to the lien and security rights granted
hereunder, such power to be exercised in the manner provided by applicable law
or otherwise in a commercially reasonable manner and upon reasonable notice.
Each party agrees that the other parties shall be entitled to utilize the
provisions of Oil and Gas lien law or other lien law of any state in which the
Contract Area is situated to enforce the obligations of each party hereunder.
Without limiting the generality of the foregoing, to the extent permitted by
applicable law, Non-Operators agree that Operator may invoke or utilize the
mechanics' or materialmen's lien law of the state in which the Contract Area is
situated in order to secure the payment to Operator of any sum due hereunder for
services performed or materials supplied by Operator.
C. ADVANCES:
Operator, at its election, shall have the right from time to time to demand
and receive from one or more of the other parties payment in advance of their
respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of such
estimated expense, together with an invoice for its share thereof. Each such
statement and invoice for the payment in advance of estimated expense shall be
submitted on or before the 20th day of the next preceding month. Each party
shall pay to Operator its proportionate share of such estimate within fifteen
(15) days after such estimate and invoice is received. If any party fails to pay
its share of said estimate within said time, the amount due shall bear interest
as provided in Exhibit "C" until paid. Proper adjustment shall be made monthly
between advances and actual expense to the end that each party shall bear and
pay its proportionate share of actual expenses incurred, and no more.
D. DEFAULTS AND REMEDIES:
If any party fails to discharge any financial obligation under this
agreement, including without limitation the failure to make any advance under
the preceding Article VII.C. or any other provision of this agreement, within
the period required for such payment hereunder, then in addition to the remedies
provided in Article VII.B. or elsewhere in this agreement, the remedies
specified below shall be applicable. For purposes of this Article VII.D., all
notices and elections shall be delivered
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A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
only by Operator, except that Operator shall deliver any such notice and
election requested by a non-defaulting Non-Operator, and when Operator is the
party in default, the applicable notices and elections can be delivered by any
Non-Operator. Election of any one or more of the following remedies shall not
preclude the subsequent use of any other remedy specified below or otherwise
available to a non-defaulting party.
1. Suspension of Rights: Any party may deliver to the party in default a
Notice of Default, which shall specify the default, specify the action to be
taken to cure the default, and specify that failure to take such action will
result in the exercise of one or more of the remedies provided in this Article.
If the default is not cured within thirty (30) days of the delivery of such
Notice of Default, all of the rights of the defaulting party granted by this
agreement may upon notice be suspended until the default is cured, without
prejudice to the right of the non-defaulting party or parties to continue to
enforce the obligations of the defaulting party previously accrued or thereafter
accruing under this agreement. If Operator is the party in default, the
Non-Operators shall have in addition the right, by vote of Non-Operators owning
a majority in interest in the Contract Area after excluding the voting interest
of Operator, to appoint a new Operator effective immediately. The rights of a
defaulting party that may be suspended hereunder at the election of the
non-defaulting parties shall include, without limitation, the right to receive
information as to any operation conducted hereunder during the period of such
default, the right to elect to participate in an operation proposed under
Article VI.B. of this agreement, the right to participate in an operation being
conducted under this agreement even if the party has previously elected to
participate in such operation, and the right to receive proceeds of production
from any well subject to this agreement.
2. Suit for Damages: Non-defaulting parties or Operator for the benefit of
non-defaulting parties may sue (at joint account expense) to collect the amounts
in default, plus interest accruing on the amounts recovered from the date of
default until the date of collection at the rate specified in Exhibit "C"
attached hereto. Nothing herein shall prevent any party from suing any
defaulting party to collect consequential damages accruing to such party as a
result of the default.
3. Deemed Non-Consent: The non-defaulting party may deliver a written
Notice of Non-Consent Election to the defaulting party at any time after the
expiration of the thirty-day cure period following delivery of the Notice of
Default, in which event if the billing is for the drilling of a new well or the
Plugging Back, Sidetracking, Reworking or Deepening of a well which is to be or
has been plugged as a dry hole, or for the Completion or Recompletion of any
well, the defaulting party will be conclusively deemed to have elected not to
participate in the operation and to be a Non-Consenting Party with respect
thereto under Article VI.B. or VI.C., as the case may be, to the extent of the
costs unpaid by such party, notwithstanding any election to participate
theretofore made. If election is made to proceed under this provision, then the
non-defaulting parties may not elect to sue for the unpaid amount pursuant to
Article VII.D.2.
Until the delivery of such Notice of Non-Consent Election to the defaulting
party, such party shall have the right to cure its default by paying its unpaid
share of costs plus interest at the rate set forth in Exhibit "C," provided,
however, such payment shall not prejudice the rights of the non-defaulting
parties to pursue remedies for damages incurred by the non-defaulting parties as
a result of the default. Any interest relinquished pursuant to this Article
VII.D.3. shall be offered to the non-defaulting parties in proportion to their
interests, and the non-defaulting parties electing to participate in the
ownership of such interest shall be required to contribute their shares of the
defaulted amount upon their election to participate therein.
4. Advance Payment: If a default is not cured within thirty (30) days of
the delivery of a Notice of Default, Operator, or Non-Operators if Operator is
the defaulting party, may thereafter require advance payment from the defaulting
party of such defaulting party's anticipated share of any item of expense for
which Operator, or Non-Operators, as the case may be, would be entitled to
reimbursement under any provision of this agreement, whether or not such expense
was the subject of the previous default. Such right includes, but is not limited
to, the right to require advance payment for the estimated costs of drilling a
well or Completion of a well as to which an election to participate in drilling
or Completion has been made. If the defaulting party fails to pay the required
advance payment, the non-defaulting parties may pursue any of the remedies
provided in this Article VII.D. or any other default remedy provided elsewhere
in this agreement. Any excess of funds advanced remaining when the operation is
completed and all costs have been paid shall be promptly returned to the
advancing party.
5. Costs and Attorneys' Fees. In the event any party is required to bring
leal proceedings to enforce any financial obligation of a party hereunder, the
prevailing party in such action shall be entitled to recover all court costs,
costs of collection, and a reasonable attorney's fee, which the lien provided
for herein shall also secure.
E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES:
Rentals, shut-in well payments and minimum royalties which may be required
under the terms of any lease shall be paid by the party or parties who subjected
such lease to this agreement at its or their expense. In the event two or more
parties own and have contributed interests in the same lease to this agreement,
such parties may designate one of such parties to make said payments for and on
behalf of all such parties. Any party may request, and shall be entitled to
receive, proper evidence of all such payments. In the event of failure to make
proper payment of any rental, shut-in well payment or minimum royalty through
mistake or oversight where such payment is required to continue the lease in
force, any loss which results from such non-payment shall be borne in accordance
with the provisions of Article IV.B.2.
Operator shall notify Non-Operators of the anticipated completion of a
shut-in well, or the shutting in or return to production of a producing well, at
least five (5) days (excluding Saturday, Sunday and leal holidays) prior to
taking such action, or at the earliest opportunity permitted by circumstances,
but assumes no liability for failure to do so. In the event of failure by
Operator to so notify Non-Operators, the loss of any lease contributed hereto by
Non-Operators for failure to make timely payments of any shut-in well payment
shall be borne jointly by the parties hereto under the provisions of Article
IV.B.3.
F. TAXES:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Operator shall bill
the other parties for their proportionate shares of all tax payments in the
manner provided in Exhibit "C".
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A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT - 1989
If Operator considers any tax assessment improper, Operator may, at its
discretion,-protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assessment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C."
Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party's share of Oil and Gas produced under the terms of this
agreement.
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, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after delivery of the notice within which to notify the
party proposing the surrender whether they elect to consent thereto. Failure of
a party to whom such notice is delivered to reply within said 30-day period
shall constitute a consent to the surrender of the Leases described in the
notice. If all 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 to be on the form attached hereto as Exhibit "B." 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 well's salvable materials and equipment attributable to
the assigned or leased acreage. The value of all salvable materials and
equipment 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 and restoring the surface. If such value is less than such costs,
then the party assignor or lessor shall pay to the party assignee or lessee the
amount of such deficit. 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. If the
interest of the parties to whom the assignment is to be made varies according to
depth, then the interest assigned shall similarly reflect such variances.
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 but shall be deemed subject to an Operating Agreement in the
form of this agreement.
B. RENEWAL OR EXTENSION OF LEASES:
If any party secures a renewal or replacement of an Oil and Gas Lease or
Interest subject to this agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease taken
before expiration of an existing Lease, promptly upon expiration of the existing
Lease. The parties notified shall have the right for a period of thirty (30)
days following delivery of such notice in which to elect to participate in the
ownership of the renewal or replacement Lease, insofar as such Lease affects
lands within the Contract Area, by paying to the party who acquired it their
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. Each party who
participates in the purchase of a renewal or replacement Lease shall be given an
assignment of its proportionate interest therein by the acquiring party.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal or replacement 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 or replacement Lease. The
acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interests of the parties stated in
Exhibit "A," but any renewal or replacement Lease in which less than all parties
elect to participate shall not be subject to this agreement but shall be deemed
subject to a separate Operating Agreement in the form of this agreement.
If the interests of the parties in the Contract Area vary according to
depth, then their right to participate proportionately in renewal or replacement
Leases and their right to receive an assignment of interest shall also reflect
such depth variances.
The provisions of this Article shall apply to renewal or replacement 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 or replacement
Lease taken before the expiration of its predecessor Lease, or taken or
contracted for or becoming effective within six 6) months after the expiration
of the existing Lease, shall be subject to this provision so long as this
agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective; 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 or replacement Lease and shall not be
subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of
Oil and Gas Leases.
C. ACREAGE OR CASH CONTRIBUTIONS:
While this agreement is in force, if any party contracts for a contribution
of cash towards the drilling of a well or any other operation on the Contract
Area, such contribution shall be paid to the party who conducted the drilling or
other operation and shall be applied by it against the cost of such drilling or
other operation. If the contribution be in the form of acreage, the party to
whom the contribution is made shall promptly tender an assignment of the
acreage, without warranty of title, to the Drilling Parties in the
proportions said Drilling Parties shared the cost of drilling the well. Such
acreage shall become a separate Contract Area and, to the extent possible, be
governed by provisions identical to this agreement. Each party shall promptly
notify all other parties of any acreage or cash contributions it may obtain in
support of any well or any other operation on the Contract Area. The above
provisions shall also be applicable to optional rights to earn acreage outside
the Contract Area which are in support of well drilled inside the Contract Area.
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A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
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. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:
For the purpose of maintaining uniformity of ownership in the Contract Area
in the Oil and Gas Leases, Oil and Gas Interests, wells, equipment and
production covered by this agreement no party shall sell, encumber, transfer or
make other disposition of its interest in the Oil and Gas Leases and Oil and Gas
Interests embraced within the Contract Area or in wells, equipment and
production unless such disposition covers either:
1. the entire interest of the party in all Oil and Gas Leases, Oil
and Gas Interests, wells, equipment and production; or
2. an equal undivided percent of the party's present interest in all
Oil and Gas Leases, Oil and Gas Interests, wells, equipment and production in
the Contract Area.
Every 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, and any transferee of an ownership
interest in any Oil and Gas Lease or Interest shall be deemed a party to this
agreement as to the interest conveyed from and after the effective date of the
transfer of ownership; provided, however, that the other parties shall not be
required to recognize any such sale, encumbrance, transfer or other disposition
for any purpose hereunder until thirty (30) days after they have received a copy
of the instrument of transfer or other satisfactory evidence thereof in writing
from the transferor or transferee. No assignment or other disposition of
interest by a party shall relieve such party of obligations previously incurred
by such party hereunder with respect to the interest transferred, including
without limitation the obligation of a party to pay all costs attributable to an
operation conducted hereunder in which such party has agreed to participate
prior to making such assignment, and the lien and security interest granted by
Article VII.B. shall continue to burden the interest transferred to secure
payment of any such obligations.
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. PREFERENTIAL RIGHT TO PURCHASE:
[ ] (Optional; Check if applicable.)
