SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
[X] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM MARCH 31, 1999 TO DECEMBER 31, 1999
Commission file number: 0-26321
SAN JOAQUIN RESOURCES INC.
(Name of small business issuer in its charter)
NEVADA 98-0204105
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
53 STRATFORD PLACE, S.W., CALGARY, ALBERTA T3H 1H7 CANADA
(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (403)242-9703
Securities registered under Section 12(b) of the Exchange Act: NONE
Securities registered under Section 12(g) of the Exchange Act:
COMMON STOCK, $0.0001 PAR VALUE
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter
period that the registrant was required to file such reports), and (2) has been
subject to the filing requirements for the past 90 days. Yes _X_ No ___
Check if disclosure of delinquent filers in response to Item 405 of Regulation
S-B is not contained in this form, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB.[ ]
Issuer's revenues for its most recent fiscal year. $5,784
Aggregate market value of the voting stock held by
non-affiliates of the registrant as of March 31, 2000: $0
Number of shares outstanding of registrant's Common Stock, $0.0001 par value,
as of March 31, 2000: 11,769,000
Documents incorporated by reference: NONE
Transitional Small Business Disclosure Format (check one): Yes ___ No _X_
Exhibit index on consecutive page 27 Page 1 of 131 Pages
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PART I
ITEM 1. DESCRIPTION OF BUSINESS.
San Joaquin Resources Inc. (the "Company") was incorporated on April 21, 1997
under the laws of the State of Nevada as "LEK International, Inc."
The Company operated as a "shell" company until December 31, 1999, when a change
in control of the Company occurred, in conjunction with closing under an
Agreement and Plan of Reorganization. Prior to closing under the Agreement and
Plan of Reorganization, the Company had a total of 3,700,000 shares issued and
outstanding.
The Company issued 8,069,000 shares of its common stock in exchange for all of
the issued and outstanding common stock of San Joaquin Oil & Gas Ltd., a Nevada
corporation ("San Joaquin"). As a result of that transaction, San Joaquin became
a wholly-owned subsidiary of the Company.
Upon consummation of these transactions, the Company had 11,769,000 issued and
outstanding shares of common stock, of which 8,069,000 shares, or approximately
68.56%, were owned by persons who were previously shareholders of San Joaquin.
Persons who were previously shareholders of the Company owned a total of
3,700,000 shares or approximately 31.44% of the issued and outstanding common
stock.
Prior to closing, shareholders of the Company adopted Restated and Amended
Articles of Incorporation to be effective as of January 17, 2000. Among the
amendments was a change in the name of the Company to "San Joaquin Resources
Inc."
In conjunction with the change in ownership of a controlling interest in the
stock of the registrant, the previous officers and directors of the registrant
resigned and appointed as new directors J. Timothy Bowes, Nick DeMare, and Colin
S. McNeil. The new directors elected J. Timothy Bowes as the President and Nick
DeMare as Secretary and Treasurer of the Company.
BUSINESS OF SAN JOAQUIN
San Joaquin was incorporated in Nevada on September 14, 1999, to acquire
interests in petroleum and natural gas leases in the San Joaquin and Sacramento
Basins of California. San Joaquin completed private placements of its common
stock in 1999, selling a total of 1,920,000 shares of common stock for gross
proceeds of $960,000 and 61,490 Series A Preferred Shares for gross proceeds of
$30,745. The Series A Preferred Shares were subsequently converted into
6,149,000 shares of common stock.
AGREEMENTS
i) On September 20, 1999, the Company entered into an agreement (the
"Consulting and Overriding Royalty Agreement") covering exploration
activity principally in the San Joaquin Basin and, to a lesser extent,
in the Sacramento Basin, located in southern California. The Consulting
and Overriding Royalty Agreement had an initial term of four months,
and renews automatically for four month periods. The Consulting and
Overriding Royalty Agreement may be terminated by giving notice 45 days
prior to the end of any four month period. The Consulting and
Overriding Royalty Agreement provides for the Company retaining the
consulting services of Jay S. Davis and Thomas L. Namson (collectively
"Davis & Namson") pursuant to a set fee structure in order to generate
petroleum and natural gas prospects. As part of the retainer, the
Company agreed to compensate Davis & Namson for a minimum of 120 man
days during the initial four month term of the agreement, at the
following rates: $750/day for Partners, $275/day for Geological
Technicians and $750/day for the Travel Day Rate for Partners.
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The Company has also agreed to compensate Davis & Namson for its
reasonable expenses incurred in connection with the performance of
services. For each prospect Davis & Namson generates the Company has
the right to accept or reject the prospect. With respect to prospects
the Company accepts, any petroleum and natural gas leases acquired by
the Company, within the boundary of the prospect, are subject to a
royalty to Davis & Namson, the amount of which is determined in
accordance with the Consulting and Overriding Royalty Agreement, but is
substantially as follows:
ROYALTY PERCENTAGE IF THE NET REVENUE
INTEREST IS:
3.0% Greater than 87.5%
2.5% 84% to 87.5% inclusive
2.0% 81% to 83.99% inclusive
1.5% Less than 81%
To date the Company has accepted the following prospects from Davis &
Namson:
Willow Springs
Crocker Canyon
Bitterwater Creek
Midway Peak
Davis & Namson is not affiliated with the Company.
Should the Company reject a prospect Davis & Namson has the right,
after four months, to locate a third party to acquire the prospect.
During this four month period the Company can elect to accept the
prospect and fund the acquisition of petroleum and natural gas leases.
The Company still has the right for seven months after the aforesaid
four months to acquire a 50% interest in the prospect. As of April 10,
2000, the Company had not rejected any prospects presented by Davis &
Namson.
ii) On December 1, 1999, the Company and Canyon Oil ("Canyon") entered into
an agreement whereby the Company paid an initial $70,000 to Canyon for
technical information provided by Canyon on certain petroleum and
natural gas properties (the "Canyon Properties") located in the San
Joaquin and Sacramento Basins. The Company is also required to pay a
renewal payment of $70,000 every four months until termination of the
agreement. A payment of $70,000 was due on April 1, 2000. To date the
Company has not made this payment and is attempting to renegotiate the
terms. Canyon will retain a 14% carried working interest in any of the
Canyon Properties which are acquired by the Company.
Canyon is a limited liability company incorporated in California and is
not affiliated with the Company.
As of April 10, 2000, the Company had not acquired any properties from
Canyon.
iii) On November 16, 1999, the Company and Consolidated Earth Stewards Inc.
("CEW") entered into a joint venture agreement whereby the Company
agreed to grant CEW a right of first refusal ("ROFR") until October 1,
2001, to participate in a 19% working interest in certain petroleum and
natural gas prospects to be identified, acquired or generated by the
Company in the San Joaquin and Sacramento Basins. Under the terms of
the joint venture agreement CEW had agreed to pay any initial $150,000
for the ROFR and provide an initial advance of $200,000 to fund CEW's
share of costs. On November 23, 1999, CEW paid $70,000 to the Company.
On February 8, 2000, the Company and CEW amended the joint venture
agreement whereby CEW paid the Company a further $8,000 and the Company
and CEW agreed to suspend the joint venture agreement and any further
obligations of CEW, pending a review of developments in the San Joaquin
and Sacramento Basins.
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CEW is a public company trading on the Canadian Venture Exchange. CEW
is not affiliated with the Company.
INVESTMENT IN HILTON LLC
A portion of the proceeds from San Joaquin's private offering was used to
acquire four membership interests in Hilton Petroleum Greater San Joaquin Basin
Joint Venture LLC ("Hilton LLC"), a Colorado limited liability company, for an
initial investment of $390,000. As of December 31, 1999, the Company owned 20%
of the Hilton LLC's membership interests. The Company has subsequently elected
not to fund any further capital contributions for Hilton LLC and expects to have
its interest in Hilton LLC converted to shares of Hilton Petroleum Ltd., the
manager of Hilton LLC, pursuant to the terms of Hilton LLC's operating
agreement. See "Item 2. Description of Property - Other Assets." The remainder
of the proceeds from the private placements will be used to generate new
prospects for San Joaquin and to fund working capital.
Mr. Nick DeMare, an officer and director of the Company and San Joaquin, is also
a director of Hilton Petroleum Ltd., the manager of Hilton LLC. The terms upon
which San Joaquin acquired its membership interests in Hilton LLC were the same
as those offered to non-affiliated purchasers.
ACQUISITION, EXPLORATION AND DEVELOPMENT EXPENSES
During the fiscal year ended December 31, 1999, the Company incurred $122,590 in
costs in identifying potential acquisitions of petroleum and natural gas leases
and paid $390,000 for its initial capital contribution for its four membership
interests in Hilton LLC. The Company had also entered into an agreement whereby
it paid $70,000, to a party at arm's-length, for technical information on
certain petroleum and natural gas properties located in the San Joaquin and
Sacramento Basins. This payment was offset by a $70,000 payment received by the
Company by its granting of a right of first refusal, to a party at arm's length,
on properties to be acquired in the San Joaquin and Sacramento Basins. As at
December 31, 1999, the Company had not acquired any direct interests in
petroleum and natural gas leases.
As of March 31, 2000, the Company had spent approximately $201,875 in leasehold
acquisition costs and costs relating to the identification of potential
properties and approximately $398,000 for its capital and funding contributions
to Hilton LLC. See "Item 2. Description of Properties".
PRINCIPAL PRODUCTS OR SERVICES AND MARKETS
The Company is participating in exploration activities to locate crude petroleum
and natural gas. The principal markets for these commodities are refining
companies, natural gas transmission pipeline companies, utilities and private
industry end-users, which purchase the crude oil, and natural gas pipeline
companies, which purchase the gas.
COMPETITIVE BUSINESS CONDITIONS, COMPETITIVE POSITION IN THE INDUSTRY AND
METHODS OF COMPETITION
The Company's petroleum and natural gas exploration activities in the state of
California will be undertaken in a highly competitive and speculative business
atmosphere. In seeking any other suitable petroleum and natural gas properties
for acquisition, the Company will be competing with a number of other companies
located in the state of California and elsewhere, including large oil and gas
companies and other independent operators with greater financial resources.
Management does not believe that the Company's initial competitive position in
the petroleum and natural gas industry will be significant.
Management does not foresee any difficulties in procuring drilling rigs or the
manpower to run them in the area of its operations; however, several factors,
including increased competition in the area, may limit the availability of
drilling rigs, rig operators and related personnel and/or equipment; such an
event may have a significant adverse impact on the profitability of the
Company's operations.
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The prices of the Company's products are controlled by the world oil market and
the United States natural gas market. However, competition in the petroleum and
natural gas exploration industry exists in the form of competition to acquire
the most promising acreage blocks and obtaining the most favorable prices for
transporting the product. The Company, and ventures in which it participates, is
relatively small compared to other petroleum and natural gas exploration
companies and may have difficulty acquiring additional acreage and/or projects
and arranging for the transportation of product, in the event the Company, or
ventures in which it participates, is successful in its exploration efforts.
GOVERNMENTAL REGULATIONS AND ENVIRONMENTAL LAWS
At this time, the Company does not offer or sell any products or services;
however it, or any venture in which it participates, is required to obtain
permits for drilling oil or gas wells.
Exploration and production activities relating to oil and gas leases are subject
to numerous environmental laws, rules and regulations. The Federal Clean Water
Act requires the Company to construct a fresh water containment barrier between
the surface of each drilling site and the underlying water table.
Various federal, state and local laws and regulations covering the discharge of
materials into the environment, or otherwise relating to the protection of the
environment, may affect the Company's operations and costs through their effect
on oil and gas exploration, development and production operations. Environmental
laws and regulations have changed substantially and rapidly over the last 20
years, and the Company anticipates that there will be continuing changes. Laws
and regulations protecting the environment have generally become more stringent
in recent years, and may in certain circumstances impose "strict liability,"
rendering a corporation liable for environmental damages without regard to
negligence or fault on the part of such corporation. Such laws and regulations
may expose the Company to liability for the conduct of operations or conditions
caused by others, or for acts of the Company which were in compliance with all
applicable laws at the time such acts were performed. Increasingly strict
environmental restrictions and limitations have resulted in increased operating
costs for the Company and other businesses throughout the United States, and it
is possible that the costs of compliance with environmental laws and regulations
will continue to increase. The modification of existing laws or regulations or
the adoption of new laws or regulations relating to environmental matters could
have a material adverse effect on the Company's operations. In addition, the
Company's existing and proposed operations could result in liability for fires,
blowouts, oil spills, discharge of hazardous materials into surface and
subsurface aquifers and other environmental damage, any one of which could
result in personal injury, loss of life, property damage or destruction or
suspension of operations.
The Comprehensive Environmental Response, Compensation and Liability Act
("CERCLA"), also known as the "Superfund" law, requires payments for cleanup of
certain abandoned waste disposal sites, even though such waste disposal
activities were undertaken in compliance with regulations applicable at the time
of disposal. Under the Superfund legislation, one party may, under certain
circumstances, be required to bear more than its proportional share of cleanup
costs at a site where it has responsibility pursuant to the legislation, if
payments cannot be obtained from other responsible parties. Other legislation
mandates cleanup of certain wastes at facilities that are currently being
operated. States also have regulatory programs that can mandate waste cleanup.
CERCLA authorizes the Environmental Protection Agency ("EPA") and, in some
cases, third parties to take actions in response to threats to the public health
or the environment and to seek to recover from the responsible classes of
persons the costs they incur. The scope of financial liability under these laws
involves inherent uncertainties.
It is not anticipated that the Company will be required in the near future to
expend amounts that are material in relation to its total capital expenditures
program by reason of environmental laws and regulations, but inasmuch as such
laws and regulations are frequently changed, the Company is unable to predict
the ultimate cost of compliance.
The Company believes it is presently in compliance with all applicable federal,
state or local environmental laws, rules or regulations; however, continued
compliance (or failure to comply) and future legislation may have an adverse
impact on the Company's present and contemplated business operations.
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The foregoing is only a brief summary of some of the existing environmental
laws, rules and regulations to which the Company's business operations are
subject, and there are many others, the effects of which could have an adverse
impact on the Company. Future legislation in this area will no doubt be enacted
and revisions will be made in current laws. No assurance can be given as to what
effect these present and future laws, rules and regulations will have on the
Company's current and future operations.
NUMBER OF TOTAL EMPLOYEES AND NUMBER OF FULL-TIME EMPLOYEES
The Company presently has no full-time employees. The officers and directors of
the Company have agreed to allocate a portion of their time to the activities of
the Company. The Company does not expect any significant changes in the number
of employees. If it commences full-scale oil and gas operations, the Company
plans to add additional full-time employees, exclusive of executive officers.
The Company's officers and directors are involved with other companies who have
a business purpose similar to that of the Company. As a result, potential
conflicts of interest may arise. If such a conflict does arise and an officer or
director of the Company is presented with business opportunities under
circumstances where there may be a doubt as to whether the opportunity should
belong to the Company or another exploration company they are affiliated with,
they will disclose the opportunity to all such companies.
RISK FACTORS
Due to the nature of the Company's business and the present stage of exploration
on its oil and gas prospects, the following risk factors apply to the Company's
operations:
ACCUMULATED LOSSES
During the year ended December 31, 1999, the Company incurred a loss of
$147,604. To date the Company's operations have not generated sufficient
operating cash flows to provide working capital for the Company's ongoing
overhead, the funding of its petroleum property acquisitions and the exploration
and development of these properties. There can be no assurances that the Company
will be able to successfully develop any properties and achieve profitability
from its operations.
ABSENCE OF A PUBLIC MARKET
As of April 10, 2000, there is no market for the Company's common stock. The
Company is seeking a listing on the Over-the-Counter Bulletin Board system
operated by the National Association of Securities Dealers, but there are no
assurances that the Company will obtain such a listing or that a market will
develop. Consequently, a holder of the Company's common stock may not be able to
liquidate his or her investment in the event of an emergency and shares of the
Company's common stock may not be accepted as collateral for loans.
EXPLORATION AND PRODUCTION RISKS
The business of exploring for and producing oil and gas involves a substantial
risk of investment loss which even a combination of experience, knowledge and
careful evaluation may not be able to overcome. Drilling oil and gas wells
involves the risk that the wells will be unproductive or that, although
productive, the wells do not produce oil and/or gas in economic quantities.
Other hazards, such as unusual or unexpected geological formations, pressures,
fires, blowouts, loss of circulation of drilling fluids or other conditions may
substantially delay or prevent completion of any well. Adverse weather
conditions can also hinder drilling operations. A productive well may become
uneconomic in the event water or other deleterious substances are encountered,
which impair or prevent the production of oil and/or gas from the well. In
addition, production from any well may be unmarketable if it is impregnated with
water or other deleterious substances. As with any petroleum property, there can
be no assurance that oil and gas will be produced from the properties in which
the Company, or any venture in which it participates, may obtain an interest. In
addition,
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the marketability of oil and gas which may be acquired or discovered will be
affected by numerous factors beyond the control of the Company. These factors
include the proximity and capacity of oil and gas pipelines and processing
equipment, market fluctuations of prices, taxes, royalties, land tenure,
allowable production and environmental protection. The extent of these factors
cannot be accurately predicted, but any one or a combination of these factors
may result in the Company not receiving an adequate return on invested capital.
There is no assurance that crude oil or natural gas in commercial quantities
will be discovered by the Company, or any venture in which the Company
participates.
FINANCING RISKS
The Company has relied on the sale of its equity capital to fund the initial
acquisition of its interest in Hilton LLC, the acquisition of its petroleum
properties and for working capital. It has no assurance that additional funding
will be available to it to fund the acquisition, exploration or development of
any additional properties. There can be no assurance that the Company will be
able to obtain adequate financing in the future or that the terms of such
financing will be favorable. Failure to generate operating cash flow or obtain
additional financing could result in substantial dilution of the Company's
petroleum interests, or delay or indefinite postponement of further exploration
and development of its projects with the possible loss of such properties.
UNINSURABLE RISKS
Although management believes the operator of any properties in which the Company
and its subsidiary may acquire interests, will acquire and maintain appropriate
insurance coverage in accordance with standard industry practice, the Company
and its subsidiary may suffer losses from uninsurable hazards or from hazards
which the operator or the Company has chosen not to insure against because of
high premium costs or other reasons. The Company, and its subsidiary intend to
engage in participating in the drilling of both exploratory and development
wells. Exploratory wells have much greater dry hole risk than do wells which are
drilled offsetting established production. The Company and its subsidiary may
become subject to liability for pollution, fire, explosion, blow-outs, cratering
and oil spills against which it cannot insure or against which it may elect not
to insure. Such events could result in substantial damage to oil and gas wells,
producing facilities and other property and personal injury. The payment of any
such liabilities may have a material, adverse effect on the Company's financial
position.
NO ASSURANCE OF TITLES
It is the practice of the Company in acquiring petroleum and natural gas leases
or undivided interests in petroleum and natural gas leases not to undergo the
expense of retaining lawyers to examine the title to the mineral interest to be
placed under lease or already placed under lease. Rather, the Company will rely
upon the judgment of petroleum and natural gas lease brokers or landsmen who
perform the field work in examining records in the appropriate governmental
office before attempting to place under lease a specific mineral interest. This
practice is widely followed in the petroleum and natural gas industry. Prior to
the drilling of a petroleum and natural gas well, however, it is the normal
practice in the petroleum and natural gas industry for the person or company
acting as the operator of the well to obtain a preliminary title review of the
spacing unit within which the proposed petroleum and natural gas well is to be
drilled to ensure there are no obvious deficiencies in title to the well;
however, neither the Company or companies in which it invests, nor the person or
company acting as operator of the well will obtain counsel to examine title to
such spacing unit until the well is about to go into production. It frequently
happens, as a result of such examinations, that certain curative work must be
done to correct deficiencies in the marketability of the title, and such
curative work entails expense. The work might include obtaining affidavits of
heirship or causing an estate to be administered. IT DOES HAPPEN, FROM TIME TO
TIME, THAT THE EXAMINATION MADE BY THE TITLE LAWYERS REVEALS THAT THE PETROLEUM
AND NATURAL GAS LEASE OR LEASES ARE WORTHLESS, HAVING BEEN PURCHASED IN ERROR
FROM A PERSON WHO IS NOT THE OWNER OF THE MINERAL INTEREST DESIRED. IN SUCH
INSTANCES, THE AMOUNT PAID FOR SUCH PETROLEUM AND NATURAL GAS LEASE OR LEASES IS
GENERALLY LOST. To date the Company has not lost title to any of its petroleum
and natural gas leases, nor is the Company aware that any of its currently held
properties is subject to being lost as a result of faulty titles.
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ENVIRONMENTAL REGULATIONS
In general, the exploration and proposed production activities of the Company
are subject to certain federal, state and local laws and regulations relating to
environmental quality and pollution control. Such laws and regulations increase
the costs of these activities and may prevent or delay the commencement or
continuance of a given operation. Compliance with these laws and regulations has
not had a material effect on the Company's operations or financial condition to
date. Specifically, the Company is subject to legislation regarding emissions
into the environment, water discharges, and storage and disposition of hazardous
wastes. In addition, legislation has been enacted which requires well and
facility sites to be abandoned and reclaimed to the satisfaction of state
authorities. However, such laws and regulations are frequently changed and the
Company is unable to predict the ultimate cost of compliance. Generally,
environmental requirements do not appear to affect the Company any differently
or to any greater or lesser extent than other companies in the industry.
The Company believes that its operations comply, in all material respects, with
all applicable environmental regulations.
GOVERNMENTAL REGULATIONS
Petroleum and natural gas exploration, development and production are subject to
various types of regulation by local, state and federal agencies. Legislation
affecting the petroleum and natural gas industry is under constant review for
amendment and expansion. Also, numerous departments and agencies, both federal
and state, are authorized by statute to issue and have issued rules and
regulations binding on the petroleum and natural gas industry and its individual
members, some of which carry substantial penalties for failure to comply. The
regulatory burden on the petroleum and natural gas industry increases the
Company's cost of doing business and, consequently, affects its profitability.
There is no assurance that laws and regulations enacted in the future will not
adversely affect the petroleum and natural gas industry. However, since these
regulations generally apply to all petroleum and natural gas producers,
management of the Company believes that these regulations should not put the
Company at a material disadvantage with respect to other petroleum and natural
gas producers.
Most states in which the Company may own and/or operate properties have
statutes, rules and regulations governing conservation matters including the
unitization or pooling of petroleum and natural gas properties, establishment of
maximum rates of production from petroleum and natural gas wells and the spacing
of such wells.
Petroleum and natural gas mineral rights may be held by individuals or
corporations and, in certain circumstances, by governments having jurisdiction
over the area in which such mineral rights are located. As a general rule,
parties holding such mineral rights grant licenses or leases to third parties to
facilitate the exploration and development of these mineral rights. The terms of
the leases and licenses are generally established to require timely development.
Notwithstanding the ownership of mineral rights, the government of the
jurisdiction in which mineral rights are located generally retains authority
over the manner of development of those rights.