Should any party desire to 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, with full information concerning its
proposed disposition, which shall include the name and address of the
prospective transferee (who must be ready, willing and able to purchase), the
purchase price, a legal description sufficient to identify the property, and all
other terms of the offer. The other parties shall then have an optional prior
right, for a period of ten (10) days after the notice is delivered, to purchase
for the stated consideration on the same terms and conditions the interest which
the other party proposes to sell; and, if this optional right is exercised, the
purchasing parties shall share the purchased interest in the proportions that
the interest of each bears to the total interest of all purchasing parties.
However, there shall be no preferential right to purchase in those cases where
any party wishes to mortgage its interests, or to transfer title to its
interests to its mortgagee in lieu of or pursuant to foreclosure of a mortgage
of its interests, or to dispose of its interests by merger, reorganization,
consolidation, or by sale of all or substantially all of its Oil and Gas assets
to any party, or by transfer of its interests to a subsidiary or parent company
or to a subsidiary of a parent company, or to any company in which such party
owns a majority of the stock.
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
If, for federal income tax purposes, this agreement and the operations
hereunder are regarded as a partnership, and if the parties have not otherwise
agreed to form a tax partnership pursuant to Exhibit "G" or other agreement
between them, each party thereby 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 amended ("Code"), 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 Treasury Regulations Subsection
1.761. Should there by 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 Code, 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.
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 or suit. If the amount required for settlement exceeds the above
amount, the parties hereto shall assume and take over the further handling of
the claim or suit, unless such authority is delegated to Operator. All costs and
expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation from
which the claim or suit arises. If a claim is made against any party or if any
party is sued on account of any matter arising from operations hereunder over
which such individual has no control because of the rights given Operator by
this agreement such party shall immediately notify all other parties, and the
claim or suit shall be treated as any other claim or suit involving operations
hereunder.
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A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
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
indemnify or make money payments or furnish security, that party shall give to
all other parties prompt written notice of the force majeure with reasonably
full particulars concerning it; thereupon, the obligations of the party giving
the notice, so far as they are affected by the force majeure, shall be suspended
during, but no longer than, the continuance of the force majeure. The 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 or other act of nature, 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.
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.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties by any of the
provisions of this agreement, unless otherwise specifically provided, shall be
in writing and delivered in person or by United States mail, courier service,
telegram, telex, telecopier or any other form of facsimile, postage or charges
prepaid, and addressed to such parties at the addresses listed on Exhibit "A".
All telephone or oral notices permitted by this agreement shall be confirmed
immediately thereafter by written notice. The originating notice given under any
provision hereof shall be deemed delivered only when received by the party to
whom such notice is directed, and the time for such party to deliver any notice
in response thereto shall run from the date the originating notice is received.
"Receipt" for purposes of this agreement with respect to written notice
delivered hereunder shall be accrual delivery of the notice to the address of
the party to be notified specified in accordance with this agreement, or to the
telecopy, facsimile or telex machine of such party. The second or any responsive
notice shall be deemed delivered when deposited in the United States mail or at
the office of the courier or telegraph service, or upon transmittal by telex,
telecopy or facsimile, or when personally delivered to the party to be notified,
provided, that when response is required within 24 or 48 hours, such response
shall be given orally or by telephone, telex, telecopy or other facsimile within
such period. 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. If
a party is not available to receive notice orally or by telephone when a party
attempts to deliver a notice required to be delivered within 24 or 48 hours, the
notice may be delivered in writing by any other method specified herein and
shall be deemed delivered in the same manner provided above for any responsive
notice.
ARTICLE XIII. TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the Oil and Gas
Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.
[X] Option No. 1: So long as any of the Oil and Gas Leases subject to this
agreement remain or are continued in force as to any part of the
Contract Area, whether by production, extension, renewal or otherwise.
[ ] Option No. 2: In the event the well described in Article VI.A., or any
subsequent well drilled under any provision of this agreement, results
in the Completion of a well as a well capable of production of Oil
and/or Gas in paying quantities, this agreement shall continue in
force so long as any such well is capable of production, and for an
additional period of __________ days thereafter; provided, however,
if, prior to the expiration of such additional period, one or more of
the parties hereto are engaged in drilling, Reworking, Deepening,
Sidetracking, Plugging Back, testing or attempting to Complete or
Re-complete a well or wells hereunder, this agreement shall continue
in force until such operations have been completed and if production
results therefrom, this agreement shall continue in force as provided
herein. In the event the well described in Article VI.A., or any
subsequent well drilled hereunder, results in a dry hole, and no other
well is capable of producing Oil and/or Gas from the Contract Area,
this agreement shall terminate unless drilling, Deepening,
Sidetracking, Completing, Re-completing, Plugging Back or Reworking
operations are commenced within __________ days from the date of
abandonment of said well. "Abandonment" for such purposes shall mean
either (i) a decision by all parties not to conduct any further
operations on the well or (ii) the elapse of 180 days from the conduct
of any operations on the well, whichever first occurs.
The termination of this agreement shall not relieve any party hereto from
any expense, liability or other obligation or any remedy therefor which has
accrued or attached prior to the date of such termination.
Upon termination of this agreement and the satisfaction of all obligations
hereunder, in the event a memorandum of this Operating Agreement has been filed
of record, Operator is authorized to file of record in all necessary recording
offices a notice of termination, and each party hereto agrees to execute such a
notice of termination as to Operator's interest, upon request of Operator, if
Operator has satisfied all its financial obligations.
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. LAWS, REGULATIONS AND ORDERS:
This agreement shall be subject to the applicable laws of the state in
which the Contract Area is located, to the valid rules, regulations, and orders
of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, ordinances, rules, regulations and
orders.
B. GOVERNING LAW:
This agreement and all matters pertaining hereto, including but not limited
to matters of performance, non-performance, breach, remedies, procedures,
rights, duties, and interpretation or construction, shall be governed and
determined by the law of the state in which the Contract Area is located. If the
Contract Area is in two or more states, the law of the state of Wyoming shall
govern.
C. REGULATORY AGENCIES:
Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or
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A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
orders promulgated under such laws in reference to oil, gas and mineral
operations, including the location, operation, or production of wells, on tract
offsetting or adjacent to the Contract Area.
With respect to the operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims, and 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 Federal Energy Regulatory Commission or
predecessor or successor agencies to the extent such interpretation or
application was made in good faith and does not constitute gross negligence.
Each Non-Operator further agrees to reimburse Operator for such Non-Operator's
share of production or any refund, fine, levy or other governmental sanction
that Operator may be required to 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.
ARTICLE XV.
MISCELLANEOUS
A. EXECUTION:
This agreement shall be binding upon each Non-Operator when this agreement
or a counterpart thereof has been executed by such Non-Operator and Operator
notwithstanding that this agreement is not then or thereafter executed by all of
the parties to which it is tendered or which are listed on Exhibit "A" as owning
an interest in the Contract Area or which own, in fact, an interest in the
Contract Area Operator may, however, by written notice to all Non-Operators who
have become bound by this agreement as aforesaid, given at any time prior to the
actual spud date of the Initial Well but in no event later than five days prior
to the date specified in Article VI.A. for commencement of the Initial Well,
terminate this agreement if Operator in its sole discretion determines that
there is insufficient participation to justify commencement of drilling
operations. In the event of such a termination by Operator, all further
obligations of the parties hereunder shall cease as of such termination. In the
event any Non-Operator has advanced or prepaid any share of drilling or other
costs hereunder, all sums so advanced shall be returned to such Non-Operator
without interest. In the event Operator proceeds with drilling operations for
the Initial Well without the execution hereof by all persons listed on Exhibit
"A" as having a current working interest in such well, Operator shall indemnify
Non-Operators with respect to all costs incurred for the Initial Well which
would have been charged to such person under this agreement if such person had
executed the same and Operator shall receive all revenues which would have been
received by such person under this agreement if such person had executed the
same.
B. SUCCESSORS AND ASSIGNS:
This agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, devisees, legal representatives,
successors and assigns, and the terms hereof shall be deemed to run with the
Leases or Interests included within the contract area.
C. COUNTERPARTS:
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
D. SEVERABILITY:
For the purposes of assuming or rejecting this agreement as an executory
contract pursuant to federal bankruptcy laws, this agreement shall not be
severable, but rather must be assumed or rejected in it's entirety, and the
failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.
ARTICLE XVI.
OTHER PROVISIONS
XVI. A. All claims or suits involving title to any interest subject to this
agreement shall be treated as a clam or suit against all parties hereto.
XVI. B. In the event of transfer, sale, encumbrance, or other disposition of
interest within the Contract Area which necessitates the separate measurement of
production, the party creating the necessity for such measurement shall alone
bear the costs of purchase, installation and operation of such facilities.
XVI. C. Should the Non-Operator's account become 30 days or more past due, the
Operator may, at their discretion, contact the Purchaser to have sales proceeds
distributed to the Operator for payment of operating expenses.
XVI. D. This Model Form Operating Agreement is subject to that certain Joint Use
Agreement by and between FMC Wyoming Corporation and Saurus Resources, Inc.
dated 10/6/99. A copy of the Joint Use Agreement is attached to this Model Form
Operating Agreement as Exhibit "H". By signing this Model Form Operating
Agreement, each of the parties hereto acknowledge that it has read the Joint Use
Agreement, understands the terms thereof, and agrees that if any provision of
the Joint Use Agreement is inconsistent with any provision contained in this
Model Form Operating Agreement, the provision in the Joint Use Agreement shall
prevail.
- 17 -
<PAGE> 21
A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
IN WITNESS WHEREOF, this agreement shall be effective as of the 1 day of
December, 1999.
ATTEST OR WITNESS: OPERATOR
Saurus Resources Inc.
--------------------------------
By /s/ David R. Vletas
- ---------------------------------- --------------------------------
David R. Vletas
- ---------------------------------- --------------------------------
Type or print name
Title President
-------------------------
Date 12-1-99
-------------------------
Tax ID or S.S.No. 75-2228218
-------------
NON-OPERATORS
VRD
--------------------------------
By /s/ David R. Vletas
- ----------------------------------- --------------------------------
David R. Vletas
- ----------------------------------- --------------------------------
Type or print name
Title President
-------------------------
Date 12-1-99
-------------------------
Tax ID or S.S.No.
-------------
Excalibur Contracting Inc
--------------------------------
/s/ P Varshney By /s/ Don Sharpe
- ----------------------------------- --------------------------------
Don Sharpe
- ----------------------------------- --------------------------------
PEEYUSH K. VARSHNEY Type or print name
BARRISTER & SOLICITOR
SUITE 1304, 925 WEST GEORGIA STREET
VANCOUVER, BC V6C 3L2 Title President
-------------------------
Date 12-21-99
-------------------------
Tax ID or S.S.No. Canada 714-798766
-----------------
--------------------------------
By
- ----------------------------------- --------------------------------
- ----------------------------------- --------------------------------
Type or print name
Title
-------------------------
Date
-------------------------
Tax ID or S.S.No.
-------------
- 18 -
<PAGE> 22
A.A.P.L. FORM 610 -- MODEL FORM OPERATING AGREEMENT -- 1989
ACKNOWLEDGMENTS
Note: The following forms of acknowledgment are the short forms approved
by the Uniform Law on Notarial Acts. The validity and effect of these forms in
any state will depend upon the statutes of that state.
Individual acknowledgment:
State of Texas )
) ss.
County of Taylor )
This instrument was acknowledged before me on
11-29-99 by /s/ Chandra Calderon
- ------------------------------------ ------------------------------
Chandra Calderon
(Seal, if any) ------------------------------
[SEAL] Title (and Rank)
--------------
My commission expires: 01-21-01
Acknowledgment in representative capacity:
State of
----------------- )
) ss.
County of
---------------- )
This instrument was acknowledged before me on
- ------------------------------------ by ------------------------------------- as
- ------------------------------------ of ------------------------------------- .
(Seal, if any) ----------------------------------
Title (and Rank)
-----------------
My commission expires:
-----------
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<PAGE> 23
EXHIBIT "A"
1. R111W-R106W AND T16N-T22N, Sweetwater County, Wyoming.
Amended by Letter Agreement of 12/14/99, by David Vletas & Don Sharpe
2. Surface to the base of the Green River Formation.
3. Names:
Saurus Resources, Inc. -- Operator Barlow & Haun Inc.
David R. Vletas, President Mark Doelger, VP
P O Box 469 139 W.2nd St., Ste 1-C
Abilene, Texas 79604 Casper, Wyo. 82601
Phone 915-673-1024 Phone 307-234-1574
Fax 915-670-9581 Fax 307-234-1576
ID# 75-2228218 ID #
VRD INC. -- Working Interest BayPaul Energy Inc.
David R. Vletas, President Paul Hickey, President
P O Box 469 888 7th Ave. 15th Floor
Abilene, Texas 79604 N.Y., N.Y. 10106
Phone 915-673-1024 Phone 212-986-2300
Fax 915-670-9581 Fax 212-986-3182
ID# 75-2845411 ID#
Excalibur Contracting, Inc. --Working Interest
Don Sharpe, President
609 West Hastings Street, Suite 1100
Vancouver, BC V6B 4W4
Phone 604-454-8794
Fax 604-682-5564
ID# 714-798766
4. Percentage ownership -- 24% W.I. VRD, Inc. and 50% W.I. Excalibur
Contracting, Inc. and 10% W.I. B&H. and 16% W.I. BayPaul Energy Inc.
5. All leases owned, leased farmed out or to be acquired in the future, within
the area of lands subject to this agreement.
6. The Net Revenue Interest of all leases will range between 75% and 81%.
<PAGE> 24
COPAS - 1984 - ONSHORE
Recommended by the Council
of Petroleum Accountants
Societies
[LOGO] 601, BOX 800
TULSA OK 74101
EXHIBIT "C"
Attached to and made a part of the Operating Agreement by and between
Saurus Resources, Inc., as Operator, and the Non-Operators therein named, dated
12/1/99.
ACCOUNTING PROCEDURE
JOINT OPERATIONS
I. GENERAL PROVISIONS
1. Definitions
"Joint Property" shall mean the real and personal property subject to the
agreement to which this Accounting Procedure is attached.
"Joint Operations" shall mean 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
contract 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 professional 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 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 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 operation within fifteen (15) 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 fifteen
(15) 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 Merrill Lynch Bank, USA 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.
COPYRIGHT(C) 1985 by the Council of Petroleum Accountants Societies.
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COPAS - 1984 - ONSHORE
Recommended by the Council
of Petroleum Accountants
Societies
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.
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
the 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.
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<PAGE> 26
COPAS -- 1984 -- ONSHORE
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 to 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. If surplus Material is moved to Operator's warehouse or other storage
point, no charge shall be made to the Joint Account for a 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.
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 ten
percent (10%) 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
Expense of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgments 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.
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<PAGE> 27
COPAS -- 1984 -- ONSHORE
Recommended by the Council
of Petroleum Accountants
Societies
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
at 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
Costs 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 producing
operations on either:
(xx) 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 8A, Section II. The cost and
expense of services 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
(xx) 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:
( ) shall be covered by the overhead rates, or
(xx) shall not be covered by the overhead rates
A. Overhead -- Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates
per well per month:
Drilling Well Rate $ 1,000.00
(Prorated for less than a full month)
Producing Well Rate $200.00 First eight wells per section,
thereafter $100.00 per well, per month for the remaining section.
(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
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<PAGE> 28
COPAS -- 1984 -- ONSHORE
Recommended by the Council
of Petroleum Accountants
Societies
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 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
- 5 -
<PAGE> 29
COPAS -- 1984 -- ONSHORE
Recommended by the Council
of Petroleum Accountants
Societies
Account for overhead based on the following rates for any Major
Construction project in excess of $10,000.00:
A. 10% of first $100,000 or total cost if less, plus
B. 5% 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 Overload
To compensate Operator for overload 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. 10% of total costs through $100,000; plus
B. 5% 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 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 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 casing 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
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COPAS -- 1984 -- ONSHORE
Recommended by the Council
of Petroleum Accountants
Societies
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) as provided above. Freight charges shall be
calculated from Lorain, Ohio.
(c) Line pipe 24 inch OD and over and 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 agreed 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 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 percent (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.
- 7 -
<PAGE> 31
COPAS - 1984 - ONSHORE
Recommended by the Council
of Petroleum Accountants
Societies
(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 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 pricing procedures
for casing, tubing, or drill pipe. Upset tubular goods
shall be priced under normal pricing procedures for
casing, tubing, or drill pipe. Upset tubular goods
shall be priced on a non upset basis.
(8) 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.
E. 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 their
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 the 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 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 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
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<PAGE> 32
Recommended by the Council
of Petroleum Accountants
Societies
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 dude
to change of Operator shall be charged to the Joint Account.
<PAGE> 33
EXHIBIT "D"
Insurance Bituminous Insurance Company
A) COMMERCIAL GENERAL LIABILITY
General Aggregate $2,000,000
Products Aggregate $1,000,000
Each Occurrence $1,000,000
Fire Damage $ 100,000
Medical Payments $ 5,000
Underground Resources $ 250,000
B) WORKERS COMPENSATION & EMPLOYERS LIABILITY
State Statutory Requirements for workers liability.
<PAGE> 34
AMERICAN ASSOCIATION OF PETROLEUM LANDMEN
APPROVED FORM A.A.P.L. NO 610-E
MAY BE ORDERED DIRECTLY FROM THE PUBLISHER
KRAETBILT(r) P.O. BOX 800 TULSA, OK 74101
COPYRIGHT 1992 -- ALL RIGHTS RESERVED
A.A.P.L. FORM 610-E -- GAS BALANCING AGREEMENT -- 1992
NOTE: instructions For Use of Gas Balancing
Agreement MUST be reviewed before finalizing
this document.
EXHIBIT "E"
GAS BALANCING AGREEMENT ("AGREEMENT")
ATTACHED TO AND MADE PART OF THAT CERTAIN
OPERATING AGREEMENT DATED December 1, 1999
BY AND BETWEEN Saurus Resources, Inc. , VRD ,
---------------------------------------- ----------------------
AND Excalibur Contracting Inc. ("OPERATING AGREEMENT")
----------------------------------------------------
RELATING TO THE R111W-R106W and T16N-T22N AREA,
----------------------------------------------------------
Sweetwater COUNTRY/PARISH, STATE OF Wyoming
- -------------------------- ---------------------------
1. DEFINITIONS
The following definitions shall apply to this Agreement:
101 "Arms's Length Agreement" shall mean any gas sales agreement with an
unaffiliated purchaser or any gas sales agreement with an affiliated
purchaser where the sales price and delivery
102 "Balancing Area" shall mean (select one):
[X] each well subject to the Operating Agreement that produces Gas or
is allocated a share of Gas production. If a single well is
completed in two or more producing intervals, each producing
interval from which the Gas production is not commingled in the
wellbore shall be considered a separate well.
[ ] all of the acreage and depths subject to the Operating Agreement.
[ ] _________________________________________________________________
_________________________________________________________________
_________________________________________________________________
_________________________________________________________________
1.03 "Full Share of Current Production" shall mean the Percentage Interest
of each Party in the Gas actually produced from the Balancing Area
during each month.
1.04 "Gas" shall mean all hydrocarbons produced or producible from the
Balancing Area, whether from a well classified as an oil well or gas
well by the regulatory agency having jurisdiction in such matters,
which are or may be made available for sale or separate disposition by
the Parties, excluding oil, condensate and other liquids recovered by
field equipment operated for the joint account. "Gas" does not include
gas used in joint operations, such as for fuel, recycling or
reinjection, or which is vented or lost prior to its sale or delivery
from the Balancing Area.
1.05 "Markup Gas" shall mean any Gas taken by an Underproduced party from
the Balancing Area in excess of its Full Share of Current Production,
whether pursuant to Section 3.3 or Section 4.1 hereof.
1.06 "Mcf" shall mean one thousand cubic feet. A cubic foot of Gas shall
mean the volume of gas contained in one cubic foot of space at a
standard pressure base and at a standard temperature base.
1.07 "MMBtu" shall mean one million British Thermal Units. A British
Thermal Unit shall mean the quantity of heat required to raise one
pound avoirdupois of pure water from 58.5 degrees Fahrenheit to 59.5
degrees Fahrenheit at a constant pressure of 14.73 pounds per square
inch absolute.
1.08 "Operator" shall mean the individual or entity designated under the
terms of the Operating Agreement or, in the event this Agreement is
not employed in connection with an operating agreement, the individual
or entity designated as the operator of the well(s) located in the
Balancing Area.
1.09 "Overproduced Party" shall mean any Party having taken a greater
quantity of Gas from the Balancing Area than the Percentage Interest
of such Party in the cumulative quantity of all Gas produced from the
Balancing Area.
1.10 "Overproduction" shall man the cumulative quantity of Gas taken by a
Party in excess of its Percentage Interest in the cumulative quantity
of all Gas produced from the Balancing Area.
1.11 "Party" shall mean those individuals or entities subject to this
Agreement, and their respective heirs, successors, transferees and
assigns.
1.12 "Percentage Interest" shall mean the percentage or decimal interest of
each Party in the as produced from the Balancing Area pursuant to the
Operating agreement covering the Balancing Area.
1.13 "Royalty" shall mean payments on production of Gas from the Balancing
Area to all owners of royalties, overriding royalties, production
payments or similar interests.
1.14 "Underproduced Party" shall mean any Party having taken a lesser
quantity of Gas from the Balancing Area than the Percentage Interest
of such Party in the cumulative quantity of all Gas produced from the
Balancing Area.
1.15 "Underproduction" shall mean the deficiency between the cumulative
quantity of Gas taken by a Party and its Percentage Interest in the
cumulative quantity of all Gas Produced from the Balancing Area.
1.16 [ ] (Optional) "Winter Period" shall mean the months(s) of
_____________________________ in one calendar year and the month(s) of
___________________________________ in the succeeding calendar year.
2. BALANCING AREA
2.1 If this Agreement covers more than one Balancing Area, it shall be
applied as if each Balancing Area were covered by separate but
identical agreements. All balancing hereunder shall be on the basis of
Gas taken from the Balancing Area measured in (Alternative 1) [X]
Mcfs or (Alternative 2) [ ] MMBtus.
2.2 In the event that all or part of the Gas deliverable from a Balancing
Area is or becomes subject to one or more maximum lawful prices, any
Gas not subject to price controls shall be considered as produced from
a single Balancing Area and Gas subject to each maximum lawful price
category shall be considered produced from a separate Balancing Area.
3. RIGHT OF PARTIES TO TAKE GAS
3.1 Each Party desiring to take Gas will notify the Operator, or cause the
Operator to be notified of the volumes nominated, the name of the
transporting pipeline and the pipeline contract number (if available)
and meter station relating to such delivery, sufficiently in advance
from the Operator, acting with reasonable diligence, to meet all
nomination and other
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<PAGE> 35
A.A.P.L. FORM 610-E - GAS BALANCING AGREEMENT - 1992
requirements. Operator is authorized to deliver the volumes so
nominated and confirmed (if confirmation is required) to the
transporting pipeline in accordance with the terms of this Agreement.
3.2 Each Party shall make a reasonable, good faith effort to take its Full
Share of Current Production each month, to the extent that such
production is required to maintain leases in effect, to protect the
producing capacity of a well or reservoir, to preserve correlative
rights, or to maintain oil production.
3.3 When a Party fails for any reason to take its Full Share of Current
Production (as such Share may be reduced by the right of the other
Parties to make up for Underproduction as provided herein), the other
Parties shall be entitled to take any Gas which such Party fails to
take. To the extent practicable, such Gas shall be made available
initially to each Underproduced Party in the proportion that its
Percentage Interest in the Balancing Area bears to the total
Percentage Interests of all Underproduced Parties desiring to take
such Gas. If all such Gas is not taken by the Underproduced Parties,
the portion not taken shall then be made available to the other
Parties in the proportion that their respective Percentage Interests
in the Balancing Area bear to the total Percentage Interests of such
Parties.