In addition to royalties paid to freehold owners, each state generally imposes a
production or severance tax with respect to production and sale of crude oil,
natural gas and natural gas liquids within their respective jurisdictions. For
the most part, state production taxes are applied as a percentage of production
or sales. Payment of these taxes are in the normal course of operations in the
petroleum and natural gas industry and should not have a material impact on the
Company's financial condition.
NATURAL GAS AND OIL PRICES
In recent decades, there have been periods of both worldwide overproduction and
underproduction of hydrocarbons and periods of both increased and relaxed energy
conservation efforts. Such conditions have resulted in periods of excess supply
of, and reduced demand for, crude oil on a worldwide basis and for natural gas
on a domestic basis. These periods have been followed by periods of short supply
of, and increased demand for, crude oil and, to a lesser extent, natural gas.
The excess or short supply of crude oil has placed pressures on prices and has
resulted in dramatic price
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fluctuations even during relatively short periods of seasonal market demand. The
price of natural gas has exhibited market demand fluctuations; however, because
most of the natural gas consumed within the United States is produced within the
United States, the price of natural gas has not exhibited the dramatic price
fluctuations that crude oil prices have experienced under conditions of high
import levels.
COMPETITION
The petroleum and natural gas industry is intensely competitive and the Company
competes with other companies which have greater resources. Many of such
companies not only explore for and produce crude petroleum and natural gas but
also carry on refining operations and market petroleum and other products on a
worldwide basis. Such companies may be able to pay more for productive petroleum
and natural gas properties and exploratory prospects to define, evaluate, bid
for and purchase a greater number of properties and prospects than the Company's
financial or human resources permit. The Company's ability to acquire additional
properties and to discover reserves in the future will be dependent upon its
ability to evaluate and select suitable properties and to consummate
transactions in a highly competitive environment. There is also competition
between the petroleum and natural gas industry and other industries with respect
to the supply of energy and fuel to industrial, commercial and individual
customers. There is no assurance that the Company will be able to effectively
compete against such companies.
RISKS ASSOCIATED WITH MANAGEMENT OF GROWTH
Because of its small size, the Company desires to grow rapidly in order to
achieve certain economies of scale. Although there is no assurance that this
rapid growth will occur, to the extent that it does occur, it will place a
significant strain on the Company's financial, technical, operational and
administrative resources. As the Company expands its activities and increases
the number of projects it is evaluating or in which it is participating, there
will be additional demands on the Company's financial, technical and
administrative resources. The failure to continue to upgrade the Company's
technical, administrative, operating and financial control systems or the
occurrence of unexpected expansion difficulties, including the recruitment and
retention of geoscientists and engineers, could have a material adverse effect
on the Company's business, financial condition and results of operations.
DEPENDENCE UPON KEY PERSONNEL
The success of the Company's operations and activities is dependent to a
significant extent on the efforts and abilities of its management. The loss of
services of any of its management could have a material adverse effect on the
Company. The Company has not obtained "key man" insurance for any of its
management.
Mr. Bowes is the President of the Company. The loss of the services of Mr. Bowes
may adversely affect the business and prospects of the Company.
ADEQUATE LABOR
In the event the Company needs to employ additional personnel, it will need to
recruit qualified personnel to staff its operations. The Company believes that
such personnel currently are available at reasonable salaries and wages in the
geographic areas in which the Company operates. There can be no assurance,
however, that such personnel will be available in the future. In addition, it
cannot be predicted whether the labor staffing at any of the Company's projects
will be unionized, which may result in potentially higher operating costs.
DIVIDEND RISKS
The Company has not paid any dividends on its common shares and does not intend
to pay dividends on its common shares in the immediate future. Any decision to
pay dividends on its common shares in the future will be made by the board of
directors on the Company on the basis of earnings, financial requirements and
other such conditions that may exist at that time.
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CONFLICTS OF INTEREST
Certain of the directors also serve as directors of other companies or have
significant shareholdings in other companies and, to the extent that such other
companies may participate in ventures in which the Company may participate, the
directors of the Company may have a conflict of interest in negotiating and
concluding terms relating to the extent of such participation. In the event that
such a conflict of interest arises at a meeting of the board of directors, a
director who has such a conflict will disclose the nature and extent of his
interest to the board of directors and abstain from voting for or against the
approval of such a participation or such terms.
In accordance with the laws of the State of Nevada, the directors of the Company
are required to act honestly and in good faith with a view to the best interests
of the Company. In determining whether or not the Company will participate in a
particular program and the interest therein to be acquired by it, the directors
will primarily consider the degree of risk to which the Company may be exposed
and its financial position at that time.
See also "Item 13. Interest of Management in Certain Transactions."
PENNY STOCK REGULATION
The SEC has adopted rules that regulate broker-dealer practices in connection
with transactions in "penny stock". Generally, penny stocks are equity
securities with a price of less than $5.00 (other than securities registered on
certain national securities exchanges or quoted on the NASDAQ system). If the
Company's shares are traded for less than $5 per share the shares will be
subject to the SEC's penny stock rules unless (1) the Company's net tangible
assets exceed $5,000,000 during the Company's first three years of continuous
operations or $2,000,000 after the Company's first three years of continuous
operations; or (2) the Company has had average revenue of at least $6,000,000
for the last three years. The penny stock rules require a broker-dealer, prior
to a transaction in a penny stock not otherwise exempt from the rules, to
deliver a standardized risk disclosure document prescribed by the SEC that
provides information about penny stocks and the nature and level of risks in the
penny stock market. The broker-dealer also must provide the customer with
current bid and offer quotations for the penny stock, the compensation of the
broker-dealer and its salesperson in the transaction and monthly account
statements showing the market value of each penny stock held in the customer's
account. In addition, the penny stock rules require that prior to a transaction
in a penny stock not otherwise exempt from those rules, the broker-dealer must
make a special written determination that the penny stock is a suitable
investment for the purchaser and receive the purchaser's written agreement to
the transaction. These requirements may have the effect of reducing the level of
trading activity in the secondary market for a stock that becomes subject to the
penny stock rules. Should a trading market for the Company's Common Stock
commence and should the Company's Common Stock become subject to the penny stock
rules, the holders of the Common Stock may find it difficult to sell the Common
Stock of the Company.
ENFORCEMENT OF LEGAL PROCESS
All of the directors and executive officers of the Company reside outside the
United States. A substantial portion of the assets of such persons and of the
Company are located outside the United States. As a result it may be difficult
or impossible to effect service of process within the United States upon such
persons, to bring suit in the United States or to enforce, in the U.S. courts,
any judgment obtained there against such persons predicated upon any civil
liability provisions of the U.S. federal securities laws. Canadian courts may
not entertain original actions against the Company's directors or officers
predicated solely upon U.S. federal securities laws. Furthermore, judgments
predicated upon any civil liability provisions of the U.S. federal securities
laws may not be directly enforceable in Canada, and since most of the Company's
assets are located outside the United States, any judgment obtained in the
United States against the Company or such persons may not be collectible within
the United States.
10
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY.
PETROLEUM AND NATURAL GAS PROPERTIES
The Company's principal business is the acquisition of leasehold interests in
petroleum and natural gas rights, either directly or indirectly, and the
exploration for and development of petroleum and natural gas. All of the
Company's properties are located in the continental United States.
As of March 31, 2000, the Company had acquired the following petroleum and
natural gas leases under the Consulting and Overriding Royalty Agreement with
Davis & Namson:
WILLOW SPRINGS PROSPECT
Location: West side of the San Joaquin Basin in Townships 29 and 30 South, Range
21 East, Kern County, California.
Leases: To date the Company acquired one petroleum and natural gas lease
containing 65 acres from the United States Department of the Interior, Bureau of
Land Management. Currently the Company, through its land broker, is in the
process of contacting the remaining owners of the petroleum and natural gas
rights to obtain leases covering a significant portion of the prospect. Many of
the owners of the mineral rights have agreed to enter into petroleum and natural
gas leases with respect to this prospect. Currently the Company is in the
process of completing legal documentation to register these leases. The leases
will have lessor royalty of between 12.5% to 20% with a term ranging between two
to ten years.
Ownership: The Company expects to have a 100% working interest in the leases it
has acquires on the Willow Springs Prospect and net revenue interests of 77% to
84.5% in those leases. After acquiring a significant lease position the Company
may sell all or a portion of this prospect to fund its further activities.
Access and Topography: The Willow Springs Prospect is situated in low hills with
some small ravines. The proposed surface location of an exploration well is
accessible by paved and well graded dirt roads.
Geological Description: The Willow Springs Prospect is a four way closed
anticline defined by well data including stratigraphic correlation, dip meter
and core dip. The primary reservoir targets are the Phacoides sandstone, Oceanic
sandstone, and Point of Rocks sandstone. The Phacoides and Point of Rocks
sandstones are trapped by four way closure whereas the Oceanic sandstone is
trapped by a combination structure and stratigraphic trap. The seal with respect
to the prospect is over 6,000 feet of shale dominated by Monterey and Temblor
formation. The prospect size is approximately 550 acres for the Phacoides
sandstone, 320 acres for the Oceanic sandstone, and 600 acres for the Point of
Rocks sandstone. An exploration well to test this prospect would be roughly
8,000 feet (MD). It is expected that the gravity of the oil, should it be found,
will be in the range of 35(degree) to 50(degree) API (a measurement of the
density of liquid petroluem). Light crude oil generally has an API of between
35(degree) and 45(degree); therefore, management believes the API of the oil is
economical to produce. This range was obtained from offsetting fields.
CROCKER CANYON PROSPECT
Location: The Crocker Canyon Prospect is located on the west side of the San
Joaquin basin in Townships 30 and 31 South, Range 21 East in Kern and San Luis
Obispo Counties, California.
Leases: The Company acquired on March 16, 2000 two United States Department of
the Interior, Bureau of Land Management petroleum and natural gas leases
totaling 2,732 net acres which cover the prospect. These leases are for a ten
year term with a 12.5% lessor royalty.
Ownership: The Company has acquired a 100% working interest in the Canyon Creek
Prospect, with an 84.5% net revenue interest in the prospect. It may sell all or
a portion of this prospect to fund further activities.
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Access and Topography: The surface area is mountainous with steep ravines. The
proposed exploration well drill site is accessible by paved and well graded dirt
roads.
Geological Description: The Canyon Creek prospect is a four way closed anticline
defined by well data including stratigraphic correlation; dip meter and core
dip. The primary reservoir targets are the Carneros sandstone, Phacoides
sandstone, Oceanic sandstone and the Point of Rocks. For the Carneros sandstone
the closure area prospect size is between 2,150 to 3,400 acres with the
remaining three reservoirs having a closure area (prospect size) of between
1,300 to 2,300 acres. The seal for this prospect is over 8,000 feet of shale
dominated Monterey and Temblor formations. An exploration well to test this
prospect would be drilled to approximately 10,000 feet (MD). It is expected that
the gravity of the oil would range between 35(degree) to 50(degree); therefore,
management believes the API of the oil is economical to produce. API based upon
the gravity of oil in offsetting fields.
BITTERWATER CREEK & MIDWAY PEAK PROSPECTS
Exploration prospects were generated by Davis & Namson for the Bitterwater Creek
and Midway Peak prospects. A large percentage of these prospects are owned (but
not leased) by the United States Department of the Interior, Bureau of Land
Management. The Company requested that leases covering these prospects be
tendered for sale at the March 16, 2000 competitive lease sale. After due
consideration of the Company's request the Bureau of Land Management declined to
tender these leases for sale given that a large portion of the requested leases
were located within the Carrizo Plain Natural Area which is currently subject to
review for creation of a restricted surface access area. Given that a large
proportion of these two prospects are covered by old natural gas rights owned by
the Bureau of Land Management the Company has elected not to further pursue
these prospects until the Bureau of Land Management agrees to tender the rights
for lease sale.
OTHER ASSETS
As of December 31, 1999, Hilton LLC owned a 2.25% working interest in various
petroleum and natural gas prospects (the "San Joaquin Joint Venture") in the San
Joaquin Basin and was required to pay 4% of the costs to drill the initial wells
on each of the initial three prospects in the San Joaquin Joint Venture and 3%
of the costs on any subsequent wells. As a member of Hilton LLC, San Joaquin was
required to fund its pro-rata share of all the capital requirements of Hilton
LLC. In the event that San Joaquin failed to pay its additional cash call
capital contributions within a specified time period, San Joaquin, as a
defaulting member, would lose its interest in Hilton LLC to Hilton Petroleum
Ltd. If the default were to occur within 24 months of the initial capital
contribution, San Joaquin would, no sooner than 12 months if the default
occurred before 12 months, receive common shares of Hilton Petroleum Ltd. for
its investment at the then prevailing prices, for its investment cost. If such
failure were to occur after 24 months then Hilton Petroleum Ltd. would fund the
capital contribution of San Joaquin and retain San Joaquin's share of cash flow
until 300% of the defaulted cash call is repaid to Hilton Petroleum Ltd. On
April 4, 2000, San Joaquin advised Hilton LLC and Hilton Petroleum Ltd. that it
would no longer fund any further capital contributions and has elected to
receive common shares of Hilton Petroleum Ltd. The number of shares will be
determined in accordance with Hilton LLC's operating agreement. According to the
terms of the operating agreement, the Company cannot obtain the Hilton Petroleum
Ltd. common shares prior to September 30, 2000, and the number of shares will be
based upon the average of the closing price of the shares of Hilton Petroleum
Ltd. on the Canadian Venture Exchange for the 30-days immediately prior to
September 30, 2000. As of March 31, 2000, the Company had paid approximately
$398,000 for its share of capital and funding contributions to Hilton LLC.
12
<PAGE>
UNDEVELOPED ACREAGE
As of December 31, 1999 and March 31, 2000, the Company, directly or indirectly,
held undeveloped acreage as follows:
<TABLE>
<CAPTION>
December 31, 1999 March 31, 2000
--------------------------------- --------------------------------
<S> <C> <C>
Undeveloped Acres:
Gross -0-(1)<F1> 2,797
Net -0-(1)<F1> 2,797
<FN>
<F1>
(1) Not including any interest owned by the Company through Hilton LLC in the San Joaquin Joint Venture.
</FN>
</TABLE>
As of March 31, the Company had acquired three leases from the federal
government. Each lease is for a period of 10 years. The Company is required to
pay $1/acre per year to the federal government under each lease. The lease
payments relating to the Willow Springs Prospect are $65 per year and the lease
payments relating to the Crocker Canyon Prospect are $2,732 per year. These
leases are also subject to a royalty of 12.5% to the leaseholders and
approximately 3% to Davis & Namson.
The Company is continuing with the negotiation, acquisition and registration of
additional petroleum and natural gas leases.
PRINCIPAL OFFICES
The Company operates from its offices at 53 Stratford Place, S.W., Calgary,
Alberta T3H 1H7 Canada. Space is provided to the Company on a rent free basis by
Mr. Bowes, an officer, director and principal shareholder of the Company.
Management believes that this space will meet the Company's needs for the
foreseeable future.
ITEM 3. LEGAL PROCEEDINGS.
Not Applicable.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.
By written consent dated December 15, 1999, shareholders of the Company holding
608,000 of the 1,000,000 outstanding shares (60.8%) of the Company's common
stock approved and adopted the amendments contained in the Amended and Restated
Articles of Incorporation and the Company's 1999 Stock Option Plan.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.
As of April 10, 2000, no public market exists for the Company's shares.
Management intends to seek market makers to quote the Company's shares on the
Over-the-Counter Bulletin Board (the "OTC Bulletin Board"). Management does not
know if, or when, a market will exist for the Company's shares.
13
<PAGE>
As of April 10, 2000, there were 104 record holders of the Company's Common
Stock.
During the last two fiscal years, no cash dividends have been declared on the
Company's common stock and management does not anticipate that dividends will be
paid in the foreseeable future.
RECENT SALES OF UNREGISTERED SECURITIES
Pursuant to the terms of the Agreement and Plan of Reorganization, effective
December 31, 1999, the Company issued 8,069,000 shares of its common stock in
exchange for all of the issued and outstanding common stock of San Joaquin. The
shares were issued pursuant to Rule 506 of Regulation D, promulgated by the
Securities and Exchange Commission. The shares were issued to not more than 35
non-accredited investors and bear restrictive legends.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION.
MANAGEMENT'S DISCUSSION AND ANALYSIS OF OPERATING RESULTS
The following discussion of the results of operations of the Company for the the
period from inception (September 14, 1999) to December 31, 1999 should be read
in conjunction with the consolidated financial statements of the Company and
related notes included therein.
The Independent Accountant's Report and Note 2 of the Notes to Financial
Statements accompanying this report state that substantial doubt has been raised
about the Company's ability to continue as a going concern. The ability of the
Company to continue operations as a going concern is dependent upon its success
in obtaining capital through sale of common stock or other securities and
ultimately achieving profitable operations.
BUSINESS COMBINATION
LEK International, Inc. ("LEK") was incorporated for the purpose of evaluating,
structuring and completion of a merger with, or acquiring a privately owned
corporation. On December 31, 1999, LEK completed the Agreement and Plan of
Reorganization whereby it issued 8,069,000 shares of its common stock to acquire
all of the shares of San Joaquin. San Joaquin is an independent energy company
engaged in the exploration, development and acquisition of crude oil and natural
gas reserves in the western United States and is considered a development stage
company as defined by Statement of Financial Accounting Standards (SFAS) No. 7.
San Joaquin is an exploration stage oil and gas company and as of December 31,
1999, has not earned any production revenue, nor found proved resources on any
of its properties. San Joaquin's principal activities have been raising capital
through the sale of its securities, identifying and evaluating potential oil and
gas property acquisitions, and acquiring an interest in Hilton LLC.
As a result of this transaction, San Joaquin became a wholly-owned subsidiary of
LEK, and effective January 17, 2000, LEK changed its name to San Joaquin
Resources Inc. Since this transaction resulted in the former shareholders of San
Joaquin acquiring control of LEK, for financial reporting purposes the business
combination was accounted for as an additional capitalization of LEK (a reverse
acquisition with San Joaquin as the accounting acquirer). The operations of San
Joaquin will be the only continuing operations of the Company. In accounting for
this transaction:
i) San Joaquin was deemed to be the purchaser and parent company for
financial reporting purposes. Accordingly, its net assets were included
in the consolidated balance sheet at their historical book value;
ii) control of the net assets and business of LEK was acquired effective
December 31, 1999, for no consideration; and
iii) the consolidated financial statements of operations, stockholders'
equity and cash flow include San Joaquin's results of operations and
changes in cash flow for the period from inception, September 14, 1999,
to December 31, 1999.
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<PAGE>
The Company's fiscal year end is December 31.
YEAR 2000 READINESS DISCLOSURE
The Year 2000 issue refers to the inability of computer and other information
technology systems to properly process date and time information due to the
programming of a two digit year rather than a four digit year. The risk is that
a system will recognize the digits "00" as 1900 rather than the year 2000, or
that the system may not recognize "00" as a year at all. As a result, computers
and embedded processing systems may be at risk of malfunctioning, particularly
during the transition from 1999 to 2000.
During 1999, the Company assessed the impact of Year 2000 issues on its business
operations. The Year 2000 issue may affect the Company in four principal areas
including: computer systems such as personal computers, operating systems,
business software, and application software including accounting systems,
technical support software and administration software; field assets (primarily
embedded systems) such as programmable logic controllers and equipment control
panels; other systems such as telephones, photocopiers and facsimile machines;
and third-party suppliers such as joint venture partners, customers who purchase
natural gas and crude oil, suppliers of field parts and services and service
providers such as banks and insurance companies. The Company has implemented and
tested its computer software and hardware, field assets and other systems for
Year 2000 compliance.
The Company's Year 2000 program is designed to reduce the Company's risk of
material losses due to the Year 2000 issue. However, the Company cannot be
certain that all aspects of Year 2000 compliance will be resolved, especially
with respect to third parties upon which the Company is dependent, nor can the
Company be certain that it will be able to develop contingency plans which will
adequately address all anticipated or unexpected failures. Therefore, the
Company cannot provide assurance that the Year 2000 issue will not materially
and adversely affect the Company's operations and financial results.
As of March 31, 2000, the Company has not experienced any Year 2000 related
problems.
OVERVIEW
The Company, through its subsidiary, San Joaquin, is engaged in the business of
acquiring and exploring for petroleum and natural gas prospects.
The Company follows the full cost method of accounting for oil and gas
operations. Under this method all costs related to the exploration for and
development of oil and gas reserves are capitalized on a country-by-country
basis. Costs include lease acquisition costs, geological and geophysical
expenses, overhead directly related to exploration and development activities
and costs of drilling both productive and non-productive wells. Proceeds from
the sale of properties are applied against capitalized costs, without any gain
or loss being recognized, unless such a sale would significantly alter the rate
of depletion and depreciation.
Depletion of exploration and development costs and depreciation of production
equipment is provided using the unit-of- production method based upon estimated
proven oil and gas reserves. The costs of significant unevaluated properties are
excluded from costs subject to depletion. For depletion and depreciation
purposes, relative volumes of oil and gas production and reserves are converted
at the energy equivalent conversion rate of six thousand cubic feet of natural
gas to one barrel of crude oil.
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<PAGE>
In applying the full cost method, the Company performs a ceiling test whereby
the carrying value of oil and gas properties and production equipment, net of
recorded future income taxes and the accumulated provision for site restoration
and abandonment costs, is compared annually to an estimate of future net cash
flow from the production of proven reserves. Costs related to undeveloped oil
and gas properties are excluded from the ceiling test. Discounted net cash flow
is estimated using year end prices, less estimated future general and
administrative expenses, financing costs and income taxes. Should this
comparison indicate an excess carrying value, the excess is charged against
earnings. At December 31, 1999, there were no reserves.
RESULTS OF OPERATIONS
PERIOD FROM SEPTEMBER 14, 1999 (INCEPTION) TO DECEMBER 31, 1999
During the period ended December 31, 1999, the Company recorded a net loss of
$147,604, a loss of $0.03 per common share. During the period the Company earned
interest revenue of $5,784 as a result of interest earned on deposits held from
funds received from the Company's equity financings.
During 1999, the Company incurred total expenses of $155,058. Of this amount,
the majority of the costs (audit and legal costs of $21,148, professional fees
of $95,362, and travel costs of $33,212) related to the Company's acquisition of
San Joaquin. Included in professional fees was $18,000 relating to the salary of
the current President of the Company.
During 1999, the Company paid $390,000 for its four membership units in Hilton
LLC and incurred $192,590 for costs of identifying and reviewing prospective
petroleum and natural gas leases. Although no properties were acquired in 1999,
a number of prospects were acquired in 2000 and additional acquisitions are
ongoing. See "Item 2. Material Properties". In 1999, the Company also received
$70,000 on the granting of an option to CEW to participate in the exploration
and development of properties acquired by the Company. These proceeds were
credited to property costs.
The Company completed equity financings totalling $990,745 during 1999. The
proceeds have been used as described above, with the remainder allocated for
additional property acquisitions and general working capital.