3.4 All Gas taken by a Party in accordance with the provisions of this
Agreement, regardless of whether such Party is underproduced or
overproduced, shall be regarded as Gas taken for its own account with
title thereto being in such taking Party.
3.5 Notwithstanding the provisions of Section 3.3 hereof, no Overproduced
Party shall be entitled in any month to take any Gas in excess of
three hundred percent (300%) of its Percentage Interest of the
Balancing Area's then-current Maximum Monthly Availability; provided,
however, that this limitation shall not apply to the extent that it
would preclude production that is required to maintain leases in
effect, to protect the producing capacity of a well or reservoir, to
preserve correlative rights, or to maintain oil production. "Maximum
Monthly Availability" shall mean the maximum average monthly rate of
production at which Gas can be delivered from the Balancing Area, as
determined by the Operator, considering the maximum efficient well
rate for each well within the Balancing Area, the maximum allowable(s)
set by the appropriate regulatory agency, mode of operation,
production facility capabilities and pipeline pressures.
3.6 In the event that a Party fails to make arrangements to take its Full
Share of Current Production required to be produced to maintain leases
in effect, to protect the producing capacity of a well or reservoir,
to preserve correlative rights, or to maintain oil production, the
Operator may sell any part of such Party's Full Share of Current
Production that such Party fails to take for the account of such Party
and render to such Party, on a current basis, the full proceeds of the
sale, less any reasonable marketing, compression, treating, gathering
or transportation costs incurred directly in connection with the sale
of such Full Share of Current Production. In making the sale
contemplated herein, the Operator shall be obliged only to obtain such
price and conditions for the sale as are reasonable under the
circumstances and shall not be obligated to share any of its markets.
Any such sale by Operator under the terms hereof 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 year. Notwithstanding the
provisions of Article 3.4 hereof, Gas sold by Operator for a Party
under the provisions hereof shall be deemed to be Gas taken for the
account of such Party.
4. IN-KIND BALANCING
4.1 Effective the first day of any calendar month following at lease
thirty (30) days' prior written notice to the Operator, any
Underproduced Party may begin taking, in addition to its Full Share of
Current Production and any Makeup Gas taken pursuant to Section 3.3 of
this Agreement, a share of current production determined by
multiplying fifty percent (50%) of the Full Shares of Current
Production of all Overproduced Parties by a fraction, the numerator of
which is the Percentage Interest of such Underproduced Party and the
denominator of which is the total of the Percentage Interests of all
Underproduced Parties desiring to take Makeup Gas. In no event will an
Overproduced Party be required to provide more than fifty percent
(50%) of its Full Share of Current Production for Makeup Gas. The
Operator will promptly notify all Overproduced Parties of the election
of an Underproduced Party to begin taking Makeup Gas.
4.2 [ ] (Optional - Seasonal Limitation on Makeup - Option 1)
Notwithstanding the provisions of Section 4.1, the average monthly
amount of Makeup Gas taken by an Underproduced Party during the Winter
Period pursuant to Section 4.1 shall not exceed the average monthly
amount of Makeup Gas taken by such Underproduced Party during the
________________ (______) months immediately preceding the Winter
Period.
4.2 [ ] (Optional - Seasonal Limitation on Makeup - Option 2)
Notwithstanding the provisions of Section 4.1, no Overproduced Party
will be required to provide more than _____________ percent (______%)
of its Full Share of Current Production for Makeup Gas during the
Winter Period.
4.3 [ ] (Optional) Notwithstanding any other provision of this Agreement,
at such time and for so long as Operator, or (insofar as concerns
production by the Operator) any Underproduced Party, determines in
good faith that an Overproduced Party has produced all of its share of
the ultimately recoverable reserves in the Balancing Area, such
Overproduced Party may be required to make available for Makeup Gas,
upon the demand of the Operator or any Underproduced Party, up to
_____________ percent (______%) of such Overproduced Party's Full
Share of Current Production.
5. STATEMENT OF GAS BALANCES
5.1 The Operator will maintain appropriate accounting on a monthly and
cumulative basis of the volumes of Gas that each Party is entitled to
receive and the volumes of Gas actually taken or sold for each Party's
account. Within forty-five (45) days after the month of production,
the Operator will furnish a statement for such month showing (1) each
Party's Full Share of Current Production, (2) the total volume of Gas
actually taken or sold for each Party's account, (3) the difference
between the volume taken by each Party and that Party's Full Share of
Current Production, (4) the Overproduction or Underproduction of each
Party, and (5) other data as recommended by the provisions of the
Council of Petroleum Accountants Societies Bulletin No. 24, as amended
or supplemented hereafter. Each Party taking Gas will promptly provide
to the Operator any data required by the Operator for preparation of
the statements required hereunder.
5.2 If any Party fails to provide the data required herein for four (4)
consecutive production months, the Operator, or where the Operator has
failed to provide data, another Party, may audit the production and
Gas sales and transportation volumes of the non-reporting Party to
provide the required data. Such audit shall be conducted only after
reasonable notice and during normal business hours in the office of
the Party whose records are being audited. All costs associated with
such audit will be charged to the account of the Party failing to
provide the required data.
6. PAYMENTS ON PRODUCTION
6.1 Each Party taking Gas shall pay or cause to be paid all production and
severance taxes due on all volumes of Gas actually taken by such
Party.
6.2 [X] (Alternative 1 - Entitlements) Each Party shall pay or cause to be
paid all Royalty due with respect to Royalty
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<PAGE> 36
A.A.P.L. FORM 610-E -- GAS BALANCING AGREEMENT - 1992
owners to whom it is accountable as if such Party were taking its Full
Share of Current Production, and only its Full Share of Current
Production.
6.2.1 [ ] (Optional -- For use only with Section 6.2 -- Alternative 1 --
Entitlement) Upon written request of a Party taking less than its Full
Share of Current Production in a given month ("Current
Underproducer"), any Party taking more than its Full Share of Current
Production in such month ("Current Overproducer") will pay to such
Current Underproducer an amount each month equal to the Royalty
percentage of the proceeds received by the Current Overproducer for
that portion of the Current Underproducer's Full Share of Current
Production taken by the Current Overproducer; provided, however, that
such payment will not exceed the Royalty percentage that is common to
all Royalty burdens in the Balancing Area. Payments made pursuant to
this Section 6.2.1 will be deemed payments to the Underproduced
Party's Royalty owners for purposes of Section 7.5.
6.2 [ ] (Alternative 2 -- Sales) Each Party shall pay or cause to be paid
Royalty due with respect to Royalty owners to whom it is accountable
based on the volume of Gas actually taken for its account.
6.3 In the event that any governmental authority requires that Royalty
payments be made on any other basis than that provided for in this
Section 6, each Party agrees to make such Royalty payments
accordingly, commencing on the effective date required by such
governmental authority, and the method provided for herein shall be
thereby superseded.
7. CASH SETTLEMENTS
7.1 Upon the earlier of the plugging and abandonment of the last producing
interval in the Balancing Area, the termination of the Operating
Agreement or any pooling or unit agreement covering the Balancing
Area, or at any time no Gas is taken from the Balancing Area for a
period of twelve (12) consecutive months, any Party may give written
notice calling for cash settlement of the Gas production imbalances
among the Parties. Such notice shall be given to all Parties in the
Balancing Area.
7.2 Within sixty (60) days after the notice calling for cash settlement
under Section 7.1, the Operator will distribute to each Party a Final
Gas Settlement Statement detailing the quantity of Overproduction owed
by each Overproduced Party to each Underproduced Party and identifying
the month to which such Overproduction is attributed, pursuant to the
methodology set out in Section 7.4.
7.3 [ ] (Alternative 1 -- Direct Party-to-Party Settlement) Within sixty
(60) days after receipt of the Final Gas Settlement Statement, each
Overproduced Party will pay to each Underproduced Party entitled to
settlement the appropriate cash settlement, accompanied by appropriate
accounting detail. At the time of payment, the Overproduced Party will
notify the Operator of the Gas imbalance settled by the Overproduced
Party's payment.
7.3 [X] (Alternative 2 -- Settlement Through Operator) Within sixty (60)
days after receipt of the Final Gas Settlement Statement, each
Overproduced Party will send its cash settlement, accompanied by
appropriate accounting detail, to the Operator. The Operator will
distribute the monies so received, along with any settlement owed by
the Operator as an Overproduced Party, to each Underproduced Party to
whom settlement is due within ninety (90) days after issuance of the
Final Gas Settlement Statement. In the event that any Overproduced
Party fails to pay any settlement due hereunder, the Operator may turn
over responsibility for the collection of such settlement to the Party
to whom it is owed, and the Operator will have no further
responsibility with regard to such settlement.
7.3.1 [ ] (Optional -- For use only with Section 7.3, Alternative 2 --
Settlement Through Operator) Any Party shall have the right at any
time upon thirty (30) days' prior written notice to all Parties to
demand that any settlements due such Party for Overproduction be paid
directly to such Party by the Overproduced Party, rather than being
paid through the Operator. In the event that an Overproduced Party
pays the Operator any sums due to an Underproduced Party at any time
after thirty (30) days following the receipt of the notice provided
for herein, the Overproduced Party will continue to be liable to such
Underproduced Party for any sums so paid, until payment is actually
received by the Underproduced Party.
7.4 [X] (Alternative 1 -- Historical Sales Basis) The amount of the cash
settlement will be based on the proceeds received by the Overproduced
Party under an Arm's Length Agreement for the Gas taken from time to
time by the Overproduced Party in excess of the Overproduced Party's
Full Share of Current Production. Any Makeup Gas taken by the
Underproduced Party prior to monetary settlement hereunder will be
applied to offset Overproduction chronologically in the order of
accrual.
7.4 [ ] (Alternative 2 -- Most Recent Sales Basis) The amount of the cash
settlement will be based on the proceeds received by the Overproduced
Party under an Arm's Length Agreement for the volume of Gas that
constituted Overproduction by the Overproduced Party from the
Balancing Area. For the purpose of implementing the cash settlement
provision of the Section 7, an Overproduced Party will not be
considered to have produced any of an Underproduced Party's share of
Gas until the Overproduced Party has produced cumulatively all of its
Percentage Interest share of the Gas ultimately produced from the
Balancing Area.
7.5 The values used for calculating the cash settlement under Section 7.4
will include all proceeds received for the sale of the Gas by the
Overproduced Party calculated at the Balancing Area, after deducting
any production or severance taxes paid and any Royalty actually paid
by the Overproduced Party to an Underproduced Party's Royalty
owner(s), to the extent said payments amounted to a discharge of said
Underproduced Party's Royalty obligation, as well as any reasonable
marketing, compression, treating, gathering or transportation costs
incurred directly in connection with the sale of the Overproduction.
7.5.1 [X] (Optional -- For Valuation Under Percentage of Proceeds
Contracts) For Overproduction sold under a gas purchase contract
providing for payment based on a percentage of the proceeds obtained
by the purchaser upon resale of residue gas and liquid hydrocarbons
extracted at a gas processing plant, the values used for calculating
cash settlement will include proceeds received by the Overproduced
Party for both the liquid hydrocarbons and the residue gas
attributable to the Overproduction.
7.5.2 [ ] (Optional -- Valuation for Processed Gas -- Option 1) For
Overproduction processed for the account of the Overproduced Party at
a gas processing plant for the extraction of liquid hydrocarbons, the
full quantity of the Overproduction will be valued for purposes of
cash settlement at the prices received by the Overproduced Party for
the sale of the residue gas attributable to the Overproduction without
regard to proceeds attributable to liquid hydrocarbons which may have
been extracted from the Overproduction.
7.5.2 [ ] (Optional -- Valuation for Processed Gas -- Option 2 ) For
Overproduction processed for the account of the Overproduced Party at
a gas processing plant for the extraction of liquid hydrocarbons, the
values used for calculating cash settlement will include the proceeds
received by the Overproduced Party for the sale of the liquid
hydrocarbons extracted from the Overproduction, less the actual
reasonable costs incurred by the Overproduced Party to process the
Overproduction and to transport, fractionate and handle the liquid
hydrocarbons extracted therefrom prior to sale.
7.6 To the extent the Overproduced Party did not sell all Overproduction
under an Arm's Length Agreement, the cash settlement will be based on
the weighted average price received by the Overproduced Party for any
gas sold from the
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<PAGE> 37
A.A.P.L. FORM 610-E -- GAS BALANCING AGREEMENT -- 1992
Balancing Area under Arm's Length Agreements during the months to
which such Overproduction is attributed. In the event that no sales
under Arm's Length Agreements were made during any such month, the
cash settlement for such month will be based on the spot sales prices
published for the applicable geographic area during such month in a
mutually acceptable pricing bulletin.
7.7 Interest compounded at the rate of Merrill Lynch percent (P+1%) per
annum or the maximum lawful rate of interest applicable to the
Balancing Area, whichever is less, will accrue for all amounts due
under Section 7.1, beginning the first day following the date payment
is due pursuant to Section 7.3. Such interest shall be borne by the
Operator or any Overproduced Party in the proportion that their
respective delays beyond the deadliness set out in Sections 7.2 and
7.3 contributed to the accrual of the interest.
7.8 In lieu of the cash settlement required by Section 7.3, an
Overproduced Party may deliver to the Underproduced Party an offer to
settle its Overproduction in-kind and at such rates, quantities, times
and sources as may be agreed upon by the Underproduced Party. If the
Parties are unable to agree upon the manner in which such in-kind
settlement gas will be furnished within sixty (60) days after the
Overproduced Party's offer to settle in kind, which period may be
extended by agreement of said Parties, the Overproduced Party shall
make a cash settlement as provided in Section 7.3. The making of an
in-kind settlement offer under this Section 7.8 will not delay the
accrual of interest on the cash settlement should the Parties fail to
reach agreement on an in-kind settlement.
7.9 [ ] (Optional - For Balancing Areas Subject to Federal Price
Regulation) That portion of any monies collected by an Overproduced
Party for Overproduction which is subject to refund by orders of the
Federal Energy Regulatory Commission or other governmental authority
may be withheld by the Overproduced Party until prices are fully
approved by such governmental authority, unless the Underproduced
Party furnishes a corporate undertaking, acceptable to the
Overproduced Party, agreeing to hold the Overproduced Party harmless
from financial loss due to refund orders by such governmental
authority.
7.10 [X](Optional - Interim Cash Balancing) At any time during the term of
this Agreement, any Overproduced Party may, in its sole discretion,
make cash settlement(s) with the Underproduced Parties covering all or
part of its outstanding Gas imbalance, provided that such settlements
must be made with all Underproduced Parties proportionately based on
the relative imbalances of the Underproduced Parties, and provided
further that such settlements must be made at least once every
twenty-four (24) months. Such settlements will be calculated in the
same manner provided above for final cash settlements. The
Overproduced Party will provide Operator a detailed accounting of any
such cash settlement within thirty (30) days after the settlement is
made.
8. TESTING
Notwithstanding any provision of this Agreement to the contrary, any Party
shall have the right, from time to time, to produce and take up to one hundred
percent (100%) of a well's entire Gas stream to meet the reasonable
deliverability test(s) required by such Party's Gas purchaser, and the right to
take any Makeup Gas shall be subordinate to the right of any Party to conduct
such tests; provided, however, that such tests shall be conducted in accordance
with prudent operating practices only after thirty (30) days' prior written
notice to the Operator and shall last no longer than twenty-four (24) hours.
9. OPERATING COSTS
Nothing in this Agreement shall change or affect any Party's obligation to
pay its proportionate share of all costs and liabilities incurred in operations
on or in connection with the Balancing Area, as its share thereof is set forth
in the Operating Agreement, irrespective of whether any Party is at any time
selling and using Gas or whether such sales or use are in proportion to its
Percentage Interest in the Balancing Area.
10. LIQUIDS
The Parties shall share proportionately in and own all liquid hydrocarbons
recovered with Gas by field equipment operated for the joint account in
accordance with their Percentage Interests in the Balancing Area.
11. AUDIT RIGHTS
Notwithstanding any provision in this Agreement or any other agreement
between the Parties hereto, and further notwithstanding any termination or
cancellation of this Agreement, for a period of two (2) years from the end of
the calendar year in which any information to be furnished under Section 5 or 7
hereof is supplied, any Party shall have the right to audit the records of any
other Party regarding quantity, including but not limited to information
regarding Btu-content. Any Underproduced Party shall have the right for a
period of two (2) years from the end of the calendar year in which any cash
settlement is received pursuant to Section 7 to audit the records of any
Overproduced Party as to all matters concerning values, including but not
limited to information regarding prices and disposition of Gas from the
Balancing Area. Any such audit shall be conducted at the expense of the Party
or Parties desiring such audit, and shall be conducted, after reasonable
notice, during normal business hours in the office of the Party whose records
are being audited. Each Party hereto agrees to maintain records as to the
volumes and prices of Gas sold each month and the volumes of Gas used in its
own operations, along with the Royalty paid on any such Gas used by a Party in
its own operations. The audit rights provided for in this Section 11 shall be
in addition to those provided for in Section 5.2 of this Agreement.
12. MISCELLANEOUS
12.1 As between the Parties, in the event of any conflict between the
provisions of this Agreement and the provisions of any gas sales
contract, or in the event of any conflict between the provisions of
this Agreement and the provisions of the Operating Agreement, the
provisions of this Agreement shall govern.
12.2 Each Party agrees to defend, indemnify and hold harmless all other
Parties from and against any and all liability for any claims, which
may be asserted by any third party which now or hereafter stands in a
contractual relationship with such indemnifying Party and which arise
out of the operation of this Agreement or any activities of such
indemnifying Party under the provisions of this Agreement, and does
further agree to save the other Parties harmless from all judgements
or damages sustained and costs incurred in connection therewith.
12.3 Except as otherwise provided in this Agreement, Operator is authorized
to administer the provisions of this Agreement, but shall have no
liability to the other Parties for losses sustained or liability
incurred which arise out of or in connection with the performance of
Operator's duties hereunder, except such as result from Operator's
gross negligence or willful misconduct. Operator shall not be liable
to any Underproduced Party for the failure of any Overproduced Party
(other than Operator) to pay any amounts owned pursuant to the terms
hereof.
12.4 This Agreement shall remain in full force and effect for as long as
the Operating Agreement shall remain in force and effect as to the
Balancing Area, and thereafter until the Gas accounts between the
Parties are settled in full, and shall inure to the benefit of and be
binding upon the Parties hereto, and their respective heirs,
successors, legal representatives
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<PAGE> 38
A.A.P.L. FORM 610-E -- GAS BALANCING AGREEMENT -- 1992
and assigns, if any. The Parties hereto agree to give notice of the
existence of this Agreement to any successor in interest of any such
Party and to provide that any such successor shall be bound by this
Agreement, and shall further make any transfer of any interest subject
to the Operating Agreement, or any part thereof, also subject to the
terms of this Agreement.
12.5 Unless the context clearly indicates otherwise, words used in the
singular include the plural, the plural includes the singular, and the
neuter gender includes the masculine and the feminine.
12.6 In the event that any "Optional" provision of this Agreement is not
adopted by the Parties to this Agreement by a typed, printed or
handwritten indication, such provision shall not form a part of this
Agreement, and no inference shall be made concerning the intent of the
Parties in such event. In the event that any "Alternative" provision
of this Agreement is not so adopted by the Parties, Alternative 1 in
each such instance shall be deemed to have been adopted by the Parties
as a result of any such omission. In those cases where it is indicated
that an Optional provision may be used only if a specific Alternative
is selected: (i) an election to include said Optional provision shall
not be effective unless the Alternative in question is selected; and
(ii) the election to include said Optional provision must be expressly
indicated hereon, it being understood that the selection of an
Alternative either expressly or by default as provided herein shall
not, in and of itself, constitute an election to include an associated
Optional provision.
12.7 This Agreement shall bind the Parties in accordance with the
provisions hereof, and nothing herein shall be construed or
interpreted as creating any rights in any person or entity not a
signatory hereto, or as being a stipulation in favor of any such
person or entity.
12.8 If contemporaneously with this Agreement becoming effective, or
thereafter, any Party requests that any other Party execute an
appropriate memorandum or notice of this Agreement in order to give
third parties notice of record of same and submits same for execution
in recordable form, such memorandum or notice shall be duly executed
by the Party to which such request is made and delivered promptly
thereafter to the Party making the request. Upon receipt, the Party
making the request shall cause the memorandum or notice to be duly
recorded in the appropriate real property or other records affecting
the Balancing Area.
12.9 In the event Internal Revenue Service regulations require a uniform
method of computing taxable income by all Parties, each Party agrees
to compute and report income to the Internal Revenue Service (select
one) [ ] as if such Party were taking its Full Share of Current
Production during each relevant tax period in accordance with such
regulations, insofar as same relate to entitlement method tax
computations; or [ ] based on the quantity of Gas taken for its
account in accordance with such regulations, insofar as same relate to
sales method tax computations.
13. ASSIGNMENT AND RIGHTS UPON ASSIGNMENT
13.1 Subject to the provisions of Sections 13.2 (if elected) and 13.3
hereof, and notwithstanding anything in this Agreement or in the
Operating Agreement to the contrary, if any Party assigns (including
any sale, exchange or other transfer) any of its working interest in
the Balancing Area when such Party is an Underproduced or Overproduced
Party, the assignment or other act of transfer shall, insofar as the
Parties hereto are concerned, include all interest of the assigning or
transferring Party in the Gas, all rights to receive or obligations to
provide or take Makeup Gas and all rights to receive or obligations to
make any monetary payment which may ultimately be due hereunder, as
applicable. Operator and each of the other Parties hereto shall
thereafter treat the assignment accordingly, and the assigning or
transferring Party shall look solely to its assignee or other
transferee for any interest in the Gas or monetary payment that such
Party may have or to which it may be entitled, and shall cause its
assignee or other transferee to assume its obligations hereunder.
13.2 [X] (Optional -- Cash Settlement Upon Assignment) Notwithstanding
anything in this Agreement (including but not limited to the
provisions of Section 13.1 hereof) or in the Operating Agreement to
the contrary, and subject to the provisions of Section 13.3 hereof, in
the event an Overproduced Party intends to sell, assign, exchange or
otherwise transfer any of its interest in a Balancing Area, such
Overproduced Party shall notify in writing the other working interest
owners who are Parties hereto in such Balancing Area of such fact at
least thirty (30) days prior to closing the transaction. Thereafter,
any Underproduced Party may demand from such Overproduced Party in
writing, within thirty (30) days after receipt of the Overproduced
Party's notice, a cash settlement of its Underproduction from the
Balancing Area. The Operator shall be notified of any such demand and
of any cash settlement pursuant to this Section 13, and the
Overproduction and Underproduction of each Party shall be adjusted
accordingly. Any cash settlement pursuant to this Section 13 shall be
paid by the Overproduced Party on or before the earlier to occur (i)
of sixty (60) days after receipt of the Underproduced Party's demand
or (ii) at the closing of the transaction in which the Overproduced
Party sells, assigns, exchanges or otherwise transfers its interest in
a Balancing Area on the same basis as otherwise set forth in Sections
7.3 through 7.6 hereof, and shall bear interest at the rate set forth
in Section 7.7 hereof, beginning sixty (60) days after the
Overproduced Party's sale, assignment, exchange or transfer of its
interest in the Balancing Area for any amounts not paid. Provided,
however, if any Underproduced Party does not so demand such cash
settlement of its Underproduction from the Balancing Area, such
Underproduced Party does not so demand such cash settlement of its
Underproduction from the Balancing Area, such Underproduced Party
shall look exclusively to the assignee or other successor in interest
of the Overproduced Party giving notice hereunder for the satisfaction
of such Underproduced Party's Underproduction in accordance with the
provisions of Section 13.1 hereof.
13.3 The provisions of this Section 13 shall not be applicable in the event
any Party mortgages its interest or disposes of its interest by
merger, reorganization, consolidation or sale of substantially all of
its assets to a subsidiary or parent company, or to any company in
which any parent or subsidiary of such Party owns a majority of the
stock of such company.