LIQUIDITY AND PLAN OF OPERATIONS
In management's view, given the nature of the Company's operations, which
consist of the acquisition, exploration and evaluation of petroleum and natural
gas properties, the most meaningful information relates to current liquidity and
solvency. The Company's financial success will be dependent upon the extent to
which it can discover sufficient economic reserves and successfully develop the
properties. Such development may take years to complete and the amount of
resulting income, if any, is difficult to determine with any certainty. The
sales value of any petroleum or natural gas discovered by the Company is largely
dependent upon other factors beyond the Company's control.
To date, the Company's capital needs have been met by equity financings. As at
March 31, 2000, the Company had approximately $197,000 in cash which management
has allocated to:
i) acquire approximately 650 acres of petroleum and natural gas leases in
the Willow Springs project; and
ii) continue to fund the retainer fees to Davis & Namson through September
2000. Davis & Namson has additional prospects in the San Joaquin Basin
on which they need to carry out additional geological studies to
determine if the prospects satisfy the Company's criteria to justify
acquiring petroleum and natural gas leases covering said prospects.
In order to reduce its outlay of capital the Company has decided to convert its
interest in the Hilton LLC into common shares of Hilton Petroleum Ltd. By making
this election the Company is no longer subject to cash calls for wells drilled
in the San Joaquin Joint Venture. Pursuant to the terms of the operating
agreement of Hilton LLC, it is anticipated that
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<PAGE>
the Company will receive shares in Hilton Petroleum Ltd. See "Item 2.
Description of Properties - Other Assets." The number of shares to be issued
cannot be determined at this time. The agreement provides that no shares can be
issued until twelve months after the date of the investment in the Hilton LLC,
which in the case of the Company is September 30, 2000. In addition, the price
for the shares of Hilton Petroleum Ltd. will be determined at this future date.
The objective of the agreement is to reimburse the Company for its investment in
Hilton LLC with common shares of Hilton Petroleum Ltd.
It is anticipated these shares in Hilton Petroleum Ltd. will be sold in an
orderly manner on the Canadian Venture Exchange in the fourth quarter year 2000
and the first half of the year 2001. The money received from the sale of these
shares will be used to fund the further activity of the Company. There are no
assurances that the Company will be able to sell the shares of Hilton Petroleum
Ltd. which the Company receives or that the Company will realize an amount upon
any such sales sufficient to reimburse the Company for its expenditures.
It is the intention of the Company to raise additional capital in the following
ways to fund the acquisition of additional prospects and to drill exploration
wells on the Willow Springs and Crocker Canyon prospects:
a. Farmout both Willow Springs and Crocker Canyon prospects
whereby the Company will be carried through the cost to drill,
complete, equip or abandon an exploration well on each
prospect and retain a negotiated working interest in each
prospect. Alternatively, the Company may elect to sell all or
portions of Willow Springs and/or Crocker Canyon prospects.
The funds derived from the sale could be used to pay the
Company's portion of the cost to drill, complete, equip or
abandon an exploration wellon the working interest Company
retains in the prospects.
b. By raising additional capital through a private placement of
common stock of the Company.
During 2000 the operational plans for the Company entail conducting the
following:
a. Complete acquisition of petroleum and natural gas leases in
the Willow Springs Prospect.
b. Continue the services of Davis & Namson in generating
prospects in the San Joaquin Basin which will be accepted or
rejected by the Company. In prospects the Company accepts,
acquire available petroleum and natural gas leases covering
said prospects.
c. Either sell all or a portion of its interest in the Willow
Springs and Crocker Canyon prospects or, alternatively,
farmout its interest in said prospects. This action is
necessary to facilitate the drilling of an exploration well on
each prospect in year 2000 or early year 2001.
The Company's ability to continue as a going concern is dependent upon its
ability to generate sufficient cash flow to meet its obligations on a timely
basis, to obtain additional financing (through the sale of its equity interests
or interests in its properties) or refinancing as may be required, and
ultimately to attain profitability. There are no assurances that the Company
will be able to obtain any such financing or, if the Company is able to obtain
additional financing, that such financing will be on terms favorable to the
Company. The inability to obtain additional financing when needed will have a
material adverse effect on the Company's operating results.
ITEM 7. FINANCIAL STATEMENTS.
Please refer to the pages beginning with F-1.
17
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING
AND FINANCIAL DISCLOSURE.
Effective January 2000, Kish, Leake & Associates, P.C., resigned as the
Company's independent accountants, and the Company engaged Wheeler Wasoff, P.C.,
Denver, Colorado, as the Company's new independent accountants.
There were no disagreements or reportable events between the Company or Kish,
Leake & Associates, P.C.
Prior to the engagement of Wheeler Wasoff, P.C. the Company did not consult
Wheeler Wasoff, P.C. regarding any of the matters identified in Item 304(a)(2)
of Regulation S-B.
The resignation of Kish, Leake & Associates, P.C. and the retention of Wheeler
Wasoff, P.C., was approved by the Company's Board of Directors.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT.
The officers and directors of the Company are as follows:
<TABLE>
<CAPTION>
<S> <C>
J. Timothy Bowes President and director since December 31, 1999.
Nick DeMare Secretary, Treasurer and director since December 31, 1999.
Colin S. McNeil Director since December 31, 1999.
</TABLE>
The directors of the Company are elected to serve until the next annual
shareholders' meeting or until their respective successors are elected and
qualified. Officers of the Company hold office until the meeting of the Board of
Directors immediately following the next annual shareholders' meeting or until
removal by the Board of Directors. Interim replacements for resigning directors
and officers are appointed by the Board of Directors. As of April 10, 2000,
directors of the Company received no compensation solely for their service as
directors. Set forth below are brief descriptions of the recent employment and
business experience of the Company's officers and directors.
J. TIMOTHY BOWES (AGE 44): Mr. Bowes holds a Bachelor of Commerce degree and a
Masters of Business Administration degree, both from the University of British
Columbia. On October 26, 1999, Mr. Bowes became the President, Chief Executive
Officer, and a director of Lucre Ventures Ltd., a public petroleum and natural
gas company listed on the Canadian Venture Exchange. Prior to Mr. Bowes
employment with the Company and Lucre Ventures Ltd., he was primarily engaged as
a self-employed consultant involved in the structuring of mergers and
acquisitions of petroleum and natural gas companies. Prior to starting his own
consulting business, Mr. Bowes was employed by Yorkton Securities Inc. He began
working for Yorkton in October 1994 as a Senior Analyst for petroleum and
natural gas properties. Mr. Bowes held several positions at Yorkton in which he
was responsible for, among other things, reviewing, structuring and approving
all initial public offerings generated from Yorkton's Calgary Office during the
period from June 1995 to April 1997. From April 1997 to March 1999, Mr. Bowes
was the Vice President Corporate Finance in the Natural Resources section of the
Calgary office of Yorkton Securities (subject to regulatory approval).
Prior to Mr. Bowes' employment with Yorkton, he was employed as the Land Manager
of Numac Energy Inc., which was created as a result of the 1993 merger of
Westcoast Petroleum Ltd. and Numac Oil & Gas Ltd. Prior to the merger, Mr. Bowes
was the Land Manager for Westcoast Petroleum Ltd.
NICK DEMARE (AGE 45): Mr. DeMare holds a Bachelor of Commerce degree from the
University of British Columbia and is a member in good standing of the Institute
of Chartered Accountants of British Columbia. He is the President of Chase
Management Ltd., a private British Columbia company which provides a broad range
of administrative,
18
<PAGE>
management and financial services to private and public companies with varied
interests in mineral exploration and development, gold and silver production,
petroleum and natural gas and venture capital. In addition to various Canadian
public companies, Mr. DeMare is a director of the following U.S. reporting
companies: Hilton Petroleum Ltd., Trimark Oil & Gas Ltd., IMA Exploration, Inc.,
Peruvian Gold Limited and Ardis Telecom and Technologies, Inc.
COLIN S. MCNEIL (AGE 52): Mr. McNeil holds a Bachelor of Science (Geology)
degree from the University of Calgary. Since 1996 he has been the President of
C. McNeil and Associates Inc., a private company which provides geological
consulting services to clients for domestic and international exploration and
development projects. Mr. McNeil is a member of the board of directors of Pilot
Energy Corp. and Mount Dakota Energy Corp. From June 1996 to March 1997, Mr.
McNeil was the Vice President, Chief Financial Officer and a director of
Briggand Energy Corp., where he assisted in the formation, financing and listing
of Briggand on the Alberta Stock Exchange. In addition, Mr. McNeil assisted with
a reverse-takeover between Briggand and Canop Worldwide Corp. During 1995, Mr.
McNeil was the President of Hyenergy Corp., a private corporation formed to
evaluate and purchase production assets. From 1993 to 1994, Mr. McNeil was the
Manager of International Exploration for Numac Energy Inc. Mr. McNeil was
responsible for managing and directing an exploration budget of approximately
$10 million. Mr. McNeil also participated in and managed exploration programs in
Libya and Indonesia, evaluated exploration, development and enhanced oil
recovery projects in Africa, South America, the Middle East, and South-East Asia
for Numac. While with Numac, Mr. McNeil managed and participated in a worldwide
"scoping" study to determine the future direction of Numac.
Mr. McNeil is a member of the Association of Professional Engineers, Geologists
and Geophysicists of Alberta, the Society of Exploration Geophysicists, the
Canadian Society of Exploration Geophysicists, the American Association of
Petroleum Geologists, and the Canadian Society of Petroleum Geologists.
CONFLICTS OF INTEREST
Members of the Company's management are associated with other firms involved in
a range of business activities. Consequently, there are potential inherent
conflicts of interest in their acting as officers and directors of the Company.
Insofar as the officers and directors are engaged in other business activities,
management anticipates they will devote as much time to the Company's affairs as
is reasonably needed.
The officers and directors of the Company are now and may in the future become
shareholders, officers or directors of other companies which may be formed for
the purpose of engaging in business activities similar to those conducted by the
Company. Accordingly, additional direct conflicts of interest may arise in the
future with respect to such individuals acting on behalf of the Company or other
entities. Moreover, additional conflicts of interest may arise with respect to
opportunities which come to the attention of such individuals in the performance
of their duties or otherwise. The Company does not currently have a right of
first refusal pertaining to opportunities that come to management's attention
insofar as such opportunities may relate to the Company's business operations.
The officers and directors are, so long as they are officers or directors of the
Company, subject to the restriction that all opportunities contemplated by the
Company's plan of operation which come to their attention, either in the
performance of their duties or in any other manner, will be considered
opportunities of, and be made available to the Company and the companies that
they are affiliated with on an equal basis. A breach of this requirement will be
a breach of the fiduciary duties of the officer or director. If the Company or
the companies in which the officers and directors are affiliated with both
desire to take advantage of an opportunity, then said officers and directors
would abstain from negotiating and voting upon the opportunity. However, all
directors may still individually take advantage of opportunities if the Company
should decline to do so. Except as set forth above, the Company has not adopted
any other conflict of interest policy with respect to such transactions.
The Company does not have any standing audit, nominating, or compensation
committees of the Board of Directors.
19
<PAGE>
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's
officers and directors, and persons who own more than 10% of a registered class
of the Company's equity securities, to file reports of ownership and changes in
ownership with the Securities and Exchange Commission. Officers, directors and
greater than 10% percent shareholders are required by SEC regulation to furnish
the Company with copies of all Section 16(a) forms they file. David Ward and
Robert Hemmerling were each required to file an Initial Statement of Beneficial
Ownership of Securities on Form 3 at the time of the registration of the
Company's securities under Section 12(g) of the Exchange Act. To the best
knowledge and belief of the Company, none of such persons made a timely filing
of Form 3. None of such persons filed a report on Form 5 for the fiscal year
ended March 31, 1999. To the best of the Company's knowledge, with the exception
of Mr. Bowes, no reports have been filed by any persons who owned 10% or more of
the Company's registered equity securities.
ITEM 10. EXECUTIVE COMPENSATION.
The following table sets forth information for David Ward and J. Timothy Bowes.
Mr. Ward and Mr. Bowes each served as the Company's Chief Executive Officer
("CEO") during the fiscal year ended December 31, 1999. No disclosure need be
provided for any executive officer, other than the CEO, whose total annual
salary and bonus for the last completed fiscal year did not exceed $100,000.
Accordingly, no other executive officers of the Company are included in the
table.
<TABLE>
<CAPTION>
LONG TERM COMPENSATION
ANNUAL COMPENSATION AWARDS PAYOUTS
OTHER RESTRICTED SECURITIES
NAME AND ANNUAL STOCK UNDERLYING ALL OTHER
PRINCIPAL COMPEN- AWARD(S) OPTIONS / LTIP COMPEN-
POSITION YEAR SALARY($) BONUS($) SATION ($) ($) SARS ($) PAYOUTS ($) SATION ($)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
David Ward, 1999(3)<F3> -0- -0- -0- -0- -0- -0- -0-
Former 1999(4)<F4> -0- -0- -0- -0- -0- -0- -0-
President and 1998(5)<F5> -0- -0- -0- -0- -0- -0- -0-
Former Chief
Executive
Officer(1)<F1>
J. Timothy 1999 18,000(6)<F6> -0- -0- -0- -0- -0- -0-
Bowes
President and
Chief
Executive
Officer(2)<F2>
<FN>
<F1>
(1) Mr. Ward resigned effective December 31, 1999.
<F2>
(2) Mr. Bowes was appointed effective December 31, 1999.
<F3>
(3) Fiscal year ended December 31, 1999.
<F4>
(4) Fiscal year ended March 31, 1999.
<F5>
(5) Fiscal year ended March 31, 1998.
<F6>
(6) San Joaquin has agreed to compensate Mr. Bowes at the rate of $6,000
per month. The compensation included in the table includes Mr. Bowes
compensation from San Joaquin.
</FN>
</TABLE>
The Company does not have any employment contracts with any of its officers or
directors. Such persons are employed by the Company on an at will basis, and the
terms and conditions of employment are subject to change by the Company. At
December 31, 1998 and 1999, none of the Named Executive Officers held any
options to acquire shares of the
20
<PAGE>
Company's stock.
STOCK OPTION PLANS
By written consent dated December 15, 1999, the shareholders of the Company
adopted the Company's 1999 Stock Option Plan to be effective January 17, 2000.
Pursuant to the 1999 Stock Option Plan (the "Plan") an aggregate of 1,176,900
shares of the Company's common stock (the "Available Shares") has been reserved
for issuance pursuant to the exercise of stock options ("Options") which may be
granted to employees, officers, and directors of the Company and consultants to
the Company. The Plan also provides for annual adjustment in the number of
Available Shares, commencing upon the beginning of the next fiscal year, to a
number equal to 10% of the number of shares outstanding as of the end of the
preceding fiscal year or 1,176,900 shares, whichever is greater.
The Plan is designed to (i) induce qualified persons to become employees,
officers, or directors of the Company; (ii) reward such persons for past
services to the Company; (iii) encourage such persons to remain in the employ of
the Company or associated with the Company; and (iv) provide additional
incentive for such persons to put forth maximum efforts for the success of
business of the Company. No stock options have been granted under this Plan.
The Plan will be administered by the the Board of Directors (the "Board").
Transactions under the Plan are intended to comply with all applicable
conditions of Rule 16b-3 under the Securities Exchange Act of 1934, as amended
(the "1934 Act"). In addition to determining who will be granted Options, the
Board has the authority and discretion to determine when Options will be granted
and the number of Options to be granted. The Board may determine which Options
may be intended to qualify ("Incentive Stock Option") for special treatment
under the Internal Revenue Code of 1986, as amended from time to time (the
"Code") or Non-Qualified Options ("Non-Qualified Stock Options") which are not
intended to so qualify. See "Federal Income Tax Consequences" below. The Board
also may determine the time or times when each Option becomes exercisable, the
duration of the exercise period for Options and the form or forms of the
instruments evidencing Options granted under the Plan. The Board may adopt,
amend, and rescind such rules and regulations as in its opinion may be advisable
for the administration of the Plan. The Board may amend the Plan without
shareholder approval where such approval is not required to satisfy any
statutory or regulatory requirements.
Grants to employee directors and officer/directors can be either Non-Qualified
Stock Options or Incentive Stock Options, to the extent that they do not exceed
the Incentive Stock Option exercise limitations, and the portion of an option to
an employee director or officer/director that exceeds the dollar limitations of
Code Section 422 will be treated as a Non-Qualified Stock Option.
The Board also may construe the Plan and the provisions in the instruments
evidencing options granted under the Plan to employee and officer participants
and is empowered to make all other determinations deemed necessary or advisable
for the administration of the Plan. The Board may not adversely affect the
rights of any participant under any unexercised option or any potion thereof
without the consent of such participant. This Plan will remain in effect until
it is terminated by the Board, except that no Incentive Stock Option will be
granted after December 15, 2009.
The Plan contains provisions for proportionate adjustment of the number of
shares for outstanding options and the option price per share in the event of
stock dividends, recapitalizations resulting in stock splits or combinations or
exchanges of shares.
Participants in the Plan may be selected by the Board from employees and
officers of the Company and its subsidiaries and consultants to the Company and
its subsidiaries. In determining the persons to whom options will be granted and
the number of shares to be covered by each option, the Board will take into
account the duties of the respective persons, their present and potential
contributions to the success of the Company, and such other factors as the Board
deems relevant to accomplish the purposes of the Plan.
21
<PAGE>
Only employees of the Company and its subsidiaries, as the term "employee" is
defined for the purposes of the Code, and consultants to the Company will be
entitled to receive Incentive Stock Options. Incentive Stock Options granted
under the Plan are intended to satisfy all requirements for incentive stock
options under Section 422 of the Code and the Treasury Regulations thereunder.
Each option granted under the Plan will be evidenced by a written option
agreement between the Company and the optionee. The option price of any
Incentive Stock Option may be not less than 100% of the Fair Market Value per
share on the date of grant of the option; provided, however, that any Incentive
Stock Option granted under the Plan to a person owning more than ten percent of
the total combined voting power of the common stock will have an option price of
not less than 110% of the Fair Market Value per share on the date of grant of
the Incentive Stock Option. Each Non- Qualified Stock Option granted under the
Plan will be at a price no less than 85% of the Fair Market Value per share on
the date of grant thereof. "Fair Market Value" per share as of a particular date
is defined in the Plan as the last sale price of the Company's common stock as
reported on a national securities exchange or on the NASDAQ System or, if none,
the average of the closing bid and asked prices of the Company's common stock as
reported by NASDAQ or, if such quotations are unavailable, the value determined
by the Board in its discretion in good faith.
The exercise period of options granted under the Plan may not exceed ten years
from the date of grant thereof. Incentive Stock Options granted to a person
owning more than ten percent of the total combined voting power of the common
stock of the Company will be for no more than five years. The Board will have
the authority to accelerate or extend the exercisability of any outstanding
option at such time and under such circumstances as it, in its sole discretion,
deems appropriate. However, no exercise period may be extended to increase the
term of the option beyond ten years from the date of the grant.
To exercise an option, the optionee must pay the full exercise price in cash, in
shares of common stock having a Fair Market Value equal to the option price or
in property or in a combination of cash, shares, and property and, subject to
approval of the Board. The Board has the sole and absolute discretion to
determine whether or not property other than cash or common stock may be used to
purchase the shares of common stock thereunder and, if so, to determine the
value of the property received.
An option may not be exercised unless the optionee then is an employee, officer,
or director of the Company or its subsidiaries, and unless the optionee has
remained continuously as an employee, officer, or director of the Company since
the date of grant of the option. If the optionee ceases to be an employee,
officer, or director of the Company or its subsidiaries other than by reason of
death, disability, or for cause, all options granted to such optionee, fully
vested to such optionee but not yet exercised, will terminate three months after
the date the optionee ceases to be an employee, officer or director of the
Company. All options which are not vested to an optionee, under the conditions
stated in this paragraph for which employment ceases, will immediately terminate
on the date the optionee ceases employment or association.
If an optionee dies while an employee, officer or director of the Company, or if
the optionee's employment, officer, or director status terminates by reason of
disability, all options theretofore granted to such optionee, whether or not
otherwise exercisable, unless earlier terminated in accordance with their terms,
may be exercised at any time within one year after the date of death or
disability of said optionee, by the optionee or by the optionee's estate or by a
person who acquired the right to exercise such options by bequest or inheritance
or otherwise by reason of the death or disability of the optionee.
Options granted under the Plan are not transferable other than by will or by the
laws of descent and distribution or pursuant to a qualified domestic relations
order as defined by the Code or Title I of the Employee Retirement Income
Security Act of 1974, or the rules thereunder. Options may be exercised, during
the lifetime of the optionee, only by the optionee and thereafter only by his
legal representative. An optionee has no rights as a shareholder with respect to
any shares covered by an option until the option has been exercised.
As a condition to the issuance of shares upon the exercise of an option, the
Company will require the optionee to pay
22
<PAGE>
to the Company the amount of the Company's tax withholding liability required in
connection with such exercise. The Company, to the extent permitted or required
by law, may deduct a sufficient number of shares due to the optionee upon
exercise of the option to allow the Company to pay such withholding taxes. The
Company is not obligated to advise any optionee of the existence of any tax or
the amount which the Company will be so required to withhold.
FEDERAL INCOME TAX CONSEQUENCES
The federal income tax discussion set forth below is included for general
information only. Optionees are urged to consult their tax advisors to determine
the particular tax consequences applicable to them, including the application
and effect of foreign, state, and local income and other tax laws.
INCENTIVE STOCK OPTIONS. No income results to the holder of an Incentive Stock
Option upon the grant thereof or issuance of shares upon exercise thereof. The
amount realized on the sale or taxable exchange of the Option Shares in excess
of the option exercise price will be considered a capital gain, except that, if
a sale, taxable exchange, or other disposition occurs within one year after
exercise of the Incentive Stock Option or two years after the grant of the
Incentive Stock Option (generally considered to be a "disqualifying
disposition"), the optionee will realize compensation, for federal income tax
purposes, on the amount by which the lesser of (i) the fair market value on the
date of exercise or (ii) the amount realized on the sale of the shares, exceeds
the exercise price. Any appreciation on the shares between the exercise date and
the disposition will be taxed to the optionee as capital gain. The difference
between the exercise price and the fair market value of the shares acquired at
the time of exercise is a tax preference item for the purpose of calculating the
alternative minimum tax on individuals under the Code. This preference amount
will not be included again in alternative minimum taxable income in the year the
taxpayer disposes of the stock.
NON-QUALIFIED STOCK OPTIONS. No compensation will be realized by the optionee of
a Non-Qualified Stock Option at the time it is granted. Upon the exercise of a
Non-Qualified Stock Option, an optionee will realize compensation for federal
income tax purposes on the difference between the exercise price and the fair
market value of the shares acquired at the time of exercise. If the optionee
exercises a Non-Qualified Stock Option by surrendering shares of the Company's
common stock, the optionee will not recognize income or gain at the time of
exercise.
CONSEQUENCES TO THE COMPANY. The Company recognizes no deduction at the time of
grant or exercise of an Incentive Stock Option and recognizes no deduction at
the time of grant of a Non-Qualified Stock Option. The Company will recognize a
deduction at the time of exercise of a Non-Qualified Stock Option on the
difference between the option price and the fair market value of the shares on
the date of grant. The Company also will recognize a deduction to the extent the
optionee recognizes income upon a disqualifying disposition of shares underlying
an Incentive Stock Option.
VESTING
Unless otherwise specified in an optionee's agreement, options granted under the
Plan will become vested with the optionee over a two-year period, with one-sixth
of the options vesting every four months, in addition to any other vesting
requirements determined by the Board at the time of grant.
OPTION/SAR/LTIP AWARDS
Since its inception, the Company has not granted any Stock Options, Stock
Appreciation Rights or Long Term Incentive Plan payouts.
EMPLOYMENT AGREEMENTS
None.
23
<PAGE>
DIRECTORS' COMPENSATION
The Company does not compensate directors for services in their capacities as
directors. The Company compensates directors for services in other capacities.
Mr. Bowes is paid a consulting fee of $6,000 per month. During the period ended
December 31, 1999, the Company paid Mr. Bowes a total of $18,000 for services to
the Company and/or San Joaquin.
Chase Management Ltd., a private company indirectly wholly owned by Nick DeMare,
an officer and director of the Company, provides management and accounting
services to the Company and is compensated for such services at its usual rate.
During the period ended December 31, 1999, the Company paid Chase a total of
$2,341 for services to the Company and/or San Joaquin.
Mr. McNeil, a director of the Company, provides consulting services to the
Company. Mr. McNeil receives a combination of stock and cash in payment for
services as follows:
a. Mr. McNeil's compensation is paid one-half in the Company's stock,
valued at the average of the bid and ask price of the Company's common
stock during the month in which the services are performed, and the
remaining one-half in cash.
b. If the Company's common stock is not traded on an exchange or in the
over-the-counter market, the value of common stock issued to Mr. McNeil
will be the fair value of the shares, as determined by the Company's
Board of Directors, but such value shall not be less than the last
price at which shares were sold to investors.
During the period ended December 31, 1999, the Company, or San Joaquin, had paid
Mr. McNeil a total of $7,219 in cash and a further $7,220 remained unpaid and is
to be settled by the issuance of shares of common stock of the Company, the
amount of which was still to be determined at April 10, 2000.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT.
The following table sets forth information, as of April 10, 2000, with respect
to the beneficial ownership of the Company's common stock by each person known
by the Company to be the beneficial owner of more than five percent of the
outstanding common stock and by directors and officers of the Company, both
individually and as a group:
<TABLE>
<CAPTION>
AMOUNT OF SHARES
NAME AND ADDRESS OF BENEFICIAL OWNER BENEFICIALLY OWNED PERCENT OF CLASS
<S> <C> <C>
J. Timothy Bowes (1)<F1> 1,533,000 13.03%
53 Stratford Place, S.W.
Calgary, Alberta, Canada T3H 1H7
Nick DeMare (2)<F2> 135,000 1.15%
Suite 1305, 1090 W. Georgia Street
Vancouver, British Columbia, Canada V6E
3V7
Colin McNeil 0 --
340B, 630 - 6th Avenue, S.W.
Calgary, Alberta, Canada T2P 0S8
Officers and Directors as a group (3 1,668,000 14.17%
persons)
24
<PAGE>
<FN>
<F1>
(1) These shares are held of record by Bowesco Incorporated, a company
owned and controlled by Mr. Bowes.
<F2>
(2) These shares are held of record by DNG Capital Corp., a company owned
and controlled by Mr. DeMare.
</FN>
</TABLE>
CHANGES OF CONTROL
As of the date of this annual report, there are no arrangements known to the
Company which may at a subsequent date result in a change of control of the
Company.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.
Other than as disclosed below, none of the present directors, officers or
principal shareholders of the Company, nor any family member of the foregoing,
nor, to the best of the information and belief of the present management of the
Company, any of the former directors, senior officers or principal shareholders
of the Company, nor any family member of such former directors, officers or
principal shareholders, have or have had any material interest, director or
indirect, in any transaction, within the two years prior to the date of this
report, or in any proposed transaction which has materially affected or will
materially affect the Company. Management believes the following transactions
are as fair to the Company and similar to terms which could be obtained from
unrelated third parties.
1. On June 15, 1999, Hilton Petroleum Ltd., indirectly through a
subsidiary, entered into an agreement with Berkley and acquired a
further net 4% capital interest (2.25% working interest) in the San
Joaquin Joint Venture for $1,400,000. Hilton LLC used the proceeds from
the sale of its membership units to purchase from Hilton Petroleum Ltd.
a 2.25% working interest in the San Joaquin Joint Venture for
$1,550,000. Hilton LLC is required to pay 4% of the costs to drill the
initial wells on each of the initial three prospects in the San Joaquin
Joint Venture, as discussed below. Hilton Petroleum Ltd. is the manager
and operator of Hilton LLC. The Company acquired four membership
interests in Hilton LLC for an initial purchase price of $390,000.
Hilton LLC members, including the Company, are required to fund their
pro-rata share of all the capital requirements of Hilton LLC. See "Item
1. Description of Business."
As part of the acquisition of the 4% capital interest which was
subsequently sold to Hilton LLC, Hilton Petroleum Ltd. also acquired,
as part of the $1,400,000 purchase price, an additional 0.7% (4% of
17.5%) reversionary interest in the East Lost Hills Joint Venture. The
0.7% interest was not sold to Hilton LLC with the 4% capital interest.
Mr. Nick DeMare, an officer and director of the Company and San
Joaquin, is also a director of Hilton Petroleum Ltd., the manager of
Hilton LLC. However, the terms upon which San Joaquin acquired its
membership interests in Hilton LLC were the same as those offered to
non-affiliated purchasers.
2. Chase Management Ltd., a private company indirectly wholly owned by
Nick DeMare, an officer and director of the Company, has provides
management and accounting services to the Company and is compensated
for such services at its usual rate. During the period ended December
31, 1999, the Company paid Chase a total of $2,341 for services to the
Company and/or San Joaquin.
3. Mr. McNeil, a director of the Company, provides consulting services to
the Company. Mr. McNeil receives a combination of stock and cash in
payment for services as follows:
a. Mr. McNeil's compensation is paid one-half in the Company's
stock, valued at the average of the bid and ask price of the
Company's common stock during the month in which the services
are performed, and the remaining one-half in cash.
b. If the Company's common stock is not traded on an exchange or
in the over-the-counter market, the value of common stock
issued to Mr. McNeil will be the fair value of the shares, as
determined by the Company's Board of Directors, but such value
shall not be less than the last price at which shares
25
<PAGE>
were sold to investors.
During the period ended December 31, 1999, the Company, or San Joaquin,
had paid Mr. McNeil a total of $7,219 in cash, a further $7,220
remained unpaid and is to be settled by the issuance of shares of
common stock of the Company, the amount of which was still to be
determined at April 10, 2000.
4. During September 1999, Mr. Bowes and Mr. DeMare purchased shares of San
Joaquin Oil & Gas Ltd. Series A Convertible Preferred Stock ("San
Joaquin Convertible Preferred Stock"). Mr. Bowes, through Bowesco
Incorporated, a company owned and controlled by Mr. Bowes, purchased
15,330 shares of San Joaquin Convertible Preferred Stock. Mr. DeMare
purchased 1,350 shares of San Joaquin Convertible Preferred Stock. Mr.
Bowes and Mr. DeMare purchased their shares of San Joaquin Convertible
Preferred Stock at a price of $0.50 per share, which was the same price
offered to non-affiliates. During October 1999, all outstanding shares
of San Joaquin Convertible Preferred Stock were converted into shares
of San Joaquin Oil & Gas Ltd. common stock at the ratio of 100 shares
of common stock for each share of San Joaquin Convertible Preferred
Stock. Subsequent to the conversion, Mr. Bowes owned 1,533,000 shares
of San Joaquin Oil & Gas Ltd. common stock and Mr. DeMare owned 135,000
shares of San Joaquin Oil & Gas Ltd. common stock. Mr. Bowes and Mr.
DeMare exchanged their shares of San Joaquin Oil & Gas Ltd. common
stock for shares of the Company's common stock in connection with the
share exchange with San Joaquin Oil & Gas Ltd.
5. During the fiscal year ended December 31, 1999, a related entity paid
expenses of $17,257 on behalf of the Company. Upon consummation of the
acquisition of San Joaquin by the Company, the related entity waived
payment of all amounts that was owed to it by the Company, and since
San Joaquin was the accounting acquirer, the December 31, 1999,
financial statements were not affected by the transaction.
Mr. Bowes, Mr. DeMare and Mr. McNeil are "founders" of the Company, and except
as disclosed above, have not received anything of value from the Company or its
subsidiary.
26
<PAGE>
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K.
<TABLE>
(a) Exhibits:
<CAPTION>
REGULATION CONSECUTIVE
S-B NUMBER EXHIBIT PAGE NUMBER
<S> <C> <C>
2.1 Agreement and Plan of Reorganization (1)<F1> N/A
3.1 Amended and Restated Articles of Incorporation (1)<F1> N/A
3.2 Bylaws (2)<F2> N/A
4.1 1999 Stock Option Plan 47
10.1 Operating Agreement of Hilton Petroleum Greater San Joaquin Basin Joint
Venture LLC 60
10.2 Consulting and Overriding Royalty Agreement with Davis & Namson 75
10.3 Agreement with Canyon Oil 104
10.4 Agreement with Consolidated Stewards Inc., as amended 115
11 Statement re: Computation of Per Share Earnings See
Financial
Statements
16 Letter from Kish, Leake & Associates, P.C. (1)<F1> N/A
21 List of Subsidiaries 128
27 Financial Data Schedule 130
<FN>
<F1>
(1) Incorporated by reference to the exhibits filed on the Company's Form 8-K dated December 31, 1999.
<F2>
(2) Incorporated by reference to the exhibits filed on the Company's Form 10-SB dated July 23, 1999.
</FN>
</TABLE>
(b) The following reports on Form 8-K were filed during the last quarter of the
period covered by this report:
1. Form 8-K dated December 31, 1999 reporting a change of control
under Item 1, the acquisition of assets under Item 2, and a
change in the Company's accountants under Item 4, including
Agreement and Plan of Reorganization, Restated and Amended
Articles of Incorporation, and a letter from Kish, Leake &
Associates, P.C.
27
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant has
caused this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
SAN JOAQUIN RESOURCES INC.
Dated: April 14, 2000 By:/s/J. TIMOTHY BOWES
J. Timothy Bowes, President
In accordance with the Exchange Act, this report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the dates indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
<S> <C> <C>
President and Director
(Principal Executive Officer)
/S/J. TIMOTHY BOWES APRIL 14, 2000
J. Timothy Bowes
Secretary, Treasurer and Director
(Principal Financial and Accounting
/S/NICK DEMARE Officer) APRIL 14, 2000
Nick DeMare
/S/COLIN MCNEIL Director APRIL 14, 2000
Colin McNeil
</TABLE>
28
<PAGE>
- --------------------------------------------------------------------------------
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS FOR THE
PERIOD FROM INCEPTION (SEPTEMBER 14, 1999)
TO DECEMBER 31, 1999
- --------------------------------------------------------------------------------
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
I N D E X
Independent Auditor's Report F-2
Consolidated Balance Sheet
December 31, 1999 F-3
Consolidated Statement of Operations
Period from inception (September 14, 1999) to December 31, 1999 F-4
Consolidated Statement of Stockholders' Equity
Period from Inception (September 14, 1999) to December 31, 1999 F-5
Consolidated Statement of Cash Flows
Period from Inception (September 14, 1999) to December 31, 1999 F-6 - F-7
Notes to Consolidated Financial Statements F-8 - F-17
F - 1
<PAGE>
INDEPENDENT AUDITOR'S REPORT
To The Board of Directors and Stockholders
San Joaquin Resources Inc. (Formerly LEK International, Inc.)
We have audited the accompanying consolidated balance sheet of San Joaquin
Resources Inc. (a development stage company) as of December 31, 1999 and the
related consolidated statements of operations, stockholders' equity and cash
flows for the period from inception (September 14, 1999) to December 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 made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the consolidated financial position of San
Joaquin Resources Inc. as of December 31, 1999 and the consolidated results of
its operations and its cash flows for the period from inception (September 14,
1999) to December 31, 1999 are in conformity with generally accepted accounting
principles.
The accompanying consolidated financial statements have been prepared assuming
that the Company will continue as a going concern. As discussed in Note 2 to the
consolidated financial statements, the Company has incurred losses from its
initial operations and has not earned revenues from its principal operations
that raise substantial doubt about its ability to continue as a going concern.
Management's plans in regard to these matters are also described in Note 2. The
consolidated financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
/s/WHEELER WASOFF, P.C.
Denver, Colorado
April 4, 2000
F - 2
<PAGE>
<TABLE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED BALANCE SHEET
DECEMBER 31, 1999
<CAPTION>
A S S E T S
<S> <C>
CURRENT ASSETS
Cash $ 387,160
Accounts receivable and prepaids 1,038
Advance 10,000
Total current assets 398,198
INVESTMENT IN OIL AND GAS VENTURE (NOTE 4) 391,670
OI L & GAS PROPERTIES (NOTE 3) 122,590
----------------
$ 912,458
================
<CAPTION>
L I A B I L I T I E S & S T O C K H O L D E R S' E Q U I T Y
<S> <C>
CURRENT LIABILITIES
Accounts payable and accrued liabilities (Note 6) $ 74,163
----------------
Total current liabilities 74,163
----------------
COMMITMENTS AND CONTINGENCIES (NOTES 4 AND 9)
STOCKHOLDERS' EQUITY (NOTE 5)
Common stock, $0.0001 par value
Authorized - 1,000,000,000 shares
Issued and outstanding - 11,769,000 shares 1,177
Additional paid-in capital 984,722
(Deficit) accumulated during the development stage (147,604)
----------------
838,295
----------------
$ 912,458
================
</TABLE>
The accompanying notes are an integral part of these financial statements
F - 3
<PAGE>
<TABLE>
<CAPTION>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
<S> <C>
REVENUE
Interest $ 5,784
----------------
OPERATING EXPENSES
Administration and accounting 2,341
Audit and legal 21,148
Filing 283
Office and miscellaneous 2,712
Professional fees 95,362
Travel 33,212
----------------
155,058
----------------
(LOSS) FROM OPERATIONS (149,274)
EQUITY IN INCOME OF AFFILIATE 1,670
----------------
NET (LOSS) $ (147,604)
================
NET (LOSS) PER COMMON SHARE - BASIC
AND DILUTED $ (0. 03)
================
WEIGHTED AVERAGE NUMBER OF COMMON
SHARES OUTSTANDING - BASIC AND DILUTED 5,874,429
================
</TABLE>
The accompanying notes are an integral part of these financial statements
F - 4
<PAGE>
<TABLE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
<CAPTION>
(DEFICIT)
PREFERRED STOCK COMMON STOCK ACCUMULATED
--------------------------- ---------------------------- ADDITIONAL DURING THE
PAID-IN DEVELOPMENTAL
SHARES AMOUNT SHARES AMOUNT CAPITAL STAGE
---------- ------------ ------------ ----------- ------------ ---------------
<S> <C> <C> <C> <C> <C> <C>
Inception, September 14, 1999 - $ - - $ - $ - $ -
Sale of Series A Preferred
Shares at $0.50 per share 61,490 615 - - 30,130 -
Conversion of Series A
Preferred Shares into (61,490) (615) 6,149,000 6,149 (5,534) -
common stock
Sale of common stock at
$0.50 per share - - 1,920,000 1,920 958,080 -
Costs of offerings - - - - (4,846) -
Issuance of common stock for
acquisition of San Joaquin - - - (7,262) 7,262 -
Recapitalization of shares
issued by LEK prior to merger - - 3,700,000 370 (370) -
Net (loss) - - - - - (147,604)
---------- ------------ ------------ ----------- ------------ ---------------
Balance, December 31, 1999 - $ - 11,769,000 $ 1,177 $ 984,722 $ (147,604)
========== ============ ============ =========== ============ ===============
</TABLE>
The accompanying notes are an integral part of these financial statements
F - 5
<PAGE>
<TABLE>
<CAPTION>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) for the period $ (147,604)
Adjustments to reconcile net (loss) to net cash (used)
by operating activities
Equity in income of affiliate (1,670)
Changes in assets and liabilities
Increase in amounts receivable and prepaids (1,038)
Increase in advance (10,000)
Increase in accounts payable and accrued liabilities 74,163
--------------
Net cash (used) by operating activities (86,149)
--------------
CASH FLOWS FROM INVESTING ACTIVITIES
Investment in oil and gas venture (390,000)
Additions to oil and gas properties (192,590)
Proceeds from sale of participation agreement 70,000
--------------
Net cash (used) by investing activities (512,590)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from sale of preferred stock 30,745
Proceeds from sale of common stock 960,000
Cash paid for offering costs (4,846)
--------------
Net cash provided by financing activities 985,899
--------------
NET INCREASE IN CASH 387,160
CASH - BEGINNING OF PERIOD -
--------------
CASH - END OF PERIOD $ 387,160
==============
</TABLE>
The accompanying notes are an integral part of these financial statements
F - 6
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED STATEMENT OF CASH FLOWS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
During the period from inception to December 31, 1999, the Company did not incur
any short-term borrowings.
SUPPLEMENTAL SCHEDULE OF NON-CASH FINANCING ACTIVITIES
In October 1999, 6,149,000 shares of common stock of San Joaquin Oil & Gas Ltd.
were issued on the conversion of 61,490 Series A Preferred Shares.
In December 1999, 8,069,000 shares of common stock were issued for the
acquisition of 100% of the outstanding common stock of San Joaquin Oil & Gas
Ltd. These shares were issued pursuant to an agreement and plan of
reorganization effective December 31, 1999. (Note 1)
The accompanying notes are an integral part of these financial statements
F - 7
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
1. ORGANIZATION AND BUSINESS COMBINATION
LEK International, Inc. ("LEK") was incorporated under the laws of the
State of Nevada on April 21, 1997, for the purpose of evaluating,
structuring and completion of a merger with, or acquiring a privately
owned corporation. LEK is a public company which had no operations. On
December 31, 1999, LEK completed an agreement (the "Agreement and Plan
of Reorganization") whereby it issued 8,069,000 shares of its common
stock to acquire all of the shares of San Joaquin Oil & Gas Ltd. ("San
Joaquin"), a private corporation incorporated on September 14, 1999,
under the laws of the State of Nevada. San Joaquin is an independent
energy company engaged in the exploration, development and acquisition
of crude oil and natural gas reserves in the western United States and
is considered a development stage company as defined by Statement of
Financial Accounting Standards (SFAS) No. 7. San Joaquin is an
exploration stage oil and gas company and as of December 31, 1999, has
not earned any production revenue, nor found proved resources on any of
its properties. San Joaquin's principal activities have been raising
capital through the sale of its securities, identifying and evaluating
potential oil and gas property acquisitions, and acquiring an interest
in a limited liability company. See Notes 3 and 4.
As a result of this transaction, San Joaquin became a wholly-owned
subsidiary of LEK, and effective January 17, 2000, LEK changed its name
to San Joaquin Resources Inc. (the "Company"). Since this transaction
resulted in the former shareholders of San Joaquin acquiring control of
LEK, for financial reporting purposes the business combination was
accounted for as an additional capitalization of LEK (a reverse
acquisition with San Joaquin as the accounting acquirer). The
operations of San Joaquin will be the only continuing operations of the
Company. In accounting for this transaction:
i) San Joaquin was deemed to be the purchaser and parent company
for financial reporting purposes. Accordingly, its net assets
were included in the consolidated balance sheet at their
historical book value;
ii) control of the net assets and business of LEK was acquired
effective December 31, 1999, for no consideration; and
iii) the consolidated financial statements of operations,
stockholders' equity and cash flow include San Joaquin's
results of operations and changes in cash flow for the period
from inception, September 14, 1999, to December 31, 1999.
The Company's fiscal year end is December 31.
F - 8
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF ACCOUNTING
The accompanying financial statements have been prepared on the basis
of accounting principles applicable to a going concern, which
contemplates the realization of assets and extinguishment of
liabilities in the normal course of business.
The Company is in the development stage and has not realized revenues
from its planned operations. Additional funding will be required to
complete the Company's planned funding contributions in its investment,
participate in the acquisition, exploration and development of
interests in oil and gas properties. In order to meet the Company's
continuing financing needs, management of the Company intends to raise
working capital through the sale of common stock or other securities,
or through other financing.
The Company's financial statements do not include any adjustments
related to the realization of the carrying value of assets or the
amounts and classification of liabilities that might be necessary
should the Company be unable to continue in existence.
The ability of the Company to continue operations as a going concern is
dependent upon its success in obtaining capital through sale of common
stock or other securities and ultimately achieving profitable
operations.
BASIS OF CONSOLIDATION
The consolidated financial statements include the accounts of the
Company and its wholly-owned subsidiary, San Joaquin. All significant
intercompany accounts and transactions have been eliminated in
consolidation.
OIL AND GAS PROPERTIES
CAPITALIZED COSTS
The Company follows the full cost method of accounting for oil and gas
operations. Under this method all costs related to the exploration for
and development of oil and gas reserves are capitalized on a
country-by-country basis. Costs include lease acquisition costs,
geological and geophysical expenses, overhead directly related to
exploration and development activities and costs of drilling both
productive and non-productive wells. Proceeds from the sale of
properties are applied against capitalized costs, without any gain or
loss being recognized, unless such a sale would significantly alter the
rate of depletion and depreciation.
F - 9
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
DEPLETION AND DEPRECIATION
Depletion of exploration and development costs and depreciation of
production equipment is provided using the unit-of-production method
based upon estimated proven oil and gas reserves. The costs of
significant unevaluated properties are excluded from costs subject to
depletion. For depletion and depreciation purposes, relative volumes of
oil and gas production and reserves are converted at the energy
equivalent conversion rate of six thousand cubic feet of natural gas to
one barrel of crude oil.
CEILING TEST
In applying the full cost method, the Company performs a ceiling test
whereby the carrying value of oil and gas properties and production
equipment, net of recorded future income taxes and the accumulated
provision for site restoration and abandonment costs, is compared
annually to an estimate of future net cash flow from the production of
proven reserves. Costs related to undeveloped oil and gas properties
are excluded from the ceiling tests. Discounted net cash flow is
estimated using year end prices, less estimated future general and
administrative expenses, financing costs and income taxes. Should this
comparison indicate an excess carrying value, the excess is charged
against earnings. At December 31, 1999 there were no reserves.