14. OTHER PROVISIONS
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<PAGE> 1
Exhibit 6.2 1999 Stock Option and Incentive Plan
EXCALIBUR CONTRACTING, INC.
1999 STOCK OPTION AND INCENTIVE PLAN
<PAGE> 2
TABLE OF CONTENTS
<TABLE>
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PAGE
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<S> <C> <C>
I. PURPOSE......................................................................................3
II. DEFINITIONS..................................................................................3
III. EFFECTIVE DATE...............................................................................5
IV. ADMINISTRATION...............................................................................5
V. PARTICIPATION................................................................................6
5.1 Eligibility.........................................................................6
5.2 Ten-Percent Shareholders............................................................6
5.3 Stock Ownership.....................................................................6
5.4 Outstanding Stock...................................................................7
VI. STOCK SUBJECT TO THE PLAN....................................................................7
VII. OPTIONS......................................................................................7
7.1 Stock Option Agreements.............................................................7
7.2 Type and Number of Shares...........................................................7
7.3 Exercise Price......................................................................7
7.4 Medium and Time of Payment..........................................................7
7.5 Term and Nontransferability of Options..............................................8
7.6 Modification, Extension, and Renewal of Option......................................8
7.7 Limitation on Grant of Incentive Stock Options......................................8
7.8 Other Provisions....................................................................8
7.9 Specific Awards Approved by the Shareholders........................................8
VIII. RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS, AND BENEFICIARIES................................8
8.1 Employee Status.....................................................................8
8.2 No Employment Contract..............................................................8
8.3 No Transferability..................................................................9
8.4 Plan Not Funded.....................................................................9
8.5 Adjustment Upon Recapitalizations and Corporate Changes.............................9
8.6 Termination of Employment, Except by Death, Disability, or Retirement...............9
8.7 Death of Participant...............................................................10
8.8 Disability of Participant..........................................................10
8.9 Retirement of Participant..........................................................10
8.10 Rights as a Stockholder............................................................10
8.11 Deferral of Payments...............................................................10
8.12 Acceleration of Awards.............................................................10
</TABLE>
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<TABLE>
<CAPTION>
PAGE
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<S> <C> <C>
IX. MISCELLANEOUS...............................................................................11
9.1 Termination, Suspension and Amendment..............................................11
9.2 No Fractional Shares...............................................................11
9.3 Tax Withholding....................................................................11
9.4 Restrictions on Elections Made by Participants.....................................12
9.5 Limitations on the Corporation's Obligations.......................................12
9.6 Compliance with Laws...............................................................12
9.7 Governing Laws.....................................................................12
9.8 Securities Law Requirements........................................................12
9.9 Execution..........................................................................13
</TABLE>
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<PAGE> 4
EXCALIBUR CONTRACTING, INC.
1999 STOCK OPTION AND INCENTIVE PLAN
I. PURPOSE
The Plan is intended to provide incentive to key employees and
directors of, and key consultants, vendors, customers, and others expected to
provide significant services to, the Corporation, to encourage proprietary
interest in the Corporation, to encourage such key employees to remain in the
employ of the Corporation and its Subsidiaries, to attract new employees with
outstanding qualifications, and to afford additional incentive to consultants,
vendors, customers, and others to increase their efforts in providing
significant services to the Corporation.
II. DEFINITIONS
2.1 "Award" shall mean an Option, which may be designated an Incentive
Stock Option or a Nonstatutory Stock Option, in each case as granted pursuant to
the Plan.
2.2 "Award Agreement" shall mean any written agreement, contract, or
other instrument or document evidencing an Award.
2.3 "Beneficiary" shall mean the person, persons, trust or trusts
entitled by will or the laws of descent and distribution to receive the benefits
specified under the Plan in the event of a Participant's death.
2.4 "Board" shall mean the Board of Directors of the Corporation.
2.5 "Code" shall mean the Internal Revenue Code of 1986, as amended.
2.6 "Committee" shall mean the committee, if any, appointed by the
Board in accordance with Section 4 of the Plan, or the Board if no Committee has
been appointed.
2.7 "Common Stock" shall mean the Common Stock, $.001 par value, of the
Corporation.
2.8 "Corporation" shall mean Excalibur Contracting, Inc., a Florida
corporation, and its Subsidiaries.
2.9 "Disability" shall mean the condition of a Participant who is
unable to perform his or her substantial and material job duties due to injury
or sickness or such other condition as the Board or Committee may determine in
its sole discretion and/or engage in any substantial gainful activity by reason
of any medically determinable physical or mental impairment which can be
expected to result in death or which has lasted or can be expected to last for a
continuous period of not less than 12 months.
2.10 "Effective Date" shall mean the date that the Plan was adopted by
the shareholders of the Company.
2.11 "Eligible Employee" shall mean an individual who is employed
(within the meaning of Code Section 3401 and the regulations thereunder) by the
Corporation. Additionally for purposes of this Plan, a Participant who is a
director or a consultant, vendor, customer, or other provider of significant
services to the Corporation or a Subsidiary shall be deemed to be an Eligible
Employee, and service as a director, consultant, vendor, customer, or other
provider of significant services to the Corporation or a
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<PAGE> 5
Subsidiary shall be deemed to be employment, except that no Incentive Stock
Option may be granted to a non-employee director or non-employee consultant,
vendor, customer, or other provider of significant services to the Corporation
or a Subsidiary.
2.12 "Event" shall mean any of the following:
(a) Any person or entity (or group of affiliated persons or
entities) acquires in one or more transactions, whether before or after the
effective date of the Plan, ownership of more than 50% of the outstanding shares
of stock entitled to vote in the election of directors of the Corporation; or
(b) The dissolution or liquidation of the Corporation or a
reorganization, merger or consolidation of the Corporation with one or more
entities, as a result of which the Corporation is not the surviving entity, or a
sale of all or substantially all of the assets of the Corporation as an entirety
to another entity.
For purposes of this definition, ownership does not include ownership
(i) by a person owning such shares merely of record (such as a member of a
securities exchange, a nominee or a securities depository system), (ii) by a
person as a bona fide pledgee of shares prior to a default and determination to
exercise powers as an owner of the shares, (iii) by a person who is not required
to file statements on Schedule 13D by virtue of Rule 13d-1(b), or (iv) by a
person who owns or holds shares as an underwriter acquired in connection with an
underwritten offering pending and for purposes of resale.
2.13 "Exchange Act' shall mean the Securities Exchange Act of 1934, as
amended from time to time.
2.14 "Exercise Price" shall mean the price per Share of Common Stock,
determined by the Board or the Committee, at which an Award may be exercised.
2.15 "Fair Market Value" shall mean the value of one Share of Common
Stock, determined as follows:
(i) If the Shares are traded oil an exchange, the price at which
Shares traded at the close of business on the date of valuation; or
(ii) If the Shares are traded over-the-counter on the NASDAQ
System, the closing price if one is available, or the mean between the bid and
asked prices on said System at the close of business on the date of valuation;
or
(iii) If neither (i) nor (ii) above applies, the fair market
value as determined by the Board or the Committee in good faith. Such
determination shall be conclusive and binding on all persons.
2.16 "Incentive Stock Option' shall mean an option described in Section
422A(b) of the Code.
2.17 "Nonstatutory Stock Option" shall mean an option not described in
Section 422(b), 422A(b), 423(b) or 424(b) of the Code.
2.18 "Option" shall mean either an Incentive Stock Option or a
Nonstatutory Stock Option granted pursuant to the Plan.
2.19 "Participant" shall mean Eligible Employee who has received an
Award under the Plan.
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<PAGE> 6
2.20 "Plan" shall mean the EXCALIBUR CONTRACTING, INC. 1999 Stock
Option and Incentive Plan, as it may be amended from time to time.
2.21 "Purchase Price" shall mean the Exercise Price times the number of
Shares with respect to which an Award is exercised.
2.22 "Restricted Stock Awards" shall mean any Award of shares of Common
Stock that may be subject to certain restrictions and to a risk of forfeiture.
2.23 "Retirement" shall mean the voluntary termination of employment by
an Employee upon the attainment of age 65 and the completion of not less than 20
years of service with the Corporation or a Subsidiary.
2.24 "Rule 16b" shall mean Rule 16b of the Securities and Exchange Act
of 1934.
2.25 "Share" shall mean one share of Common Stock, adjusted in
accordance with Section 8.5 of the Plan (if applicable).
2.26 "Securities Act" shall mean the Securities Act of 1933, as amended
from time to time.
2.27 "Stock Appreciation Right" shall mean the right granted to a
Participant to be paid an amount measured by the appreciation in the Fair Market
Value of the Common Stock from the date of grant to the date of exercise of the
right, with payment to be made in cash, Common Stock, or property as specified
in the Award or determined by the Board or the Committee.
2.28 "Stock Option Agreements" shall mean an Award Agreement granting
Options under the Plan.
2.29 "Stock Purchase Agreement" shall mean an agreement to exercise
Options under the Plan.
2.30 "Subsidiary" shall mean any corporation at least 50% of the total
combined voting power of which is owned by the Corporation or by another
Subsidiary.
2.31 "Tax Date" shall have the meaning set forth in Section 9.3 hereof.
III. EFFECTIVE DATE
The Plan was adopted by the Board May 6, 1999, subject to the approval
by the Corporation's shareholders. The Plan is being submitted for shareholder
approval pursuant to a shareholder's action without a meeting in which holders
of a majority of the shares of Common Stock must approve of the adoption of the
Plan pursuant to the Corporations Bylaws and Florida Corporate Law. The
effective date of the Plan shall be May 6, 1999 (the "Effective Date"), provided
that the Plan receives shareholder approval.
IV. ADMINISTRATION
The Plan shall be administered by the Board in compliance with Rule
16b-3, or by a Committee appointed by the Board, which Committee shall be
constituted to permit the Plan to comply with Rule 16b-3, and which shall
consist of not less than two members. The Board shall appoint one of the members
of the Committee, if there be one, as Chairman of the Committee. If a Committee
has been
5
<PAGE> 7
appointed, the Committee shall hold meetings at such times and places as it may
determine. Acts of a majority of the Committee at which a quorum is present, or
acts reduced to or approved in writing by a majority of the members of the
Committee, shall be the valid acts of the Committee. The Board, or the Committee
if there be one, shall from time to time at its discretion select the Eligible
Employees and consultants who are to be granted Awards, determine the number of
Shares to be applicable to such Award, and designate any Options as Incentive
Stock Options or Nonstatutory Stock Options, except that no Incentive Stock
Option may be granted to a non-employee director or a non-employee consultant. A
member of the Board or a Committee member shall in no event participate in any
determination relating to Awards held by or to be granted to such Board or
Committee member; however, a member of the Board or a Committee member shall be
entitled to receive Awards which are duly approved in accordance with the
provisions of Rule 16b-3. The interpretation and construction by the Board, or
by the Committee if there be one, of any provision of the Plan or of any Award
granted thereunder shall be final. No member of the Board or of the Committee
shall be liable for any action or determination made in good faith with respect
to the Plan or any Award granted thereunder. In addition to any right of
indemnification provided by the Articles of Incorporation or Bylaws of the
Corporation, such person shall be indemnified and held harmless by the
Corporation from any loss, cost, liability or expense that may be imposed upon
or reasonably incurred by him in connection with any claim, suit, action or
proceeding to which he may be a party by reason of any action or omission under
the Plan.
V. PARTICIPATION
5.1 Eligibility. Subject to the terms and conditions of Section 5.2
below, the Participants shall be such persons as the shareholders may approve or
as the Board or the Committee may select from among the following classes of
persons: (i) Employees of the Corporation or of a Subsidiary (who may be
officers, whether or not they are directors); and (ii) Consultants, vendors,
customers, and others expected to provide significant services to the
Corporation or a Subsidiary.