INVESTMENTS
Investments in affiliated companies (20% to 50% owned), are accounted
for by the equity method. Under this method, the Company recognizes its
share of income (loss) in the investee company. Where, in the opinion
of management, there has been a loss in value of long-term investments,
which is other than a temporary decline, the carrying value is reduced
to estimated realizable value.
REVENUE RECOGNITION
The Company will recognize oil and gas revenues from its interests in
producing wells as oil and gas is produced and sold from these wells.
IMPAIRMENT
The Company has adopted SFAS No. 121 "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed of" which
requires that long-lived assets to be held and used be reviewed for
impairment whenever events or changes in circumstances indicate that
the carrying amount of an asset may not be recoverable. Oil and gas
properties accounted for using the full cost method of accounting, a
method utilized by the Company, are excluded from this requirement, but
will continue to be subject to the ceiling test limitations.
F-10
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
INCOME TAXES
The Company has adopted the provisions of SFAS No. 109, "Accounting for
Income Taxes". SFAS 109 requires recognition of deferred tax
liabilities and assets for the expected future tax consequences of
events that have been included in the financial statements or tax
returns. Under this method, deferred tax liabilities and assets are
determined based on the difference between the financial statement and
tax basis of assets and liabilities using enacted tax rates in effect
for the year in which the differences are expected to reverse.
At December 31, 1999, the Company had a net operating loss carryforward
of approximately $253,000 that may be offset against future taxable
income through 2019.
The Company has fully reserved the tax benefits of these operating
losses because the likelihood of realization of the tax benefits cannot
be determined.
The tax benefit of the loss carryforward of $38,000 has been offset by
a valuation allowance of the same amount.
Temporary differences between the time of reporting certain items for
financial and tax reporting purposes consist primarily of exploration
costs on oil and gas properties, and equity income (loss) in affiliated
companies.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates
and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the
date of the financial statements and reported amounts of revenues and
expenses during the reporting period. Actual results could differ from
those estimates.
The oil and gas industry is subject, by its nature, to environmental
hazards and clean-up costs. At this time, management knows of no
substantial costs from environmental accidents or events for which it
may be currently liable. In addition, the Company's oil and gas
business makes it vulnerable to changes in wellhead prices of crude oil
and natural gas. Such prices have been volatile in the past and can be
expected to be volatile in the future. By definition, proved reserves
are based on current oil and gas prices and estimated reserves. Price
declines reduce the estimated quantity of proved reserves and increase
annual amortization expense (which is based on proved reserves).
F - 11
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
FOREIGN CURRENCY TRANSLATION
The assets and liabilities of the Company's foreign operations are
generally translated into US dollars at current exchange rates, and
revenues and expenses are translated at average exchange rates for the
year. Resulting translation adjustments, if any, are reflected as a
separate component of stockholders' equity.
Transaction gains and losses that arise from exchange rate fluctuations
on transactions denominated in a currency other than the functional
currency are included in the results of operations as incurred.
(LOSS) PER COMMON SHARE
(Loss) per common share is computed based on the weighted average
number of common shares outstanding during the period. Common shares
issued upon conversion of Series A convertible preferred stock (Note 4)
are considered outstanding for all periods presented.
CASH EQUIVALENTS
For purposes of reporting cash flows, the Company considers as cash
equivalents all highly liquid investments with a maturity of three
months or less at the time of purchase. On occasion, the Company has
cash in banks in excess of federally insured amounts.
CONCENTRATION OF CREDIT RISK
Financial instruments, which potentially subject the Company to
concentrations of credit risk, consist of cash. The Company maintains
cash accounts at one financial institution. The Company periodically
evaluates the credit worthiness of financial institutions, and
maintains cash accounts only in large high quality financial
institutions.
FAIR VALUE
The carrying amount reported in the balance sheet for cash, accounts
receivable and prepaids, advances, accounts payable and accrued
liabilities approximates fair value because of the immediate or
short-term maturity of these financial instruments.
F - 12
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
NEW TECHNICAL PRONOUNCEMENTS
In June 1998 SFAS No. 133 "Accounting for Derivative Instruments and
Hedging Activities" was issued for fiscal years beginning after June
15, 1999. Adoption of SFAS No. 133 does not have an impact on the
Company's financial statements.
In October 1998 SFAS No. 134 "Accounting for Mortgage Broker
Securities" was issued for fiscal years beginning after December 15,
1998. Adoption of SFAS No. 134 does not have an impact on the Company's
financial statements.
In February 1999 SFAS No. 135 "Rescission of FASB Statement No. 75 and
Technical Corrections" was issued for fiscal years beginning after
February 15, 1999. Adoption of SFAS No. 135 does not have an impact on
the Company's financial statements.
In June 1999 SFAS No. 137 "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statements
No. 133" was issued. Adoption of SFAS No. 137 is not expected to have
an impact on the Company's financial statements.
3. OIL & GAS PROPERTIES
Pursuant to an agreement, dated November 16, 1999, the Company agreed
to grant Consolidated Earth Stewards Inc. ("CEW") a right to first
refusal ("ROFR") until October 1, 2001 to participate in a 19% working
interest in certain oil and gas prospects to be identified, acquired,
or generated by the Company in the San Joaquin and Sacramento Basins,
located in California. CEW had agreed to pay an initial $150,000 for
the ROFR and provide an initial advance of $200,000 to fund exploration
costs. As at December 31, 1999, CEW had paid the Company $70,000. By
agreement dated February 8, 2000, CEW paid a further $8,000 and the
Company and CEW agreed to suspend the agreement, and any further
obligations of CEW, pending a review of developments in the San Joaquin
and Sacramento Basins.
On December 1, 1999, the Company and Canyon Oil & Gas ("Canyon")
entered into an agreement whereby the Company paid an initial $70,000
to Canyon for technical information provided by Canyon on certain oil
and gas prospects (the "Canyon Prospects") located in the San Joaquin
and Sacramento Basins. The Company is also required to pay a renewal
payment of $70,000 every four months until termination of the agreement
by either party. The Company has not made the $70,000 renewal payment
which was due on April 1, 2000 and is attempting to renegotiate the
terms of the agreement. Canyon will retain a 14% carried working
interest in any of the Canyon Prospects which are acquired by the
Company.
F - 13
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
3. OIL & GAS PROPERTIES (continued)
Oil and gas properties at December 31, 1999, consist of exploration and
geological and geophysical costs on specific prospective properties and
areas of interest. As at December 31, 1999, the Company has not
acquired any direct interests in oil and gas properties.
4. INVESTMENT IN OIL AND GAS VENTURE
During the period ended December 31, 1999, the Company purchased four
units, representing a 20% ownership interest, in Hilton Petroleum
Greater San Joaquin Basin LLC ("Hilton LLC") for $390,000. Hilton LLC,
a Colorado limited liability company organized on June 4, 1999, is a
development stage company as defined by SFAS No. 7. As of December 31,
1999, Hilton LLC has paid Hilton Petroleum Ltd. ("Hilton") $1,550,000
for a 2.25% working interest in the San Joaquin Joint Venture and will
pay 4% of the costs to drill the initial wells on each of the initial
three prospects in the San Joaquin Basin.
As a member of Hilton LLC, the Company will be required to provide its
pro-rata share of all capital requirements of Hilton LLC. In the event
that a member fails to pay its additional cash call capital
contributions within a specified time period, then, that defaulting
member's interest in Hilton LLC shall revert to Hilton. If the default
occurs within 24 months of the initial capital contribution the member
will, no sooner than 12 months, if the default occurs before 12 months,
receive common stock of Hilton, at the then prevailing prices, for the
defaulting member's investment cost. If such failure occurs after 24
months, then Hilton will fund the capital contribution of the
defaulting member and retain that member's share of cash flow until
300% of the defaulted cash is repaid to Hilton.
Hilton is the manager of Hilton LLC. A director of the Company is also
a director of Hilton.
The Company's investment in Hilton LLC is accounted for using the
equity method. Equity income in Hilton LLC for the period ended
December 31, 1999 was $1,670. Summarized unaudited financial
information of Hilton LLC, as of December 31, 1999, is as follows:
Cash $ 7,193
Oil and gas properties 2,036,706
--------------
Total assets $ 2,043,899
==============
Accounts payable $ 95,297
==============
Members' equity $ 1,948,602
==============
Net income $ 8,352
==============
F - 14
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
4. INVESTMENT IN OIL AND GAS VENTURE (continued)
On April 4, 2000, the Company notified Hilton and Hilton LLC that it
would no longer fund any further capital contributions. Accordingly,
the Company will receive common shares of Hilton, based on the trading
value price of Hilton common stock, in an amount equal to its capital
contributions. Hilton is a Canadian public company listed on the
Canadian Venture Exchange and is engaged in the business of acquiring
leasehold interests in oil and gas properties and the exploration for,
and development, production and sale of oil and gas, predominantly in
the United States through its wholly owned subsidiaries.
5. STOCKHOLDERS' EQUITY
Effective December 31, 1999, LEK completed the acquisition of San
Joaquin (Note 1). In conjunction with the acquisition, LEK exchanged
8,069,000 shares of its common stock for 100% of the outstanding common
shares of San Joaquin. The 3,700,000 shares of common stock of LEK
outstanding at the date of acquisition were recapitalized at the net
assets value of LEK as of that date of $0. For financial statement
reporting purposes this transaction was treated as a reverse
acquisition whereby San Joaquin was considered the surviving and
reporting entity. For legal purposes, LEK remained as the surviving
entity; therefore, the capital structure of the Company was accordingly
restated. In December 1999, the Board of Directors and shareholders of
LEK approved a 3.7 to 1 stock split. All common shares of LEK
outstanding prior to the acquisition of San Joaquin have been
retroactively restated.
In September 1999, San Joaquin designated 70,000 shares of its
1,000,000 authorized preferred stock, as Series A convertible preferred
stock (the "Series A Preferred Shares"). San Joaquin subsequently sold
61,490 Series A Preferred Shares, at $0.50 per share, for cash proceeds
of $30,745. In October 1999, the Series A Preferred Shares were
converted by the holders into 6,149,000 common shares of San Joaquin.
In October 1999, San Joaquin completed the sale of an aggregate of
1,920,000 shares of common stock, at a price of $0.50 per common share,
for cash proceeds of $960,000. The shares of common stock were sold
pursuant to the exemption from registration contained in Sections 3(b)
and 4(2) of the Securities Act of 1933 and Rule 504 of Regulation D
promulgation thereunder.
The cost of San Joaquin's preferred and common stock offerings was an
aggregate $4,846.
F - 15
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
5. STOCKHOLDER'S EQUITY (continued)
On December 15, 1999, the Board of Directors of LEK approved, subject
to completion of the Agreement and Plan of Reorganization between LEK
and San Joaquin, a stock option plan (the "Plan"), which reserved an
aggregate of 1,176,900 shares of common stock for issuance pursuant to
the exercise of stock options which may be granted to employees,
officers and directors of the Company and consultants to the Company.
The Plan also provides for annual adjustments in the number of shares
available under the Plan equal to 10% of the number of shares
outstanding. No stock options have been granted under the Plan. The
Company will measure compensation for options utilizing the intrinsic
value approach under Accounting Principles Board Opinion No. 25.
6. RELATED PARTY TRANSACTIONS
During the period ended December 31, 1999, the Company was charged
$2,341 for accounting services rendered by a company owned by a
director of the Company, $18,000 for professional fees rendered by the
President of the Company, and $14,439 for services related to
exploration of oil and gas properties by a director of the Company. At
December 31, 1999, $11,016 remained unpaid and has been included in
accounts payable and accrued liabilities.
See also Note 4.
7. SEGMENT REPORTING
The Company has one reportable segment, the exploration and development
of oil and gas properties. The Company has concentrated its oil and gas
exploration and development activities in the western United States,
primarily California. All activities in this segment have been with
industry partners and have been substantially conducted through the
Company's investment in Hilton LLC.
8. COMPREHENSIVE INCOME
There are no adjustments necessary to the net (loss) as presented in
the accompanying statement of operations to derive comprehensive income
in accordance with SFAS No. 130, "Reporting Comprehensive Income".
F - 16
<PAGE>
SAN JOAQUIN RESOURCES INC.
(FORMERLY LEK INTERNATIONAL, INC.)
(A DEVELOPMENT STAGE COMPANY)
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE PERIOD FROM INCEPTION
(SEPTEMBER 14, 1999) TO DECEMBER 31, 1999
9. COMMITMENTS AND CONTINGENCIES
The Company may be subject to various possible contingencies which are
derived primarily from interpretations of federal and state laws and
regulations affecting the oil and gas industry. Although management
believes it has complied with the various laws and regulations, new
rulings and interpretations may require the Company to make future
adjustments.
10. SUBSEQUENT EVENTS
Effective January 17, 2000, the Company amended and restated its
Articles of Incorporation to authorize additional capital stock
consisting of 5,000,000 shares of Preferred Stock with $0.001 par value
per share and changed the name of the Company to San Joaquin Resources
Inc.
Also see Note 4.
F - 17
<PAGE>
Exhibit 4.1
1999 Stock Option Plan
<PAGE>
SAN JOAQUIN RESOURCES INC.
1999 STOCK OPTION PLAN
1. PURPOSE; EFFECTIVENESS OF THE PLAN.
(a) The purpose of this Plan is to advance the interests of the
Company and its stockholders by helping the Company obtain and
retain the services of employees, officers, consultants, and
directors, upon whose judgment, initiative and efforts the
Company is substantially dependent, and to provide those
persons with further incentives to advance the interests of
the Company.
(b) This Plan will become effective on the date of its adoption by
the Board, provided the Plan is approved by the stockholders
of the Company (excluding holders of shares of Stock issued by
the Company pursuant to the exercise of options granted under
this Plan) within twelve months before or after that date. If
the Plan is not so approved by the stockholders of the
Company, any options granted under this Plan will be rescinded
and will be void. This Plan will remain in effect until it is
terminated by the Board or the Committee (as defined
hereafter) under section 9 hereof, except that no ISO (as
defined herein) will be granted after the tenth anniversary of
the date of this Plan's adoption by the Board. This Plan will
be governed by, and construed in accordance with, the laws of
the State of Nevada.
2. CERTAIN DEFINITIONS.
Unless the context otherwise requires, the following defined terms
(together with other capitalized terms defined elsewhere in this Plan)
will govern the construction of this Plan, and of any stock option
agreements entered into pursuant to this Plan:
(a) "10% Stockholder" means a person who owns, either directly or
indirectly by virtue of the ownership attribution provisions
set forth in Section 424(d) of the Code at the time he or she
is granted an Option, stock possessing more than ten percent
(10%) of the total combined voting power or value of all
classes of stock of the Company and/or of its subsidiaries;
(b) "1933 Act" means the federal Securities Act of 1933, as
amended;
(c) "Board" means the Board of Directors of the Company;
(d) "Called for under an Option," or words to similar effect,
means issuable pursuant to the exercise of an Option;
(e) "Code" means the Internal Revenue Code of 1986, as amended
(references herein to Sections of the Code are intended to
refer to Sections of the Code as enacted at the time of this
Plan's adoption by the Board and as subsequently amended, or
to any substantially similar successor provisions of the Code
resulting from recodification, renumbering or otherwise);
<PAGE>
(f) "Committee" means a committee of two or more Disinterested
Directors, appointed by the Board, to administer and interpret
this Plan; provided that the term "Committee" will refer to
the Board during such times as no Committee is appointed by
the Board;
(g) "Company" means San Joaquin Resources Inc. (formerly LEK
International, Inc.), a Nevada corporation;
(h) "Disability" has the same meaning as "permanent and total
disability," as defined in Section 22(e)(3) of the Code;
(i) "Disinterested Director" means a member of the Board who is
not during the period of one year prior to his or her service
as an administrator of the Plan, or during the period of such
service, granted or awarded Stock, options to acquire Stock,
or similar equity securities of the Company under this Plan or
any similar plan of the Company, other than the grant of a
Formula Option pursuant to section 6(m) of this Plan;
(j) "Eligible Participants" means persons who, at a particular
time, are employees, officers, consultants, or directors of
the Company or its subsidiaries;
(k) "Fair Market Value" means, with respect to the Stock and as of
the date an ISO or a Formula Option is granted hereunder, the
market price per share of such Stock determined by the
Committee, consistent with the requirements of Section 422 of
the Code and to the extent consistent therewith, as follows:
(i) If the Stock was traded on a stock exchange on the
date in question, then the Fair Market Value will be
equal to the closing price reported by the applicable
composite-transactions report for such date;
(ii) If the Stock was traded over-the-counter on the date
in question and was classified as a national market
issue, then the Fair Market Value will be equal to
the last-transaction price quoted by the NASDAQ
system for such date;
(iii) If the Stock was traded over-the-counter on the date
in question but was not classified as a national
market issue, then the Fair Market Value will be
equal to the average of the last reported
representative bid and asked prices quoted by the
NASDAQ system for such date; and
(iv) If none of the foregoing provisions is applicable,
then the Fair Market Value will be determined by the
Committee in good faith on such basis as it deems
appropriate.
(l) "Formula Option" means an NSO granted to members of the
Committee pursuant to section 6(m) hereof;
San Joaquin Resources Inc. 1999 Stock Option Plan - Page 2
<PAGE>
(m) "ISO" has the same meaning as "incentive stock option," as
defined in Section 422 of the Code;
(n) "Just Cause Termination" means a termination by the Company of
an Optionee's employment by and/or service to the Company (or
if the Optionee is a director, removal of the Optionee from
the Board by action of the stockholders or, if permitted by
applicable law and the by-laws of the Company, the other
directors), in connection with the good faith determination of
the Company's board of directors (or of the Company's
stockholders if the Optionee is a director and the removal of
the Optionee from the Board is by action of the stockholders,
but in either case excluding the vote of the Optionee if he or
she is a director or a stockholder) that the Optionee has
engaged in any acts involving dishonesty or moral turpitude or
in any acts that materially and adversely affect the business,
affairs or reputation of the Company or its subsidiaries;
(o) "NSO" means any option granted under this Plan whether
designated by the Committee as a "non-qualified stock option,"
a "non-statutory stock option" or otherwise, other than an
option designated by the Committee as an ISO, or any option so
designated but which, for any reason, fails to qualify as an
ISO pursuant to Section 422 of the Code and the rules and
regulations thereunder;
(p) "Option" means an option granted pursuant to this Plan
entitling the option holder to acquire shares of Stock issued
by the Company pursuant to the valid exercise of the option;
(q) "Option Agreement" means an agreement between the Company and
an Optionee, in form and substance satisfactory to the
Committee in its sole discretion, consistent with this Plan;
(r) "Option Price" with respect to any particular Option means the
exercise price at which the Optionee may acquire each share of
the Option Stock called for under such Option;
(s) "Option Stock" means Stock issued or issuable by the Company
pursuant to the valid exercise of an Option;
(t) "Optionee" means an Eligible Participant to whom Options are
granted hereunder, and any transferee thereof pursuant to a
Transfer authorized under this Plan;
(u) "Plan" means this 1999 Stock Option Plan of the Company;
(v) "QDRO" has the same meaning as "qualified domestic relations
order" as defined in Section 414(p) of the Code;
(w) "Stock" means shares of the Company's Common Stock, $0.0001
par value;
San Joaquin Resources Inc. 1999 Stock Option Plan - Page 3
<PAGE>
(x) "Subsidiary" has the same meaning as "Subsidiary Corporation"
as defined in Section 424(f) of the Code;
(y) "Transfer," with respect to Option Stock, includes, without
limitation, a voluntary or involuntary sale, assignment,
transfer, conveyance, pledge, hypothecation, encumbrance,
disposal, loan, gift, attachment or levy of such Option Stock,
including without limitation an assignment for the benefit of
creditors of the Optionee, a transfer by operation of law,
such as a transfer by will or under the laws of descent and
distribution, an execution of judgment against the Option
Stock or the acquisition of record or beneficial ownership
thereof by a lender or creditor, a transfer pursuant to a
QDRO, or to any decree of divorce, dissolution or separate
maintenance, any property settlement, any separation agreement
or any other agreement with a spouse (except for estate
planning purposes) under which a part or all of the shares of
Option Stock are transferred or awarded to the spouse of the
Optionee or are required to be sold; or a transfer resulting
from the filing by the Optionee of a petition for relief, or
the filing of an involuntary petition against such Optionee,
under the bankruptcy laws of the United States or of any other
nation.
3. ELIGIBILITY.
The Company may grant Options under this Plan only to persons who are
Eligible Participants as of the time of such grant. Subject to the
provisions of sections 4(d), 5 and 6 hereof, there is no limitation on
the number of Options that may be granted to an Eligible Participant.
4. ADMINISTRATION.
(a) COMMITTEE. The Committee, if appointed by the Board, will
administer this Plan. If the Board, in its discretion, does
not appoint such a Committee, the Board itself will administer
this Plan and take such other actions as the Committee is
authorized to take hereunder; provided that the Board may take
such actions hereunder in the same manner as the Board may
take other actions under the Company's Articles of
Incorporation and By-laws generally.
(b) AUTHORITY AND DISCRETION OF COMMITTEE. The Committee will have
full and final authority in its discretion, at any time and
from time to time, subject only to the express terms,
conditions and other provisions of the Company's Articles of
incorporation, by-laws and this Plan, and the specific
limitations on such discretion set forth herein:
(i) to select and approve the persons who will be granted
Options under this Plan from among the Eligible
Participants, and to grant to any person so selected
one or more Options to purchase such number of shares
of Option Stock as the Committee may determine;
San Joaquin Resources Inc. 1999 Stock Option Plan - Page 4
<PAGE>
(ii) to determine the period or periods of time during
which Options may be exercised, the Option Price and
the duration of such Options, and other matters to be
determined by the Committee in connection with
specific Option grants and Options Agreements as
specified under this Plan;
(iii) to interpret this Plan, to prescribe, amend and
rescind rules and regulations relating to this Plan,
and to make all other determinations necessary or
advisable for the operation and administration of
this Plan; and
(iv) to delegate all or a portion of its authority under
subsections (i) and (ii) of this section 4(b) to one
or more directors of the Company who are executive
officers of the Company, but only in connection with
Options granted to Eligible Participants who are not
subject to the reporting and liability provisions of
Section 16 of the Securities Exchange Act of 1934, as
amended, and the rules and regulations thereunder,
and subject to such restrictions and limitations
(such as the aggregate number of shares of Option
Stock called for by such Options that may be granted)
as the Committee may decide to impose on such
delegate directors.
(c) LIMITATION ON AUTHORITY. Notwithstanding the foregoing, or any
other provision of this Plan, the Committee will have no
authority:
(i) to grant Options to any of its members, whether or
not approved by the Board; and
(ii) to determine any matters, or exercise any discretion,
in connection with the Formula Options under section
6(m) hereof, to the extent that the power to make
such determinations or to exercise such discretion
would cause one or more members of the Committee no
longer to be "Disinterested Directors" within the
meaning of section 2(i) above.