For purposes of this Plan, a Participant who is a director or a
consultant, vendor, customer, or other provider of significant services to the
Corporation or a Subsidiary shall be deemed to be an Eligible Employee, and
service as a director, consultant, vendor, customer, or other provider of
significant services to the Corporation or a Subsidiary shall be deemed to be
employment, except t ha t no Incentive Stock Option may be granted to a
non-employee director or non-employee consultant, vendor, customer, or other
provider of significant services to the Corporation or a Subsidiary, and except
that no Nonstatutory Stock Option may be granted to a non-employee director or
non-employee consultant, vendor, customer, or other provider of significant
services to the Corporation or a Subsidiary other than upon a vote of a majority
of disinterested directors finding that the value of the services rendered or to
be rendered to the Corporation or a Subsidiary by such non-employee director or
non-employee consultant, vendor, customer, or other provider of services is at
least equal to the value of the Awards granted.
5.2 Ten-Percent Shareholders. An Eligible Employee who owns more than
10% of the total combined voting power of all classes of outstanding stock of
the Corporation, its parent or any of its Subsidiaries shall not be eligible to
receive an Award for an Incentive Stock Option unless (i) the Exercise Price of
the Shares subject to such Award is at least 110% of the Fair Market Value of
such Shares on the date of grant; and (ii) such Award by its terms is not
exercisable after the expiration of 5 years from the date of grant.
5.3 Stock Ownership. For purposes of Section 5.2 above, in determining
stock ownership an Eligible Employee shall be considered as owning the stock
owned, directly or indirectly, by or for his brothers, sisters, spouses,
ancestors, and lineal descendants. Stock owned, directly or indirectly, by or
for a corporation, partnership, estate, or trust shall be considered as being
owned proportionately by or for its
6
<PAGE> 8
shareholders, partners, or beneficiaries. Stock with respect to which such
Eligible Employee holds an Award shall not be counted.
5.4 Outstanding Stock. For purposes of Section 5.2 above, "outstanding
stock" shall include all stock actually issued and outstanding immediately after
the grant of the Award to the Participant. "Outstanding stock" shall not include
shares authorized for issue under outstanding Options or Purchase Rights held by
the Participant or by any other person.
VI. STOCK SUBJECT TO THE PLAN
The stock subject to Awards granted under the Plan shall be Shares of
the Corporation's authorized but unissued or reacquired Common Stock. The
aggregate number of Shares which may be issued as Awards or upon exercise of
Awards under the Plan shall not exceed 2,500,000 shares. The number of Shares
subject to unexercised Options (plus the number of Shares previously issued
under the Plan) shall not at any time exceed the number of Shares available for
issuance under the Plan. In the event that any unexercised Option, or any
portion thereof, for any reason expires or is terminated, the unexercised or
unvested Shares allocable to such Option may again be made subject to any Award.
Any Shares withheld by the Corporation pursuant to Section 9.3 shall not be
deemed to be issued. The number of withheld Shares shall be deducted from the
applicable Award and shall not entitle the Participant to receive additional
Shares. The limitations established by this Article VI shall be subject to
adjustment in the manner provided in Section 8.5 hereof upon the occurrence of
an event specified therein.
VII. OPTIONS
7.1 Stock Option Agreements. Options shall be evidenced by written
Stock Option Agreements in such form as the Board or the Committee shall from
time to time determine. Such agreements shall comply with and be subject to the
terms and conditions set forth below.
7.2 Type and Number of Shares. Each Option shall state the type of
Award and the number of Shares to which it pertains and shall provide for the
adjustment thereof in accordance with the provisions of Section 8.5 hereof.
7.3 Exercise Price. Each Option shall state the Exercise Price thereof.
The Exercise Price in the case of any Incentive Stock Option shall not be less
than the Fair Market Value on the date of grant and, in the case of any Option
granted to an Optionee described in Section 5.2 hereof, shall not be less than
110% of the Fair Market Value on the date of grant. The Exercise Price in the
case of any Nonstatutory Stock Option shall not be less than 85% of the Fair
Market Value on the date of grant.
7.4 Medium and Time of Payment. The Purchase Price shall be payable in
full in United States dollars upon the exercise of the Option; provided,
however, that if the applicable Stock Option Agreement so provides the Purchase
Price may be paid (i) by the surrender of Shares in good form for transfer,
owned by the Participant and having a Fair Market Value on the date of exercise
equal to the Purchase Price, or in any combination of cash and Shares, as long
as the sum of the cash so paid and the Fair Market Value of the Shares so
surrendered equal the Purchase Price, (ii) by cancellation of indebtedness owed
by the Corporation to the Participant, (iii) with a full recourse promissory
note executed by the Participant, or (iv) any combination of the foregoing. The
interest rate and other terms and conditions of such note shall be determined by
the Board Of Directors. The Board of Directors may require that the Participant
pledge his or her Shares to the Corporation for the purpose of securing the
payment of Such note. In no event shall the stock certificate(s) representing
such Shares be released to the Participant until such note is paid in full.
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<PAGE> 9
7.5 Term and Nontransferability of Options. Each Option shall state the
time or times which all or part thereof becomes exercisable. No Option shall be
exercisable after the expiration of five years from the date it was granted.
During the lifetime of the Participant, the Option shall be exercisable only by
the Participant and shall not be assignable or transferable. In the event of the
Participant's death, the Option shall not be transferable by the Participant
other than by will or the laws of descent and distribution.
7.6 Modification, Extension, and Renewal of Option. Within the
limitations of the Plan, the Board of Directors may modify, extend or renew
outstanding Options or accept the cancellation of outstanding Options (to the
extent not previously exercised) for the granting of new Options in substitution
therefor. The foregoing notwithstanding, no modification of an Option shall,
without the consent of the Participant, alter or impair any rights or
obligations under any Option previously granted.
7.7 Limitation on Grant of Incentive Stock Options. In the case of
Incentive Stock Options granted hereunder, the aggregate Fair Market Value
(determined as of the date of the grant thereof) of the Shares with respect to
which Incentive Stock Options become exercisable by any Participant for the
first time during any calendar year (under this Plan and all other Plans
maintained by the Corporation, its parent, or its Subsidiaries) shall not exceed
$100,000. The Board or Committee may, however, with the Participant's consent
authorize an amendment to the Incentive Stock Option which renders it a
Nonstatutory Stock Option.
7.8 Other Provisions. The Stock Option Agreements authorized under the
Plan may contain such other provisions not inconsistent with the terms of the
Plan (including, without limitation, restrictions upon the exercise of the
Option) as the Board of Directors shall deem advisable.
7.9 Specific Awards Approved by the Shareholders. Subject to
shareholder approval and pursuant to the Board of Director's approval January 4,
1999, the individuals whose names are set forth in Exhibit "A,' a copy of which
is attached hereto and incorporated herein by this reference, shall be deemed
granted Nonstatutory Stock Options as of the Effective Date, in the amounts and
for the exercise price specified by the Board of Directors, all in accordance
with the provisions set forth in this Article VII of the Plan. The provisions of
this Section 7.9 shall not be amended more than once every six months, other
than to comply with changes in the Internal Revenue Code, the Employee
Retirement Income Security Act, or the rules thereunder, and are intended to be
construed in accordance with the provisions pertaining to "formula awards" under
Paragraph (c)(2)(ii) of Rule 16b-3.
VIII. RIGHTS OF ELIGIBLE EMPLOYEES, PARTICIPANTS, AND BENEFICIARIES
8.1 Employee Status. Status as an Eligible Employee shall not be
construed as a commitment that any Award will be made under the Plan to an
Eligible Employee or to Eligible Employees generally.
8.2 No Employment Contract. Nothing contained in the Plan (or in the
Award Agreements or in any other documents related to the Plan or to Awards)
shall confer upon any Eligible Employee or any Participant any right to continue
in the employ of the Corporation or constitute any contract or agreement of
employment, or interfere in any way with the right of the Corporation to reduce
such person's compensation or to terminate the employment of such Eligible
Employee or Participant, with or without cause, but nothing contained in the
Plan or any document related thereto shall affect any other contractual right of
any Eligible Employee or Participant. Nothing contained in the Plan (or in the
Award Agreements or in any other documents related to the Plan or the Awards)
shall confer upon any director of the Corporation any right to continue as a
director of the Corporation.
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8.3 No Transferability. Awards may be exercised only by, and amounts
payable or shares issuable pursuant to an Award shall be paid only to or
registered only in the name of, the Participant or, in the event of the
Participant's death, to the Participant's Beneficiary or, in the event of the
Participant's Disability, to the Participant's Personal Representative or, if
there is none, to the Participant. Other than by will or the laws of descent and
distribution, no right or benefit under the Plan or any Award, including,
without limitation, any Option or share of Restricted Stock that has not vested,
shall be subject in any manner to anticipation, alienation, sale, transfer,
assignment, pledge, encumbrance, or charge and any such attempted action shall
be void and no such right or benefit shall be, in any manner, liable for, or
subject to, debts, contract, liabilities, engagements, or torts of any Eligible
Employee, Participant, or Beneficiary, in any case except as may otherwise be
expressly required by applicable law. The Board or the Committee shall disregard
any attempt at transfer, assignment, or other alienation prohibited by the
preceding sentence and shall pay or deliver such cash or shares of Common Stock
in accordance with the provisions of the Plan. Notwithstanding the foregoing,
the Board or the Committee may authorize exercise by or transfers or payments to
a third party in a specific case or more generally; provided, however, with
respect to any option or similar right (including any Stock Appreciation Right),
such discretion may only be exercised to the extent that applicable rules under
Section 16 of the Exchange Act would so permit without disqualifying the Plan
from certain benefits thereunder.
8.4 Plan Not Funded. No Participant, Beneficiary, or other person shall
have any right, title, or interest in any fund or in any specific asset
(including shares of Common Stock) of the Corporation by reason of any Award
granted hereunder. There shall be no funding of any benefits which may become
payable hereunder. Neither the provisions of the Plan (or of any documents
related hereto), nor the creation or adoption of the Plan, nor any action taken
pursuant to the provisions of the Plan shall create, or be construed to create,
a trust of any kind or a fiduciary relationship between the Corporation and any
Participant, Beneficiary, or other person. To the extent that a Participant, a
Beneficiary, or other person acquires a right to receive an Award hereunder,
such right shall be no greater than the right of any unsecured general creditor
of the Corporation. Awards payable under the Plan shall be paid in shares of
Common Stock or from the general assets of the Corporation, and no special or
separate fund or deposit shall be established and no segregation of assets or
shares shall be made to assure payment of such Awards.
8.5 Adjustment Upon Recapitalizations and Corporate Changes. If the
outstanding shares of Common Stock are changed into or exchanged for cash or a
different number or kind of shares or securities of the Corporation, or if the
outstanding shares of the Common Stock are increased, decreased, exchanged for,
or otherwise changed, or if additional shares or new or different shares or
securities are distributed with respect to the outstanding shares of the Common
Stock, through a reorganization or merger in which the Corporation is the
surviving entity or through a combination, consolidation, recapitalization,
reclassification, stock split, stock dividend, reverse stock split, stock
consolidation, or other capital change or adjustment, an appropriate adjustment
shall be made in the number and kind of shares of other consideration that is
subject to or may be delivered under the Plan and pursuant to outstanding
Awards. A corresponding adjustment to the consideration payable with respect to
Awards granted prior to any such change and to the price, if any, to be paid in
connection with Restricted Stock Awards shall also be made as appropriate.
Corresponding adjustments shall be made with respect to Stock Appreciation
Rights related to Options to which they are related. In addition, the Board or
the Committee may grant such additional rights in the foregoing circumstances as
the Board or the Committee deems to be in the best interest of any Participant
and the Corporation in order to preserve for the Participant the benefits of an
Award.
8.6 Termination of Employment, Except by Death, Disability, or
Retirement. If a Participant ceases to be an Employee for any reason other than
his or her death, Disability or Retirement, such Participant shall have the
right, subject to the restrictions of Section 8.3 above, to exercise any Award
at
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any time within three months after termination of employment, but only to the
extent that, at the date of termination of employment, the Participant's right
to exercise such Award had accrued pursuant to the terms of the applicable
agreement and had not previously been exercised; provided, however, that if the
Participant was terminated for cause (as defined in the applicable agreement),
any Award not exercised in full prior to such termination shall be canceled. For
this purpose, the employment relationship shall be treated as continuing intact
while the Participant is on military leave, sick leave, or other bona fide leave
of absence (to be determined in the sole discretion of the Board or the
Committee). The foregoing notwithstanding, in the case of an Incentive Stock
Option, employment shall not be deemed to continue beyond the 90th day after the
Participant's reemployment rights are guaranteed by statute or by contract.