(d) DESIGNATION OF OPTIONS. Except as otherwise provided herein,
the Committee will designate any Option granted hereunder
either as an ISO or as an NSO. To the extent that the Fair
Market Value (determined at the time the Option is granted) of
Stock with respect to which all ISOs are exercisable for the
first time by any individual during any calendar year
(pursuant to this Plan and all other plans of the Company
and/or its subsidiaries) exceeds $100,000, such option will be
treated as an NSO. Notwithstanding the general eligibility
provisions of section 3 hereof, the Committee may grant ISOs
only to persons who are employees of the Company and/or its
subsidiaries.
(e) OPTION AGREEMENTS. Options will be deemed granted hereunder
only upon the execution and delivery of an Option Agreement by
the Optionee and a duly authorized officer of the Company.
Options will not be deemed granted hereunder merely upon the
authorization of such grant by the Committee.
San Joaquin Resources Inc. 1999 Stock Option Plan - Page 5
<PAGE>
5. SHARES RESERVED FOR OPTIONS.
(a) OPTION POOL. The aggregate number of shares of Option Stock
that may be issued pursuant to the exercise of Options granted
under this Plan initially will not exceed One Million One
Hundred Seventy-Six Thousand Nine Hundred (1,176,900) (the
"Option Pool"), provided that such number automatically shall
be adjusted annually on the beginning of the Company's fiscal
year to a number equal to 10% of the number of shares of Stock
of the Company outstanding at the end of the Company's last
completed fiscal year, or 1,176,900 shares, whichever is
greater, and provided further that such number will be
increased by the number of shares of Option Stock that the
Company subsequently may reacquire through repurchase or
otherwise. Shares of Option Stock that would have been
issuable pursuant to Options, but that are no longer issuable
because all or part of those Options have terminated or
expired, will be deemed not to have been issued for purposes
of computing the number of shares of Option Stock remaining in
the Option Pool and available for issuance.
(b) ADJUSTMENTS UPON CHANGES IN STOCK. In the event of any change
in the outstanding Stock of the Company as a result of a stock
split, reverse stock split, stock dividend, recapitalization,
combination or reclassification, appropriate proportionate
adjustments will be made in:
(i) the aggregate number of shares of Option Stock in the
Option Pool that may be issued pursuant to the
exercise of Options granted hereunder;
(ii) the Option Price and the number of shares of Option
Stock called for in each outstanding Option granted
hereunder; and
(iii) other rights and matters determined on a per share
basis under this Plan or any Option Agreement
hereunder. Any such adjustments will be made only by
the Board, and when so made will be effective,
conclusive and binding for all purposes with respect
to this Plan and all Options then outstanding. No
such adjustments will be required by reason of the
issuance or sale by the Company for cash or other
consideration of additional shares of its Stock or
securities convertible into or exchangeable for
shares of its Stock.
6. TERMS OF STOCK OPTION AGREEMENTS.
Each Option granted pursuant to this Plan will be evidenced by an
agreement (an "Option Agreement") between the Company and the person to
whom such Option is granted, in form and substance satisfactory to the
Committee in its sole discretion, consistent with this Plan. Without
limiting the foregoing, each Option Agreement (unless otherwise stated
therein) will be deemed to include the following terms and conditions:
San Joaquin Resources Inc. 1999 Stock Option Plan - Page 6
<PAGE>
(a) COVENANTS OF OPTIONEE. At the discretion of the Committee, the
person to whom an Option is granted hereunder, as a condition
to the granting of the Option, must execute and deliver to the
Company a confidential information agreement approved by the
Committee. Nothing contained in this Plan, any Option
Agreement or in any other agreement executed in connection
with the granting of an Option under this Plan will confer
upon any Optionee any right with respect to the continuation
of his or her status as an employee of, consultant or
independent contractor to, or director of, the Company or its
subsidiaries.
(b) VESTING PERIODS. Except as otherwise provided herein, each
Option Agreement may specify the period or periods of time
within which each Option or portion thereof will first become
exercisable (the "Vesting Period") with respect to the total
number of shares of Option Stock called for thereunder (the
"Total Award Option Stock"). Such Vesting Periods will be
fixed by the Committee in its discretion, and may be
accelerated or shortened by the Committee in its discretion.
Unless the Option Agreement executed by an Optionee expressly
otherwise provides and except as set forth herein, the right
to exercise an Option granted hereunder will be subject to the
following Vesting Periods, subject to the Optionee continuing
to be an Eligible Participant and the occurrence of any other
event (including the passage of time) that would result in the
cancellation or termination of the Option:
(i) no portion of the Option will be exercisable prior to
four (4) months from the Grant Date set forth in the
Option Agreement;
(ii) upon and after the expiration of four (4) months from
the Grant Date, the Optionee may purchase up to
sixteen and two-thirds percent (approximately 16.67%)
of the Total Award Option Stock; and
(iii) the Option will become exercisable on a cumulative
basis as to sixteen and two-thirds percent
(approximately 16.67%) of the Total Award Option
Stock, at the end of every period of four (4) months
that elapses after such first four-month period, so
that the Option will have become fully exercisable,
subject to the Optionee's remaining an Eligible
Participant, on the second anniversary of such Grant
Date; and
(iv) such additional vesting periods as may be determined
by the Committee in its sole discretion.
(c) EXERCISE OF THE OPTION.
(i) MECHANICS AND NOTICE. An Option may be exercised to
the extent exercisable (1) by giving written notice
of exercise to the Company, specifying the number of
full shares of Option Stock to be purchased and
accompanied by
San Joaquin Resources Inc. 1999 Stock Option Plan - Page 7
<PAGE>
full payment of the Option Price thereof and the
amount of withholding taxes pursuant to subsection
6(c)(ii) below; and (2) by giving assurances
satisfactory to the Company that the shares of Option
Stock to be purchased upon such exercise are being
purchased for investment and not with a view to
resale in connection with any distribution of such
shares in violation of the 1933 Act; provided,
however, that in the event the Option Stock called
for under the Option is registered under the 1933
Act, or in the event resale of such Option Stock
without such registration would otherwise be
permissible, this second condition will be
inoperative if, in the opinion of counsel for the
Company, such condition is not required under the
1933 Act, or any other applicable law, regulation or
rule of any governmental agency.
(ii) WITHHOLDING TAXES. As a condition to the issuance of
the shares of Option Stock upon full or partial
exercise of an NSO granted under this Plan, the
Optionee will pay to the Company in cash, or in such
other form as the Committee may determine in its
discretion, the amount of the Company's tax
withholding liability required in connection with
such exercise. For purposes of this subsection
6(c)(ii), "tax withholding liability" will mean all
federal and state income taxes, social security tax,
and any other taxes applicable to the compensation
income arising from the transaction required by
applicable law to be withheld by the Company.
(d) PAYMENT OF OPTION PRICE. Each Option Agreement will specify
the Option Price with respect to the exercise of Option Stock
thereunder, to be fixed by the Committee in its discretion,
but in no event will the Option Price for an ISO granted
hereunder be less than the Fair Market Value (or, in case the
Optionee is a 10% Stockholder, one hundred ten percent (110%)
of such Fair Market Value) of the Option Stock at the time
such ISO is granted, and in no event will the Option Price for
an NSO granted hereunder be less than eighty-five percent
(85%) of Fair Market Value. The Option Price will be payable
to the Company in United States dollars in cash or by check
or, such other legal consideration as may be approved by the
Committee, in its discretion.
(i) For example, the Committee, in its discretion, may
permit a particular Optionee to pay all or a portion
of the Option Price, and/or the tax withholding
liability set forth in subsection 6(c)(ii) above,
with respect to the exercise of an Option either by
surrendering shares of Stock already owned by such
Optionee or by withholding shares of Option Stock,
provided that the Committee determines that the fair
market value of such surrendered Stock or withheld
Option Stock is equal to the corresponding portion of
such Option Price and/or tax withholding liability,
as the case may be, to be paid for therewith.
(ii) If the Committee permits an Optionee to pay any
portion of the Option Price and/or tax withholding
liability with shares of Stock with respect to the
San Joaquin Resources Inc. 1999 Stock Option Plan - Page 8
<PAGE>
exercise of an Option (the "Underlying Option") as
provided in subsection 6(d)(i) above, then the
Committee, in its discretion, may grant to such
Optionee (but only if Optionee remains an Eligible
Participant at that time) additional NSOs, the number
of shares of Option Stock called for thereunder to be
equal to all or a portion of the Stock so surrendered
or withheld (a "Replacement Option"). Each
Replacement Option will be evidenced by an Option
Agreement. Unless otherwise set forth therein, each
Replacement Option will be immediately exercisable
upon such grant (without any Vesting Period) and will
be coterminous with the Underlying Option. The
Committee, in its sole discretion, may establish such
other terms and conditions for Replacement Options as
it deems appropriate.
(e) TERMINATION OF THE OPTION. Except as otherwise provided
herein, each Option Agreement will specify the period of time,
to be fixed by the Committee in its discretion, during which
the Option granted therein will be exercisable, not to exceed
ten years from the date of grant in the case of an ISO (the
"Option Period"); provided that the Option Period will not
exceed five years from the date of grant in the case of an ISO
granted to a 10% Stockholder. To the extent not previously
exercised, each Option will terminate upon the expiration of
the Option Period specified in the Option Agreement; provided,
however, that each such Option will terminate, if earlier:
(i) ninety days after the date that the Optionee ceases
to be an Eligible Participant for any reason, other
than by reason of death or disability or a Just Cause
Termination;
(ii) twelve months after the date that the Optionee ceases
to be an Eligible Participant by reason of such
person's death or disability; or
(iii) immediately as of the date that the Optionee ceases
to be an Eligible Participant by reason of a Just
Cause Termination.
In the event of a sale or all or substantially all of the
assets of the Company, or a merger or consolidation or other
reorganization in which the Company is not the surviving
corporation, or in which the Company becomes a subsidiary of
another corporation (any of the foregoing events, a "Corporate
Transaction"), then notwithstanding anything else herein, the
right to exercise all then outstanding Options will vest
immediately prior to such Corporate Transaction and will
terminate immediately after such Corporate Transaction;
provided, however, that if the Board, in its sole discretion,
determines that such immediate vesting of the right to
exercise outstanding Options is not in the best interests of
the Company, then the successor corporation must agree to
assume the outstanding Options or substitute therefor
comparable options of such successor corporation or a parent
or subsidiary of such successor corporation.
San Joaquin Resources Inc. 1999 Stock Option Plan - Page 9
<PAGE>
(f) OPTIONS NONTRANSFERABLE. No Option will be transferable by the
Optionee otherwise than by will or the laws of descent and
distribution, or in the case of an NSO, pursuant to a QDRO.
During the lifetime of the Optionee, the Option will be
exercisable only by him or her, or the transferee of an NSO if
it was transferred pursuant to a QDRO.
(g) QUALIFICATION OF STOCK. The right to exercise an Option will
be further subject to the requirement that if at any time the
Board determines, in its discretion, that the listing,
registration or qualification of the shares of Option Stock
called for thereunder upon any securities exchange or under
any state or federal law, or the consent or approval of any
governmental regulatory authority, is necessary or desirable
as a condition of or in connection with the granting of such
Option or the purchase of shares of Option Stock thereunder,
the Option may not be exercised, in whole or in part, unless
and until such listing, registration, qualification, consent
or approval is effected or obtained free of any conditions not
acceptable to the Board, in its discretion.
(h) ADDITIONAL RESTRICTIONS ON TRANSFER. By accepting Options
and/or Option Stock under this Plan, the Optionee will be
deemed to represent, warrant and agree as follows:
(i) SECURITIES ACT OF 1933. The Optionee understands that
the shares of Option Stock have not been registered
under the 1933 Act, and that such shares are not
freely tradeable and must be held indefinitely unless
such shares are either registered under the 1933 Act
or an exemption from such registration is available.
The Optionee understands that the Company is under no
obligation to register the shares of Option Stock.
(ii) OTHER APPLICABLE LAWS. The Optionee further
understands that Transfer of the Option Stock
requires full compliance with the provisions of all
applicable laws.
(iii) INVESTMENT INTENT. Unless a registration statement is
in effect with respect to the sale of Option Stock
obtained through exercise of Options granted
hereunder: (1) Upon exercise of any Option, the
Optionee will purchase the Option Stock for his or
her own account and not with a view to distribution
within the meaning of the 1933 Act, other than as may
be effected in compliance with the 1933 Act and the
rules and regulations promulgated thereunder; (2) no
one else will have any beneficial interest in the
Option Stock; and (3) he or she has no present
intention of disposing of the Option Stock at any
particular time.
(i) COMPLIANCE WITH LAW. Notwithstanding any other provision of
this Plan, Options may be granted pursuant to this Plan, and
Option Stock may be issued pursuant to the exercise thereof by
an Optionee, only after there has been compliance with all
applicable federal and state securities laws, and all of the
same will be subject to this
San Joaquin Resources Inc. 1999 Stock Option Plan - Page 10
<PAGE>
overriding condition. The Company will not be required to
register or qualify Option Stock with the Securities and
Exchange Commission or any State agency, except that the
Company will register with, or as required by local law, file
for and secure an exemption from such registration
requirements from, the applicable securities administrator and
other officials of each jurisdiction in which an Eligible
Participant would be granted an Option hereunder prior to such
grant.
(j) STOCK CERTIFICATES. Certificates representing the Option Stock
issued pursuant to the exercise of Options will bear all
legends required by law and necessary to effectuate this
Plan's provisions. The Company may place a "stop transfer"
order against shares of the Option Stock until all
restrictions and conditions set forth in this Plan and in the
legends referred to in this section 6(k) have been complied
with.
(k) NOTICES. Any notice to be given to the Company under the terms
of an Option Agreement will be addressed to the Company at its
principal executive office, Attention: Corporate Secretary, or
at such other address as the Company may designate in writing.
Any notice to be given to an Optionee will be addressed to the
Optionee at the address provided to the Company by the
Optionee. Any such notice will be deemed to have been duly
given if and when enclosed in a properly sealed envelope,
addressed as aforesaid, registered and deposited, postage and
registry fee prepaid, in a post office or branch post office
regularly maintained
(l) OTHER PROVISIONS. The Option Agreement may contain such other
terms, provisions and conditions, including such special
forfeiture conditions, rights of repurchase, rights of first
refusal and other restrictions on Transfer of Option Stock
issued upon exercise of any Options granted hereunder, not
inconsistent with this Plan, as may be determined by the
Committee in its sole discretion.
(m) FORMULA OPTIONS. [Reserved for future consideration]
7. PROCEEDS FROM SALE OF STOCK.
Cash proceeds from the sale of shares of Option Stock issued from time
to time upon the exercise of Options granted pursuant to this Plan will
be added to the general funds of the Company and as such will be used
from time to time for general corporate purposes.
8. MODIFICATION, EXTENSION AND RENEWAL OF OPTIONS.
Subject to the terms and conditions and within the limitations of this
Plan, and except with respect to Formula Options, the Committee may
modify, extend or renew outstanding Options granted under this Plan, or
accept the surrender of outstanding Options (to the extent not
theretofore exercised) and authorize the granting of new Options in
substitution therefor (to the extent not theretofore exercised).
Notwithstanding the foregoing, however, no modification of any Option
will, without the consent of the holder of the Option, alter or impair
any rights or obligations under any Option theretofore granted under
this Plan.
San Joaquin Resources Inc. 1999 Stock Option Plan - Page 11
<PAGE>
9. AMENDMENT AND DISCONTINUANCE.
The Board may amend, suspend or discontinue this Plan at any time or
from time to time; provided that no action of the Board will cause ISOs
granted under this Plan not to comply with Section 422 of the Code
unless the Board specifically declares such action to be made for that
purpose and provided further that no such action may, without the
approval of the stockholders of the Company, materially increase (other
than by reason of an adjustment pursuant to section 5(b) hereof) the
maximum aggregate number of shares of Option Stock in the Option Pool
that may be issued under Options granted pursuant to this Plan or
materially increase the benefits accruing to Plan participants or
materially modify eligibility requirements for the participants.
Provided, further, that the provisions of section 6(m) hereof may not
be amended more often than once during any six (6) month period, other
than to comport with changes in the Code, the Employee Retirement
Income Security Act, or the rules and regulations thereunder. Moreover,
no such action may alter or impair any Option previously granted under
this Plan without the consent of the holder of such Option.
10. PLAN COMPLIANCE WITH RULE 16B-3.
With respect to persons subject to Section 16 of the Securities
Exchange Act of 1934, transactions under this plan are intended to
comply with all applicable conditions of Rule 16b-3 or its successors
under the 1934 Act. To the extent any provision of the plan or action
by the plan administrators fails so to comply, it shall be deemed null
and void, to the extent permitted by law and deemed advisable by the
plan administrators.
11. COPIES OF PLAN.
A copy of this Plan will be delivered to each Optionee at or before the
time he or she executes an Option Agreement.
***
Date Plan Adopted by Board of Directors: ________________, 1999
Date Plan Approved by Stockholders: January 17, 1999
San Joaquin Resources Inc. 1999 Stock Option Plan - Page 12
<PAGE>
Exhibit 10.1
Operating Agreement of Hilton Petroleum Greater
San Joaquin Basin Joint Venture LLC
<PAGE>
OPERATING AGREEMENT
OF
HILTON PETROLEUM
GREATER SAN JOAQUIN BASIN
JOINT VENTURE LLC
THIS AGREEMENT is made and entered into this 6th day of July, 1999, by and
between HILTON PETROLEUM GREATER SAN JOAQUIN BASIN JOINT VENTURE LLC, a Colorado
limited liability company (the "Company") and those persons whose names appear
on Schedule A attached hereto, hereinafter referred to as "Members."
RECITALS:
The Company has the right to acquire a 3% participating interest in the Greater
San Joaquin Joint Venture (the "Joint Venture"), which is a consortium of oil
companies headed by Berkley Petroleum Ltd. as the joint venture operator. The
working interest and net revenue interest of the Company for a particular
prospect will vary depending upon the terms of the lease related to the
prospect. The Company shall be bound by the Joint Venture operating agreement.
Hilton Petroleum Ltd., a Yukon corporation ("Hilton Petroleum") is appointed as
the permanent Manager of the Company.
The cost of this interest is $1,550,000 and the agreement of the Company to pay
its share of all costs associated with the Joint Venture. These costs include
but may not be limited to drilling costs associated with each well; acreage
costs for any additional acreage acquired in addition to the 20,000 acres
already leased by the Joint Venture; and operating expenses associated with any
commercially developed well(s). The Company shall pay 4% of all costs to earn
its working interest in the first three wells and 3% of all costs to earn its
working interest in wells four, five, and six. The Company's share of the
estimated cost for the first well is $400,000. Accordingly, the Company is to be
capitalized initially with $1,950,000 by selling 20 Units of Membership interest
in the Company at $97,500 per Unit. Each Unit shall represent a 5% interest in
the Company.
The Company's share of the estimated costs for the first three wells is
$1,200,000. The estimated cost of drilling any future wells will be based on an
Authority for Expenditure provided by the well's operator. Calls for additional
capital contributions are typically due within 10 days of notification by the
operator as described in the Joint Venture operating agreement.
For its services as Manager of the Company, Hilton Petroleum shall be paid a
monthly management fee following the completion of the sixth well of $5,000 plus
actual costs.
IT IS AGREED, in consideration of the promises, covenants, performance, and
mutual consideration herein as follows:
<PAGE>
I
FORMATION OF COMPANY
1.1. ARTICLES OF ORGANIZATION. This Company is organized pursuant to the
provisions of the Limited Liability Company Laws of the State of
Colorado and pursuant to Articles of Organization filed with the
Secretary of State on June __, 1999. The rights and obligations of the
Company and the Members shall be provided in the Articles of
Organization and this Operating Agreement of Hilton Petroleum Greater
San Joaquin Basin Joint Venture LLC.
1.2. CONFLICT BETWEEN ARTICLES OF ORGANIZATION AND THIS AGREEMENT. If there
is any conflict between the provisions of the Articles of Organization
and this Operating Agreement, the terms of the Articles of Organization
shall control.
1.3 RECITALS PART OF THIS AGREEMENT. The recitals set forth above are
incorporated in this Agreement by this reference and shall be used as
necessary to interpret the meaning of this Agreement.
II
CAPITAL CONTRIBUTIONS
2.1 CONTRIBUTIONS. The minimum capital contribution to be made by a Member
is $97,500 for one Unit or 5% interest in the Company. The capital
contributions to be made by the Members and with which the Company
shall begin business are set forth on Schedule A attached hereto:
2.2. ADDITIONAL CAPITAL CONTRIBUTIONS. In the event that the operator of the
Joint Venture notifies the Company that a cash call is due or in the
event that the cash funds of the Company are insufficient to meet its
operating expenses, the Manager shall notify each of the Members, by
registered mail or overnight delivery service, of its share of the cash
required and the Members shall make additional capital contributions,
in the proportion of their capital contributions within 10 days of the
Member's receipt of the notification from the Manager.
2.3 FAILURE TO PAY ADDITIONAL CAPITAL CONTRIBUTION. In the event that a
Member fails to pay its additional capital contribution, on the 11th
day after having received notification pursuant to Section 2.2 above,
with no right to cure such failure, that defaulting Member's interest
in the Company shall be deemed to have been purchased by Hilton
Petroleum for shares of common stock of Hilton Petroleum or shall be
designated as "nonparticipatory" as set forth below:
2.3.1 If such failure should occur within the first 12 months after
the defaulting Member's initial capital contribution, Hilton
Petroleum shall pay the defaulting Member's share of the
additional capital contribution, but the shares of Hilton
Petroleum shall not be
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Operating Agreement - Page 2
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issued until 12-month anniversary of the initial capital
contribution. The value of the shares shall be based on the
30-day average closing price of the shares on the Vancouver
Stock Exchange immediately prior to the 12-month anniversary
date. The amount of the defaulting Member's investment divided
by the average price shall be the number of shares issued for
the defaulting Member's interest in the Company.
2.3.2 If such failure should occur after the first 12 months but
within the first 24 months after the defaulting Member's
initial capital contribution, Hilton Petroleum shall pay the
defaulting Member's share of the additional capital
contribution, and the value of the shares shall be determined
by using the 30-day average closing price of the shares on the
Vancouver Stock Exchange immediately prior to the date of
default.
2.3.3 If such failure should occur after the first 24 months after
the defaulting Member's initial capital contribution, Hilton
Petroleum shall pay the defaulting Member's share of the
additional capital contribution, and the defaulting Member's
interest shall be designated as "nonparticipatory" until that
Member's share of cash flow, if any, from an ongoing operation
has paid Hilton Petroleum 300% of the defaulted cash call
amount(s). If no cash flow can be credited to the Member's
interest from ongoing production for a period of 120 days from
the date of default, the defaulting Member's interest will
default to Hilton Petroleum.
2.4. LOANS. In lieu of voting an additional assessment of capital to meet
operating expenses or to finance new investments, the Company may, as
determined by the Manager, borrow money from one or any of the Manager,
Members, or third persons. However, the Company may only borrow funds
for expenses or investments relating to the Joint Venture. In the event
that a loan agreement is negotiated with a Manager or Member, he or she
shall be entitled to receive interest at a rate and upon such terms to
be determined by the Manager, and said loan shall be repaid to the
Manager or Member, with unpaid interest, if any, as soon as the affairs
of the Company will permit. The loan shall be evidenced by a promissory
note obligating the assets of the Company. Such interest and repayment
of the amounts so loaned are to be entitled to priority of payment over
the division and distribution of capital contributions and profit among
Members.
III
MEMBERS' ACCOUNTS; ALLOCATION OF
PROFIT AND LOSS; DISTRIBUTIONS
3.1. CAPITAL ACCOUNTS. A separate capital account shall be maintained for
each Member. The capital accounts of each Member shall initially
reflect the amounts specified in Section 2.1. No Member shall withdraw
any part of his or her capital account, except upon the approval of the
Manager. If the capital account of a Member becomes impaired, or if he
or she withdraws said capital account with approval of the Manager, his
or her share of subsequent
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Company profits shall be credited first to his or her capital account
until that account has been restored, before such profits are credited
to his or her income account. If, during the period when a Member's
capital account is impaired or he or she has withdrawn funds therefrom
as hereinbefore provided, an additional contribution is required of the
Member for the purposes specified in Section 2.2, then the Member with
such withdrawn or impaired capital account shall be required to
contribute his or her proportionate share of the additional capital
contribution and the deficiency then existing in his or her capital
account, so as to return the capital account to the same proportion
existing as of the date of the additional contribution. No interest
shall be paid on any capital contributions to the Company.
3.2. INCOME ACCOUNTS. A separate income account shall be maintained for each
Member. Company profits, losses, gains, deductions, and credits shall
be charged or credited to the separate income accounts annually unless
a Member has no credit balance in his or her income account, in which
event losses shall be charged to his or her capital account, except as
provided in Section 3.1. The profits, losses, gains, deductions, and
credits of the Company shall be distributed or charged to the Members
as provided in Section 3.3. No interest shall be paid on any credit
balance in an income account.
3.3. ALLOCATIONS AMONG MEMBERS. The profits and gains of the Company shall
be divided and the losses, deductions, and credits of the Company shall
be borne in the proportion of their capital contributions.
3.4. DISPROPORTIONATE CAPITAL ACCOUNTS. No interest or additional allocation
profits, losses, gains, deductions, and credits shall inure to any
Member by reason of his or her capital account being proportionately in
excess of the capital accounts of the other Members.
3.5. DISTRIBUTIONS OF ASSETS.
3.5.1. All distributions of assets of the Company, including cash,
shall be made in the same allocations among Members as
described in Section 3.3.
3.5.2. Within 30 days from the end of each fiscal quarter, the
Manager shall make a distribution to the Members that portion
of the net revenues of the Company, or any other assets, which
the Manager determines, in its sole discretion, are not
necessary for the Company's on-going operations; provided,
however, that no distribution of assets may be made to a
Member if, after giving effect to the distribution, all
liabilities of the Company, other than liabilities to Members
on account of their capital and income accounts, would exceed
the fair value of the Company assets.
3.5.3. A Member has no right to demand and receive any distribution
from the Company in any form other than cash.
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IV
RULES RELATING TO THE MEMBERS
4.1. ADMISSION OF NEW MEMBERS. Additional Members (i.e. those who purchase
their interests directly from the Company) may be admitted upon the
unanimous written consent of all Members.
4.2. VOTING OF MEMBERS. A Member shall be entitled to vote the percentage of
ownership interest held by that Member on any matter for which Members
are required to vote. A member may vote in person or by proxy at any
meeting of Members. All decisions of the Members shall be made by
Members holding a majority in interest of the Company at a properly
called meeting of the Members at which a quorum is present, or by
unanimous written consent of the Members.
4.3. MEETINGS OF MEMBERS.
4.3.1. Meetings of Members may be held at such time and place, either
within or without the State of Colorado, as may be determined
by the Manager or the person or persons calling the meeting.
4.3.2. An annual meeting of the Members shall be held at such time
and place as shall be determined by a resolution of the
Manager during each fiscal year of the Company. A Member may
petition any court of competent jurisdiction in the State of
Colorado to order that an annual meeting of the Members be
held if an annual meeting is not held within six (6) months
after the end of the Company's fiscal year or fifteen (15)
months after the Company's last annual meeting, whichever is
earlier.
4.3.3. A special meeting of the Members may be called by the Manager
or by at least one-tenth of all of the Members entitled to
vote at the meeting.
4.3.4. Written notice stating the place, day, and hour of the meeting
and, in the case of a special meeting, the purpose for which
the meeting is called, shall be delivered not less than ten
(10) days nor more than fifty (50) days before the date of the
meeting, either personally or by mail, by or at the direction
of the Manager or any other person calling the meeting, to
each Member of record entitled to vote at such meeting. A
waiver of notice in writing, signed by the Member before, at,
or after the time of the meeting stated in the notice shall be
equivalent to the giving of such notice.
4.3.5. By attending a meeting, a Member waives objection to the lack
of notice or defective notice unless the Member, at the
beginning of the meeting, objects to the holding of the
meeting or the transacting of business at the meeting. A
Member who attends a
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meeting also waives objection to consideration at such meeting
of a particular matter not within the purpose described in the
notice unless the Member objects to considering the matter
when it is presented.
4.4. QUORUM AND ADJOURNMENT. Members holding a majority in interest of the
Company entitled to vote shall constitute a quorum at the meeting of
Members. If a quorum is not represented at any meeting of the Members,
such meeting may be adjourned for a period not to exceed sixty (60)
days at any one adjournment; provided, however, that if the adjournment
is for more than thirty (30) days, a notice of the adjourned meeting
shall be given to each Member entitled to vote at the meeting.
4.5 SALE OF INTEREST IN JOINT VENTURE OR OTHER ASSETS. The Members of the
Company may vote to sell the Company's interest in the Joint Venture or
other assets of the Company so long as Members holding at least 60% of
the interest in the Company vote in favor of this action and so long as
Hilton Petroleum remains as the Manager of the Company.
V
RULES RELATING TO MANAGERS
5.1. GENERAL POWERS. Management and the conduct of the business of the
Company shall be vested in the Manager, Hilton Petroleum. The Manager
may adopt resolutions to govern its activities and the manner in which
it shall perform its duties to the Company.
5.2. DUTIES OF MANAGER.
5.2.1. The Manager shall have the duties and responsibilities as
described in the Colorado Limited Liability Company Act, as
amended from time to time.
5.2.2. The Manager shall execute any instruments or documents
providing for the acquisition, mortgage, or disposition of the
property of the Company.
5.2.3. Any debt contracted or liability incurred by the Company shall
be authorized only by a resolution of the Manager, and any
instruments or documents required to be executed by the
Company shall be signed by the Manager.
5.2.4. The Manager may delegate an employee or agent to be
responsible for the daily and continuing operations of the
business affairs of the Company. All decisions affecting the
policy and management of the Company, including the control,
employment, compensation, and discharge of employees; the
employment of contractors and subcontractors; and the control
and operation of the premises and property, including the
improvement, rental, lease, maintenance, and all other matters
pertaining to the operation of the property of the business
shall be made by the Manager.
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Operating Agreement - Page 6
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5.2.5. Any Manager may draw checks upon the bank accounts of the
Company and may make, deliver, accept, or endorse any
commercial paper in connection with the business affairs of
the Company.
5.3. DEVOTION TO DUTY. At all times during the term of Manager, the Manager
shall give reasonable time, attention, and attendance to, and shall use
reasonable efforts in the business of the said Company; shall, with
reasonable shall and power, exert itself for the interest, benefit, and
advantage of said Company; and shall truly and diligently pursue the
Company objectives.
5.4. INDEMNIFICATION. The Manager, employees, and agents of the Company
shall be entitled to be indemnified by the Company to the extent
provided in the Colorado Limited Liability Company Act, as amended from
time to time, and shall be entitled to the advance of expenses,
including attorneys' fees, in the defense or prosecution of a claim
against it, him or her in the capacity of Manager, employee, or agent.
VI
BOOKS
6.1. LOCATION OF RECORDS. The books of the Company shall be maintained at
the registered office of the Company.
6.2. ACCESS TO RECORDS AND ACCOUNTING. Each Member shall at all times have
access to the books and records of the Company for inspection and
copying. Each Member shall also be entitled:
6.2.1. To obtain from the Manager upon reasonable demand for any
purpose such information reasonably related to the Member's
Membership Interest in the Company;
6.2.2. To have true and full information regarding the state of the
business and financial condition and any other information
regarding the affairs of the Company;
6.2.3. To have a copy of the Company's federal, state, and local
income tax returns for each year promptly after they are
available to the Company; and
6.2.4. To have a formal accounting of the Company affairs whenever
circumstances render an accounting just and reasonable.
6.3. ACCOUNTING RULES. The books shall be maintained on a cash basis. The
fiscal year of the Company shall be the calendar year. Distributions to
income accounts shall be made annually by the 15th of March following
the end of the fiscal year. The books shall be closed and balanced at
the end of each calendar year and, if an audit is determined to be
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necessary by vote or consent of the Manager, it shall be made as of the
closing date. The Manager may authorize the preparation of year-end
profit-and-loss statements, balance sheet, and tax returns by a public
accountant. Any tax forms required to be sent to the Members shall be
sent no later than the 15th of March following the fiscal year end.
VII
DISSOLUTION
7.1. CAUSES OF DISSOLUTION. The Company shall be dissolved upon the
occurrence of any of the following events:
7.1.1. At any time by unanimous agreement of the Members;
7.1.2. Upon the termination of the Joint Venture; or
7.1.3. Upon the dissolution of the Manager.
7.2. DISTRIBUTION OF ASSETS IF BUSINESS UPON DISSOLUTION. In the event of
dissolution of the Company, the Manager shall proceed with reasonable
promptness to sell the real and personal property owned by the Company
and to liquidate the business of the Company. Upon dissolution, the
assets of the Company business shall be used and distributed in the
following order:
7.2.1. Any liabilities and liquidating expenses of the Company will
first be paid;
7.2.2. The reasonable compensation and expenses of the Manager in
liquidation shall be paid;
7.2.3. The amount then remaining shall be paid to and divided among
the Members in accordance with the statutory scheme for
distribution and liquidation of the Company under the Colorado
Limited Liability Company Act, as amended from time to time.
VIII
EXPULSION OF A MEMBER
8.1. CAUSES OF EXPULSION. A Member may be expelled from the Company upon the
occurrence of any of the following events:
8.1.1. If a Member shall violate any of the provisions of this
Agreement; or
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8.1.2. If a Member's Membership Interest shall be subject to a
charging order or tax lien, which is not dismissed or resolved
to the satisfaction of the Manager of the Company within
thirty (30) days after assessment or attachment.
8.2. NOTICE OF EXPULSION. Upon the occurrence of an event described in
Section 8.1, written notice of expulsion shall be given to the
violating Member either by serving the same by personal delivery or by
mailing the same by certified mail to his or her last known place of
residence, as shown on the books of said Company. Upon the receipt of
personal notice, or the date of the postmark for certified mail, the
violating Member shall be considered expelled, and shall have no
further rights as a Member of the Company, except to receive the amount
described in Section 8.3 below.
8.3 PAYMENT FOR MEMBERSHIP INTEREST. The violating Member shall be entitled
to the amount of his or her capital account as of the date of
expulsion, plus his or her income account as of the end of the prior
fiscal year, decreased by his or her share of the Company losses,
deductions, and credits to the Company computed to the date of
expulsion, and decreased by withdrawals such as would have been charged
to his or her income account during the present year to the date of
expulsion. This amount is subject to setoff for any damages incurred as
the result of the violating Member's actions.
IX
BANKRUPTCY OF A MEMBER
9.1. BANKRUPTCY DEFINED. A Member shall be considered bankrupt if the Member
files a petition in bankruptcy (or an involuntary petition in
bankruptcy is filed against the Member and the petition is not
dismissed within sixty (60) days) or makes an assignment for the
benefit of creditors or otherwise takes any proceeding or enters into
any agreement for compounding his or her debts other than by the
payment of them in the full amount thereof, or is otherwise regarded as
insolvent under any Colorado insolvency act.
9.2. EFFECTIVE DATE FOR BANKRUPTCY. The Effective Date of a Member's
bankruptcy shall be the date that the Manager, having learned of the
Member's bankruptcy, gives notice in writing stating that the Member is
regarded as bankrupt under this Agreement, such notice to be served
personally or by leaving the same at the place of business of the
Company. As of the Effective Date, the bankrupt Member shall have no
further rights as a Member of the Company, except to receive the
amounts to which he or she is entitled under Section 8.3.
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X
RETIREMENT OR RESIGNATION OF A MEMBER
10.1. RIGHT TO RETIRE OR RESIGN. A Member shall have the right, at any time,
to retire or resign as a Member of the Company by giving three (3)
months' notice to the Company at the Company's place of business.
10.2. CONSEQUENCES OF RETIREMENT OR RESIGNATION. Upon giving notice of an
intention to retire or resign, the Withdrawn Member shall only be
entitled to the payments provided in Section 8.3.
XI
DEATH OF A MEMBER
11.1. DEATH OF A MEMBER. Upon the death of a Member, the deceased Member's
rights as Member of the Company shall cease and terminate except as
provided in this Article XI.
11.2. CONSEQUENCES OF DEATH. The Company shall purchase the Membership
Interest of the deceased Member as provided in Section 8.3, and the
closing of such purchase shall be within thirty (30) days of the notice
of such election, except in the event the Company has life insurance on
the decedent, in which event the amount and method of payment for the
Membership Interest of the deceased Member will be as provided in
Section 11.3.
11.3. INSURANCE. The Company may, but is not obligated to, contract for life
insurance on the lives of each of the Members, or any individual
Member, in any amount not disproportionate to the value of each
Member's Membership Interest. In the event of death of a Member,
insurance proceeds paid to the Company will be used to purchase the
Membership Interest of the deceased Member. The purchase price shall be
the greater of the amount determined under Section 8.3 or the amount of
insurance proceeds received by the Company. The payment of the purchase
price to the decedent's representatives or heirs shall be made within
thirty (30) days following receipt of the insurance proceeds by the
Company.
XII
SALE OF A MEMBER'S INTEREST
12.1. PROVISIONS RESTRICTING SALE OF MEMBERSHIP INTERESTS. In the event that
a Member desires to sell, assign, or otherwise transfer his or her
Membership Interest in the Company and has obtained a bona fide offer
for the sale thereof made by some person not a member of this Company,
he or she shall first offer to sell, assign, or otherwise transfer the
Membership Interest to the other Members at the price and on the same
terms as previously offered him or her, and each of the other Members
shall have the right to purchase his or her proportionate share of the
selling Member's Membership Interest. The selling Member shall
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notify the other Members of such offer by registered mail or overnight
delivery within 10 days of the receipt of the offer. Any Member which
desires to purchase his or her proportionate interest in the selling
Member's Membership Interest shall notify the selling Member in
writing, by registered mail or overnight delivery, within 30 days of
receipt of the offer from the selling Member. If any Member does not
desire to purchase the Membership Interest on such terms or at such
price and the entire Membership Interest is not purchased by the other
Members, no other Member may purchase any part of the Membership
Interest, and the selling Member may then sell, assign, or otherwise
transfer his or her entire Membership Interest in the Company to the
person making the said offer at the price offered. The intent of this
provision is to require that the entire Membership Interest of a Member
be sold intact, without fractionalization. A purchaser of a Membership
Interest of the Company shall not become a Member and shall not
participate in the management of the Company, without the unanimous
consent of the non-selling Members, but shall be entitled to receive
the share of profits, gains, losses, deductions, credits, and
distributions to which the selling Member would be entitled.
12.2 SALE OF MEMBERSHIP INTEREST TO HILTON PETROLEUM. After 12 months but
before 25 months after a Member's initial capital contribution, the
Member may sell the interest to Hilton Petroleum in exchange for shares
of Hilton Petroleum common stock. The value of the stock shall be
determined by the average closing price for the stock on the Vancouver
Stock Exchange for the 30 days immediately after Hilton Petroleum has
received notification in writing of a Member's desire to sell to Hilton
Petroleum. The number of shares issued to the selling Member shall be
the 30-day average closing price divided into the selling Member's
total investment amount.
XIII
MEMBERS' COVENANTS
13.1. MEMBER'S PERSONAL DEBTS. In order to protect the property and assets of
the Company from any claim against any Member for personal debts owed
by such Member, each Member shall promptly pay all debts owing by him
or her and shall indemnify the Company from any claim that might be
made to the detriment of the Company by any personal creditor of such
Member.
13.2. ALIENATION OF MEMBERSHIP INTEREST. No Member shall, except as provided
in Article XII, sell, assign, mortgage, or otherwise encumber his or
her Membership Interest in the Company or in its capital assets or
property; or enter into any agreement of any kind that will result in
any person, firm, or other organization becoming interested with him or
her in the Company; or do any act detrimental to the best interests of
the Company.
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XIV
ARBITRATION
14.1. ARBITRATION. Any dispute, claim, or controversy arising out of or
relating to this Agreement or the breach thereof shall be settled by
arbitration in accordance with the rules then obtaining of the American
Arbitration Association. Judgment upon the award rendered by said
arbitration may be entered in any court having jurisdiction thereof.
Costs of arbitration shall be paid by the loser. If one Member notifies
the other Member in writing of a dispute, claim, or controversy within
six (6) months of the arising of such dispute, claim, or controversy
and requests that the same be arbitrated, no legal action may then be
commenced thereon, except to obtain judgment on the arbitration award.
XV
MISCELLANEOUS PROVISIONS
15.1. INUREMENT. This Agreement shall be binding upon the parties hereto and
their respective heirs, executors, administrators, successors, and
assigns, and each person entering into this Agreement acknowledges that
this Agreement constitutes the sole and complete representation made to
him or her regarding the Company, its purpose and business, and that no
oral or written representations or warranties of any kind or nature
have been made regarding the proposed investments, nor any promises,
guarantees, or representations regarding income or profit to be derived
from any future investment.
15.2. MODIFICATION. This Agreement may be modified from time to time as
necessary only by the written agreement of the Company, acting through
the vote or consent of its Managers, and the Members.
15.3. SEVERABILITY. The provisions of this Agreement are severable and
separate, and if one or more is voidable or void by statute or rule of
law, the remaining provisions shall be severed therefrom and shall
remain in full force and effect.
15.4. GOVERNING LAW. This Agreement and its terms are to be construed
according to the laws of the State of Colorado.
15.5. COUNTERPARTS. This Agreement has been executed in counterparts and each
such counterpart shall be deemed an original of the Agreement for all
purposes.
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IN WITNESS WHEREOF, we have hereunto set our hands and seals on the day first
written above, in _______________________.
HILTON PETROLEUM GREATER SAN
JOAQUIN BASIN JOINT VENTURE LLC
By: /s/ Donald Busby
-------------------------------------------
Authorized officer of Hilton
Petroleum Ltd., Manager
Members:
By: /s/ Nick DeMare
-----------------------------------------
Authorized officer of Hilton
Petroleum Ltd., attorney-in-fact for the
Members
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SCHEDULE A
Members Contribution Units of Interest
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Exhibit 10.2
Consulting and Overriding Royalty Agreement with Davis & Namson
<PAGE>
17
D:\WINWORD\JOANNE\BUSINESS\CONSULTING AND OVERRIDING ROYALTY AGREEMENT.doc
CONSULTING AND OVERRIDING ROYALTY AGREEMENT
DATED SEPTEMBER 20, 1999
BETWEEN:
SAN JOAQUIN OIL & GAS LTD., a corporation incorporated under the laws
of the State of Nevada and having an office in the City of Calgary,
in the Province of Alberta ("San Joaquin")
- and -
DAVIS & NAMSON CONSULTING GEOLOGISTS, a California Partnership,
having an office in the City of San Fernando, in the State of
California (the "Consultant")
WHEREAS:
A. San Joaquin wishes to retain the Consultant to provide geological
consulting services in locating, evaluating, investigating, appraising
and acquiring hydrocarbon prospects in the San Joaquin and Sacramento
basin of California in accordance with the directions of San Joaquin;
and
B. The Consultant has agreed to provide such services to San Joaquin on
the terms and subject to the conditions set out herein.
THE PARTIES AGREE AS FOLLOWS:
ARTICLE 1 - INTERPRETATION
1.1 DEFINITIONS
In this Agreement, unless the context otherwise requires, the following terms
shall have the following meanings:
"ACQUIRED PROSPECTS" means all Prospects set forth in Prospect Letters
in which an interest is acquired by San Joaquin within a period of two
years from the date of acceptance of each applicable Prospect Letter,
including interests obtained by way of lease, purchase, farmin or other
types of agreements and also including any 50% Interests San Joaquin
has elected to acquire;
"CONFIDENTIAL INFORMATION" includes: a) all Prospects, data,
evaluations, information and reports prepared as part of the Services;
b) all confidential and proprietary information and trade secrets
relating to the Services; and c) techniques, inventions, ideas,
processes and procedures, know-how, computer software and related
intellectual property and similar information concerning the business
of San Joaquin;
"CONSULTANT'S REPRESENTATIVES" means the Partners, employees, agents,
officers, directors, representatives, consultants, or advisors of the
Consultant;
"EFFECTIVE DATE" means September 20, 1999;
"50% INTEREST" is defined in Subsection 3.3 b);
"INITIAL TERM" means the period from the Effective Date until January
20, 2000, inclusive;
"NON-ACQUIRED PROSPECTS" means all Prospects other than Acquired
Prospects;
"NOTICES" is defined in Section 10.1;
"OVERRIDING ROYALTY" is defined in Schedule "B";
"PARTIES" means San Joaquin and the Consultant, and "PARTY" means
either of them;
"PARTNERS" means Jay Namson and Thom Davis or either of them, as the
context requires;
"PERSON" includes a corporation, an individual, a partnership, a firm,
an association and a syndicate;
"PRODUCTS" is defined in Section 5.1;
"PROHIBITED AREA" shall mean all lands within the Study Areas for which
Prospects have been generated by Consultant;
"PROHIBITED BUSINESS" means any business which may be directly or
indirectly in competition with the business of San Joaquin in the
Prohibited Area;
"PROSPECT MAP" is defined in Section 3.1;
"PROSPECTS" means all prospects relating to interests in lands or the
hydrocarbon rights thereto generated by the Consultant as part of the
Services pursuant to the terms of this Agreement, and "PROSPECT" means
a particular one of the Prospects;
"PROSPECT LETTER" means a letter in the form of Schedule "C" generated
by the Consultant with respect to a Prospect;
"RENEWAL PERIODS" is defined in Section 4.1;
"ROYALTY LANDS" is defined in the Royalty Procedure;
"ROYALTY PROCEDURE" means the document attached as Schedule "B";
"SERVICES" means the geological consulting services to be provided by
the Consultant hereunder as set forth in Schedule "A" and such other
consulting services as the Parties may agree from time to time;
"STUDY AREAS" means lands and geological formations within the San
Joaquin and Sacramento Basin area of California;
"TERM" is defined in Section 4.2;
"TERMINATION DATE" is defined in Section 4.1;
1.2 INTERPRETATION
a) The headings of the articles and sections of this Agreement are
inserted for convenience of reference only and shall not be used in
construing or interpreting any provisions hereof.
b) Whenever the singular or masculine or neuter is used in this Agreement,
the same shall be construed as meaning the plural or feminine or body
politic or corporate and vice versa as the context or reference to the
Parties may require.