8.7 Death of Participant. If a Participant dies while an Employee, or
after ceasing to be an Employee but during the period while he or she could have
exercised the Award under this Section 8.7, and has not fully exercised the
Award, then the Award may be exercised in full at any time within 12 months
after the Participant's death (but not later than the date of termination fixed
in the applicable agreement), by the executors or administrators of his or her
estate or by any person or persons who have acquired the Award directly from the
Participant by bequest or inheritance, but only to the extent that, at the date
of death, the Participant's right to exercise such Award had accrued and had not
been forfeited pursuant to the terms of the applicable agreement and had not
previously been exercised.
8.8 Disability of Participant. If a Participant ceases to be an
Employee by reason of Disability, such Participant shall have the right to
exercise the Award at any time within 12 months after termination of employment
(but not later than the termination date fixed in the applicable Agreement), but
only to the extent that, at the date of termination of employment, the
Participant's right to exercise such Award had accrued pursuant to the terms of
the applicable Award Agreement and had not previously been exercised.
8.9 Retirement of Participant. If a Participant ceases to be an
Employee by reason of Retirement, such Participant shall have the right to
exercise the Award at any time within three months after termination of
employment (but not later than the termination date fixed in the applicable
Award Agreement), but only to the extent that, at the date of termination of
employment, the Participant's right to exercise such Award had accrued pursuant
to the terms of the applicable Award Agreement and had not previously been
exercised.
8.10 Rights as a Stockholder. A Participant, or a transferee of a
Participant, shall have no rights as a stockholder with respect to any Shares
covered by his or her Award until the date of the issuance of a stock
certificate for such Shares. No adjustment shall be made for dividends (ordinary
or extraordinary, whether in cash, securities, or other property), distributions
or other rights for which the record date is prior to the date such stock
certificate is issued, except as provided in Section 8.5 hereof.
8.11 Deferral of Payments. The Board or the Committee may approve the
deferral of any payments that may become due under the Plan. Such deferrals
shall be subject to any conditions, restrictions, or requirements as the Board
or the Committee may determine.
8.12 Acceleration of Awards. Immediately prior to the occurrence of an
Event, (i) each Option and Stock Appreciation Right under the Plan shall become
exercisable in full; (ii) Restricted Stock delivered under the Plan shall
immediately vest free of restrictions; and (iii) each other Award outstanding
under the Plan shall be fully vested or exercisable, unless, prior to the Event,
the Board or the Committee otherwise determines that there shall be no such
acceleration or vesting of an Award or otherwise determines those Awards which
shall be accelerated or vested and to the extent to which they shall be
accelerated or vested, or that an Award shall terminate, or unless in connection
with such Event the Board provides (A) for the assumption of such Awards
theretofore granted; or (B) for the substitution
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for such Awards of new awards covering securities or obligations (or any
combination thereof) of a successor corporation, or a parent or subsidiary
thereof, with appropriate adjustments as to number and kind of shares and
prices; or (C) for the payment of the fair market value of the then outstanding
Awards. In addition, the Board or the Committee may grant such additional rights
in the foregoing circumstances as the Board or the Committee deems to be in the
best interest of the Participant and the Corporation in order to preserve for
the Participant the benefits of an Award. For purposes of this Section 8.12
only, Board shall mean the Board of Directors of the Corporation as constituted
immediately prior to the Event. In addition, the Board may in its sole
discretion accelerate the exercisability or vesting of any or all Awards
outstanding under the Plan in circumstances under which the Board or the
Committee determines such acceleration appropriate.
IX. MISCELLANEOUS
9.1 Termination, Suspension and Amendment. The Board or the Committee
may, at any time, suspend, amend, modify, or terminate the Plan (or any part
thereof) and may, with the consent of a Participant, authorize such
modifications of the terms and conditions of such Participant's Award as it
shall deem advisable; provided that, except as permitted under the provisions of
Section 8.5 hereof, no amendment or modification of the Plan may be adopted
without approval by a majority of the outstanding shares of Common Stock
pursuant to a shareholder's action taken without a meeting or by a majority of
the shares of the Common Stock represented (in person or by proxy) at a meeting
of stockholders at which a quorum is present and entitled to vote thereat, if
such amendment or modification would:
(i) materially increase the benefits accruing to Participants
under the Plan or materially increase the aggregate number of shares which may
be delivered pursuant to Awards granted under the Plan if such action would
require the approval of the Company's shareholders pursuant to Rule 16b-3 under
the Exchange Act or any successor provision; or
(ii) materially modify the requirements of eligibility for
participation in the Plan.
Neither adoption of the Plan nor the provisions hereof shall limit the
authority of the Board to adopt other Plans or to authorize other payments of
compensation and benefits under applicable law. No Awards under the Plan may be
granted or amended during any suspension of the Plan or after its termination.
The amendment, suspension or termination of the Plan shall not, without the
consent of the Participant, alter or impair any rights or obligations pertaining
to any Awards granted under the Plan prior to such amendment, suspension, or
termination.
9.2 No Fractional Shares. No Award or installment thereof shall be
exercisable except in respect of whole shares, and fractional share interests
shall be disregarded.
9.3 Tax Withholding. As required by law, federal, state, or local taxes
that are subject to the withholding of tax at the source shall be withheld by
the Corporation as necessary to satisfy such requirements. The Corporation is
entitled to require deduction from other compensation payable to each
Participant or, in the alternative: (i) the Corporation may require the
Participant to advance such sums; or (ii) if a Participant elects, the
Corporation may withhold (or require the return of) Shares having the Fair
Market Value equal to the sums required to be withheld. If the Participant
elects to advance such sums directly, written notice of that election shall be
delivered prior to such exercise and, whether pursuant to such election or
pursuant to a requirement imposed by the Corporation, payment in cash or by
check of such sums for taxes shall be delivered within 10 days after the
exercise date. If the Participant elects to have the Corporation withhold Shares
(or be entitled to the return of Shares) having a Fair Market Value equal to the
sums required to be withheld, the value of the Shares to be withheld (or
returned)will be
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equal to the Fair Market Value on the date the amount of tax to be withheld (or
subject to return) is to be determined (the "Tax Date").
9.4 Restrictions on Elections Made by Participants. Elections by
Participants to have Shares withheld (or subject to return) for this purpose
will be subject to the following restrictions' (i) the election must be made
prior to the Tax Date; (ii) the election must be irrevocable; (iii) the election
will be subject to the Board's disapproval; and (iv) if the Participant is an
"officer" within the meaning of Section 16 of the Exchange Act, the election
shall be subject to such additional restrictions as the Board or the Committee
may impose in an effort to secure the benefits of any regulations thereunder.
9.5 Limitations on the Corporation's Obligations. The Corporation shall
not be obligated to issue shares and/or distribute cash to the Participant upon
any Award exercise until such payment has been received or Shares have been
withheld, unless withholding (or offset against a cash payment) as of or prior
to the exercise date is sufficient to cover all such sums due or which may be
due with respect to such exercise. In addition, the Board or the Committee may
grant to a Participant a cash bonus in any amount required by federal, state, or
local tax law to be withheld with respect to an Award.
9.6 Compliance with Laws. The Plan, the granting of Awards under the
Plan, the Stock Option Agreements and Stock Purchase Agreements and the delivery
of Options, Shares, and Awards (and/or the payment of money or Common Stock)
pursuant thereto and the extension of any loans hereunder are subject to such
additional requirements as the Board or the Committee may impose to assure or
facilitate compliance with all applicable federal and state laws, rules and
regulations (including, without limitation, securities laws and margin
requirements) and to such approvals by any regulatory or governmental agency
which may be necessary or advisable in connection therewith. In connection with
the administration of the Plan or the grant of any Award, the Board or the
Committee may impose such further limitations or conditions as in its opinion
may be required or advisable to satisfy, or secure the benefits of, applicable
regulatory requirements (including those rules promulgated under Section 16 of
the Exchange Act or those rules that facilitate exemption from or compliance
with the Securities Act or the Exchange Act), the requirements of any stock
exchange upon which such shares or shares of the same class are then listed, and
any blue sky or other securities laws applicable to such shares.
9.7 Governing Laws. The Plan and all Awards granted under the Plan and
the documents evidencing Awards shall be governed by, and construed in
accordance with, the laws of the State of Florida as the Corporation's principle
place of business.
9.8 Securities Law Requirements.
(a) Legality of Issuance. The issuance of any Shares upon the
exercise of any Option and the grant of any Option shall be contingent upon the
following:
(i) the Corporation and the Participant shall have taken all
actions required to register the Shares under the Securities Act of 1933, as
amended (the "Securities Act"), and to qualify the Option and the Shares under
any and all applicable state securities or "blue sky" laws or regulations, or to
perfect an exemption from the respective registration and qualification
requirements thereof;
(ii) any applicable listing requirement of any stock exchange on
which the Common Stock is listed shall have been satisfied; and
(iii) any other applicable provision of state or Federal law
shall have been satisfied.
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(b) Restrictions on Transfer. Regardless of whether the offering and
sale of Shares under the Plan has been registered under the Securities Act or
has been registered or qualified under the securities laws of any state, the
Corporation may impose restrictions on the sale, pledge, or other transfer of
such Shares (including the placement of appropriate legends on stock
certificates) if, in the judgment of the Corporation and its counsel, such
restrictions are necessary or desirable in order to achieve compliance with the
provisions of the Securities Act, the securities laws of any state, or any other
law. In the event that the sale of Shares under the Plan is not registered under
the Securities Act but an exemption is available which required an investment
representation or other representation, each Participant shall be required to
represent that such Shares are being acquired for investment, and not with a
view to the sale or distribution thereof, and to make such other representations
as are deemed necessary or appropriate by the Corporation and its counsel. Any
determination by the Corporation and its counsel in connection with any of the
matters set forth in this Section 9.6(b) shall be conclusive and binding on all
persons. Stock certificates evidencing Shares acquired under the Plan pursuant
to an unregistered transaction shall bear the following restrictive legend and
such other restrictive legends as are required or deemed advisable under the
provisions of any applicable law:
THESE SHARES OF COMMON STOCK REPRESENTED HEREBY HAVE NOT BEEN
REGISTERED UNDER THE SECURITIES ACT OF 1993, AS AMENDED (THE "ACT"), OR
APPLICABLE STATE SECURITIES LAWS AND HAVE BEEN ISSUED IN RELIANCE UPON
EXEMPTIONS FROM SUCH REGISTRATION REQUIREMENTS. THESE SHARES OR ANY
INTEREST HEREIN MAY NOT, BE OFFERED, SOLD OR TRANSFERRED UNLESS
REGISTERED UNDER THE ACT AND APPLICABLE STATE SECURITIES LAWS OR AN
EXEMPTION FROM THE REGISTRATION REQUIREMENTS OF THE ACT AND APPLICABLE
STATE SECURITIES LAWS IS AVAILABLE.
(c) Registration or Qualification of Securities. The Corporation may,
but shall not be obligated to register or qualify the issuance of Awards and/or
the sale of Shares under the Securities Act or any other applicable law. The
Corporation shall not be obligated to take any affirmative action in order to
cause the issuance of Awards or the sale of Shares under the Plan to comply with
any law.
(d) Exchange of Certificates. If, in the opinion of the Corporation and
its counsel, any legend placed on a stock certificate representing shares issued
under the Plan is no longer required, the holder of such certificate shall be
entitled to exchange such certificate for a certificate representing the same
number of Shares but lacking such legend.
9.9 Execution. To record the adoption of the Plan in the form set forth
above by the Board effective as of January 25, 1999, the Corporation has caused
this Plan to be executed in the name and on behalf of the Corporation where
provided below by an officer of the Corporation thereunto duly authorized.
EXCALIBUR CONTRACTING, INC.
By: /s/ Jeffrey L.Taylor
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President
ATTEST:
/s/ Gregory V. Gibson
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Secretary
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