1.3 SCHEDULES
All Schedules attached hereto are incorporated herein by reference as fully as
though contained in the body hereof. The Schedules are as follows:
a) Schedule "A" which sets forth and describes the Services to be
performed hereunder;
b) Schedule "B" which is the Royalty Procedure, including all
accepted Prospect Letters that are to be attached thereto
pursuant to the terms of this Agreement; and
c) Schedule "C" which is a form of Prospect Letter to be
presented by the Consultant. Should there be a conflict
between the provisions of the body of this Agreement and a
Schedule hereto, the provisions in the body of the Agreement
shall prevail to the extent necessary to resolve the conflict.
ARTICLE 2 - RETAINER
2.1 RETAINER
San Joaquin agrees to retain the Consultant to provide San Joaquin with the
Services and the Consultant agrees to provide the Services to San Joaquin.
2.2 PROVISION OF SERVICES
a) The Services to be provided hereunder by the Consultant shall be
provided by the Partners. The Partners may from time to time utilize
the assistance of other Consultant's Representatives, including
geological technicians, as may be appropriate to provide them with
technical assistance in performing the Services. If an additional
independent geologist, or an engineer, landman or geophysicist is
required by Consultant to assist in providing the Services, such
additional independent geologist or such engineer, landman or
geophysicist may be hired only with the prior approval of San Joaquin.
b) During the Initial Term, the Consultant shall provide Services of
Partners for 30 man days per month or 120 days during the Initial Term.
For each Renewal Period, San Joaquin may elect, with the approval of
the Consultant, to increase or decrease the foregoing number of days in
increments of 10 days per month.
ARTICLE 3 - PROSPECTS
3.1 PROSPECT LETTERS
The Consultant shall generate and present to San Joaquin a Prospect Letter in
the form of Schedule "C" for each and every Prospect developed as part of the
Services. Each Prospect Letter shall describe the lands and include a map
outlining the area (the "Prospect Map") covering such Prospect. San Joaquin may
accept some, none or all of the Prospects described in such Prospect Letters, in
its sole discretion.
3.2 ACCEPTANCE OF PROSPECTS
Each Prospect Letter that is accepted by San Joaquin shall be incorporated into
this Agreement as part of Schedule "B" as of the date of acceptance of the
applicable Prospect Letter by San Joaquin. The lands described therein and the
Prospect Map attached thereto shall become part of the Royalty Lands for
purposes of Schedule "B".
3.3 REJECTION OF PROSPECTS BY SAN JOAQUIN
a) If San Joaquin initially rejects a Prospect Letter, it may nevertheless
(subject to Subsection 3.3 b) hereof) within twelve (12) months of the
presentation of the applicable Prospect Letter by Consultant,
subsequently elect to accept such Prospect Letter by sending an
amending letter to the Consultant. The Consultant shall acknowledge
receipt of such amending letter and the applicable Prospect Letter
shall be incorporated into this Agreement as part of Schedule "B" as of
the date of such acceptance by San Joaquin.
b) After four (4) months from the date that a Prospect Letter has been
presented by the Consultant to San Joaquin, if San Joaquin has not
accepted the Prospect Letter, the Consultant shall have the right to
have a third party acquire the applicable Prospect and any leases with
respect thereto. In such case, if, during the fifth through twelfth
months (inclusive) from the date of the presentation of the Prospect
Letter, a third party agrees to acquire such Prospect, the Consultant
shall provide San Joaquin with the right to elect to acquire a fifty
percent (50%) interest in such Prospect (the "50% Interest"), along
with the right to act as operator of the Prospect. If San Joaquin
elects to acquire such 50% Interest, San Joaquin shall pay its 50%
share of any geological, geophysical or lease acquisition costs
relating thereto. If San Joaquin elects to acquire such 50% Interest,
the applicable Prospect Letter shall be incorporated into this
Agreement as part of Schedule "B" for the 50% Interest as of the date
of such election by San Joaquin, and the lands described therein and
the Prospect Map attached thereto shall become part of the Royalty
Lands for purposes of Schedule "B".
c) After one year from the date that a Prospect Letter has been presented
by the Consultant to San Joaquin, if San Joaquin has not accepted such
Prospect Letter, the Consultant shall be free to have a third party
acquire the applicable Prospect with no further obligation to provide
an interest to San Joaquin.
3.4 DEVELOPMENT OF PROSPECTS
Nothing herein contained or implied shall obligate San Joaquin to accept any
Prospect nor to acquire an interest in or perform any operations upon or with
respect to any of the lands contained in any of the Prospects.
ARTICLE 4 - COMPENSATION
4.1 REMUNERATION
In consideration for the provision by Consultant of the Services hereunder, San
Joaquin shall pay to the Consultant the following fees:
Day Rate for Partners U.S. $750/day
Geological Technicians U.S. $275/day
Travel Day Rate for Partners U.S. $750/day
It is understood and agreed that:
a) the Consultant shall be solely responsible for any additional salaries
and wages, cost of holidays, vacation, sickness and disability
benefits, insurance coverage and other customary allowances which may
be payable to any of Consultant's Representatives; and that
b) the above-referenced fees cover all office overhead costs and include
all engineering, geological and geophysical data relating to the
Prospects currently in the possession of the Consultant.
Every four weeks during the Term, the Consultant shall provide invoices to San
Joaquin setting forth the fees payable to Consultant for that four week period
and San Joaquin shall pay such invoices by wire transfer to the Consultant's
bank account.
4.2 EXPENSES
Consultant shall be reimbursed for all reasonable out of pocket expenses,
including costs for travel, supplies, shipping, plotting and new data, actually
and properly incurred by the Consultant in connection with providing the
Services hereunder. On a monthly basis, any expenses in an aggregate amount
greater than $2000.00 shall require prior approval of San Joaquin. The
Consultant shall furnish statements and backup materials to support all
expenses.
4.3 OVERRIDING ROYALTY
In addition to paying the remuneration and expenses set forth in Sections 4.1
and 4.2, San Joaquin shall also award the Partners constituting the Consultant
an Overriding Royalty on all oil and gas leases obtained within areas indicated
on Prospect Maps for Acquired Prospects in accordance with Schedule "B".
Acquisition by San Joaquin of any oil and gas leases on prospects not generated
by the Consultant will not be subject to the Overriding Royalty, nor will any
Non-Acquired Prospects be subject to the Overriding Royalty.
4.4 NO OTHER INTEREST
Except as provided in Sections 4.1, 4.2 and 4.3, the Consultant shall not be
entitled to any other fees nor any share of the interest of San Joaquin in any
Acquired Prospect and that San Joaquin alone shall be solely entitled to the
rights and benefits in respect to the Acquired Prospects.
ARTICLE 5 - REPRESENTATIONS, WARRANTIES AND COVENANTS
5.1 REPRESENTATION AND WARRANTY BY CONSULTANT
The Consultant represents and warrants to San Joaquin that the Consultant and
all applicable Consultant's Representatives have the required skills and
experience to perform the duties and exercise the responsibilities required of
the Consultant in performing the Services hereunder. Without limiting the
generality of the foregoing, the Consultant agrees that Consultant's
Representatives shall remain members in good standing in their respective
professional associations and conduct themselves in accordance with the rules
governing the conduct of the members of the said associations.
5.2 NO DELEGATION OF SERVICES
The Consultant covenants and agrees with San Joaquin that it shall not delegate
performance of the Services to any person without the prior written consent of
San Joaquin.
ARTICLE 6 - TERM OF AGREEMENT
6.1 INITIAL TERM AND RENEWAL PERIODS
The Initial Term of this Agreement shall be the period of time commencing on the
Effective Date and ending on January 20, 2000. The Agreement shall continue for
successive four month periods (the "Renewal Periods") thereafter until
terminated by either Party by written notice given at least 45 calendar days
prior to the end of any such four month period. The Agreement shall thereupon
terminate on the last day of such four month period after such notice has been
given (the "Termination Date").
6.2 TERM
The Term of this Agreement shall be from the Effective Date until the
Termination Date.
ARTICLE 7 - CONFIDENTIALITY
7.1 OWNERSHIP OF PRODUCTS
The Consultant acknowledges and agrees that all Prospects, inventions,
improvements, discoveries, intellectual property or trade secrets (collectively
the "Products") made, conceived, developed or reduced to practice in the
performance of the Services hereunder shall belong exclusively to San Joaquin.
The Consultant agrees to take all steps to vest in San Joaquin all of the right,
title and interest in and to any of the Products and will, at the request and
expense of San Joaquin, procure appropriate intellectual property protection
covering the Products. This Section will cease to apply to any Products relating
to Non-Acquired Prospects one year from the date that each the applicable
Prospect Letter was presented to San Joaquin by the Consultant, or in the case
of a 50% Interest acquired by San Joaquin pursuant to Subsection 3.3 b), this
Section will not apply to any Products relating to the other 50% interest
acquired by the applicable third party.
7.2 CONFIDENTIAL INFORMATION
a) Except with the express written consent of San Joaquin or as otherwise
herein expressly provided, the Consultant shall not, either during the
Term of this Agreement or at any time thereafter, disclose or cause to
be disclosed, either directly or indirectly, any of the Confidential
Information in any manner, to anyone other than to the officers,
directors and management of San Joaquin.
b) The Confidential Information shall only be disclosed to Consultants
Representatives on a "need to know" basis. Consultant shall ensure that
all such Persons having access to the Confidential Information comply
with the provisions of this Agreement.
c) The confidentiality obligations hereunder shall not apply to any of the
Confidential Information that the Consultant can demonstrate is
available to the public other than as a result of disclosure by the
Consultant or Consultant's Representatives.
d) The confidentiality obligations hereunder shall cease to apply to any
Non-Acquired Prospects one year from the date that the applicable
Prospect Letter was presented to San Joaquin by the Consultant. Between
the fifth and twelfth months (inclusive) from the date that a Prospect
Letter for a Non-Aquired Prospect was presented to San Joaquin, the
Consultant shall be entitled to disclose Confidential Information to a
third party in exercising its rights under Subsection 3.3 b).
e) The Consultant shall be entitled to disclose Confidential Information
to a court of competent jurisdiction or to any regulatory body having
jurisdiction, provided that:
(i) The Consultant shall take reasonable steps to
maintain the confidentiality of the Confidential
Information by the court or regulatory body; and
(ii) The Consultant shall provide San Joaquin with
immediate written notice of any request for
disclosure.
7.3 LIABILITY AND INDEMNITY
The Consultant shall:
a) be liable to San Joaquin for all loss and damages whatsoever
which San Joaquin may sustain or incur; and, in addition
b) indemnify and hold harmless San Joaquin from and against all
loss and damages whatsoever which may be suffered by San
Joaquin or which it may sustain or incur by reason of the
failure of the Consultant or Consultant's Representatives to
comply with the obligations contained in Sections 7.1 and 7.2
of this Agreement.
7.4 OTHER REMEDIES
The Consultant acknowledges the competitive value of the Confidential
Information. Accordingly, the Consultant agrees, that in addition to the
remedies provided in Section 7.3, that injunctive relief, specific performance
or other equitable relief are appropriate remedies for any breach of this
Agreement by the Consultant or Consultant's Representatives.
ARTICLE 8 - NON-COMPETITION
8.1 NON-COMPETITION
The Consultant agrees that it will not at any time during the Term or for a
period of four (4) months following the Termination Date of this Agreement:
a) individually or jointly with or in association with or
conjunction with or in partnership with any Person carry on or
be engaged in or be concerned with the Prohibited Business
within the Prohibited Area;
b) as agent for any person or as an officer, director or
shareholder of any corporation be engaged in or concerned with
the Prohibited Business within the Prohibited Area; or
c) in any manner whatsoever, carry on or be engaged in or
concerned with or be interested in the Prohibited Business
within the Prohibited Area.
Subject to Section 7.2 and the foregoing provisions of this Section 8.1,
Consultant shall, however, be allowed to present and submit research papers and
lead geological field trips in the Prohibited Area.
8.2 RESTRICTIONS VALID
The Consultant acknowledges and agrees that all restrictions contained in this
Agreement are reasonable and valid and all defenses to the strict enforcement
thereof by the Consultant are hereby waived.
ARTICLE 9 - CAPACITY
9.1 INDEPENDENT CONTRACTOR
It is acknowledged that the Consultant is being retained by San Joaquin in the
capacity of an independent contractor and not as an employee of San Joaquin. The
Parties agree that this Agreement does not create a partnership or joint venture
between them.
ARTICLE 10 - GENERAL CONTRACT PROVISIONS
10.1 NOTICES
All notices, requests, demands or other communications (collectively, "Notices")
by the terms hereof required or permitted to be given by one Party to the other,
or to any other person, shall be given in writing by personal delivery or by
registered mail, postage prepaid, or by facsimile transmission to such other
party at the following address:
a) To San Joaquin at: 53 STRATFORD PLACE S.W.
CALGARY, ALBERTA T3H 1H7
FAX: (403) 246-5056
b) To the Consultant at: 301 S. MACLAY STREET
SUITE 201
SAN FERNANDO, CALIFORNIA 91340
FAX: (818) 838-0366
or such other address as may be given by a Party to the other Party hereto in
writing from time to time.
All such Notices shall be deemed to have been received when delivered or
transmitted or, if mailed, 72 hours after 12:01 a.m. on the day following the
day of the mailing thereof. If any Notice shall have been mailed and if regular
mail service shall be interrupted by strikes or other irregularities, such
Notice shall be deemed to have been received 72 hours after 12:01 a.m. on the
day following the resumption of normal mail service, provided that during the
period that regular mail service is interrupted, all Notices shall be given only
by personal delivery or by facsimile transmission.
10.2 FURTHER ASSURANCES
The Parties shall sign such further and other documents, cause such meetings to
be held, resolutions passed and by-laws enacted, exercise their vote and
influence, do and perform and cause to be done and performed such further and
other acts and things as may be necessary or desirable in order to give full
effect to this Agreement and every part hereof.
10.3 COUNTERPARTS
This Agreement may be executed in several counterparts, each of which so
executed shall be deemed to be an original and such counterparts together shall
be one and the same instrument.
10.4 TIME OF THE ESSENCE
Time shall be of the essence of this Agreement and of every part hereof and no
extension or variation of this Agreement shall operate as a waiver of this
provision.
10.5 ENTIRE AGREEMENT
This Agreement constitutes the entire Agreement between the Parties with respect
to all the matters herein and its execution has not been induced by, nor do
either of the Parties rely upon or regard as material, any representations or
writings whatever not incorporated herein and made a part hereof. This Agreement
may not be amended or modified in any respect except by written instrument
signed by the Parties. Any schedules referred to herein are incorporated herein
by reference and form part of this Agreement.
10.6 ENUREMENT
This Agreement shall enure to the benefit of and be binding upon the Parties and
their respective legal personal representatives, heirs, executors,
administrators or successors.
10.7 ASSIGNMENT
San Joaquin may assign its rights and obligations under this Agreement. This
Agreement may not be assigned by the Consultant, except that the Overriding
Royalty may be assigned as provided in Schedule "B".
10.8 CURRENCY
Unless otherwise specifically provided for herein, all monetary amounts
specified herein shall refer to the lawful money of the United States of
America.
10.9 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of California and each Party irrevocably attorns to the non-exclusive
jurisdiction of the Courts of such State.
10.10 CALCULATION OF TIME
When calculating a period of time within which or following which any act is to
be done or step taken pursuant to this Agreement, the date which is the
reference date shall, unless otherwise specifically included, be excluded. If
the last day of a period is not a business day, then the time period in question
shall end on the first business day following such non-business day.
<PAGE>
10.11 SEVERABILITY
If any portion of this Agreement is determined to be invalid or unenforceable
for any reason whatsoever, that invalidity or unenforceablity shall not affect
the validity or enforceability of remaining portions of this Agreement and such
invalid or unenforceable portion shall be severed from the remainder of this
Agreement.
IN WITNESS WHEREOF the Parties have executed this Agreement this 3 day of
October, 1999.
SAN JOAQUIN OIL & GAS LTD. DAVIS & NAMSON
CONSULTING GEOLOGISTS
PER: /s/ J. Timothy Bowes PER: /s/ Jay S. Namson
--------------------------- ----------------------------
J. TIMOTHY BOWES, JAY S. NAMSON, PH.D.
PRESIDENT
PER: /s/ Thomas L. Davis
---------------------------
THOMAS L. DAVIS. PH.D.
<PAGE>
SCHEDULE "A" - SERVICES
Attached to and made part of an Agreement dated the 20th day of September, 1999,
between San Joaquin Oil & Gas Ltd. and Davis & Namson Consulting Geologists
"SERVICES" SHALL INCLUDE THE FOLLOWING ACTIVITIES TO BE PERFORMED BY THE
CONSULTANT UNDER THE AGREEMENT:
A. GEOLOGICAL EVALUATION OF STUDY AREAS
The Consultant shall cause to be conducted a detailed, thorough and
complete geological study and evaluation of such lands and geological
formations within the Study Areas as directed by San Joaquin during the
Term for the purpose of locating, evaluating, investigating and
appraising hydrocarbon prospects in the Study Areas. The Consultant
shall have a good faith obligation to present all Prospects developed
during the Term to San Joaquin by presenting Prospect Letters to San
Joaquin as contemplated in the Agreement. The Consultant shall
recommend which of the Prospects should become Acquired Prospects. The
Consultant shall assist San Joaquin from a technical standpoint in
developing sufficient technical and strategic expertise regarding the
Prospects with which to acquire lands that may become available through
lease, purchase, farmin or otherwise. During the Initial Term, the
Services shall specifically include the following work programs:
I. During the period from the Effective Date until November 20,
1999 ("Phase I"), the Services shall include the following
work program:
A. Review leads in Davis and Namson inventory.
B. Select leads for further work and land evaluation.
C. Begin developing leads into Prospects.
D. Acquire additional geologic and geophysical data and
review non-proprietary seismic data over leads and
Prospects.
E. Initiate land review.
F. Review outside company proposals and data rooms
(including Enron, Aera, Chevron, Texaco).
G. Recommend lands for leasing.
II. During the period from November 21, 1999, until January 20,
2000 ("Phase II"), the Services shall include the following
work program:
A. Develop new Davis and Namson regional leads and
trends.
B. Generate new Davis and Namson prospects.
C. Review outside proposals in light of new prospects.
D. Initiate land review.
E. Recommend lands for leasing.
F. Farm out Davis and Namson generated prospects and
seek partners.
<PAGE>
B. BUDGETS AND WORK PROGRAMS
At least thirty (30) days before the end of the Initial Term and before each
Renewal Period, the Consultant shall provide San Joaquin with the following:
1. a proposed work program setting our a proposed work program
for the next succeeding four (4) month period; and
2. a proposed budget for the next succeeding four (4) month
period, including the following:
A. Number of days for which Services will be provided by
Consultant (to be divided into number of days and the
day rates for each category of Consultant's
Representatives, including Partners, landmen,
geophysicists, geologists, geological technicians and
other technical aides)
B. Travel Expenses
C. Geological and Geophysical Data Acquisition
D. Miscellaneous
The Parties will discuss and reach mutual agreement upon any budgets and work
programs to be carried out as part of the Services for each Renewal Period.
<PAGE>
SCHEDULE "B"
ROYALTY PROCEDURE
ATTACHED TO AND MADE PART OF AN AGREEMENT DATED THE 20TH DAY OF
SEPTEMBER, 1999, BETWEEN SAN JOAQUIN OIL & GAS
LTD. AND DAVIS & NAMSON CONSULTING GEOLOGISTS.
WHEREAS Davis & Namson Consulting Geologists and San Joaquin Oil
& Gas Ltd. are parties to that Agreement dated the 20th day of September, 1999
(hereinafter called the "Agreement") to which this Royalty Procedure is attached
as Schedule "B"; and
WHEREAS pursuant to the terms and conditions of the Agreement,
San Joaquin Oil & Gas Ltd. agrees to grant to Davis & Namson Consulting
Geologists a gross overriding royalty as more particularly set forth herein;
NOW THEREFORE in consideration of the mutual covenants and
agreements herein contained and subject to the terms and conditions hereinafter
set forth, the parties agree as follows:
1.00 DEFINITIONS
In this Royalty Procedure including the recitals and this Clause,
unless the context otherwise requires, the following terms shall
have the meanings hereinafter assigned thereto, namely:
(a) AFFILIATE means, with respect to the relationship between
partnerships or corporations, that one of them is controlled
by the other or both of them are controlled by the same
person, corporation or partnership; and for this purpose a
corporation shall be deemed controlled by those persons,
corporations or partnerships who own or effectively control,
other than by way of security only, sufficient voting shares
of the corporation (whether directly through the ownership of
shares of the corporation or indirectly through the ownership
of shares of another corporation which owns shares of the
corporation) to elect the majority of its board of directors,
and a partnership shall be deemed controlled by any person,
corporation or partnership with a beneficial ownership of more
than 50% in such partnership.
(b) CONDENSATE means a mixture mainly of pentanes and heavier
hydrocarbons (whether or not contaminated with sulphur
compounds) that is recovered or recoverable at a well from an
underground reservoir and that may be gaseous in its virgin
reservoir state but is liquid at the conditions under which
its volume is measured or estimated.
(c) CRUDE OIL means a mixture mainly of pentanes and heavier
hydrocarbons (whether or not contaminated with sulphur
compounds) that is recovered or recoverable at a well from an
underground reservoir and that is liquid at the conditions
under which its volume is measured or estimated and includes
all other hydrocarbon mixtures so recovered except Natural Gas
and Condensate.
(d) CURRENT MARKET VALUE means the price received by the Grantor
at the Point of Measurement for its share of Petroleum
Substances produced and marketed from, or pursuant to a scheme
of pooling or unitization allocated to, the Royalty Lands,
which price shall not be less than that which the Grantor
would have received at the wellhead in an arm's length
transaction if acting as a reasonably prudent operator having
regard to the current market prices, availability to market,
type of transportation service available and economic
conditions of the petroleum industry generally.
(e) GRANTOR means San Joaquin Oil & Gas Ltd.
(f) NATURAL GAS means Raw Gas or marketable gas as the context so
requires, and as those terms are defined in the Regulations;
(g) NET REVENUE INTEREST means the percentage interest remaining
in any particular Royalty Lands after all applicable lessor
royalties and other similar existing burdens or encumbrances
relating thereto are subtracted from 100%.
(h) OVERRIDING ROYALTY means the applicable percentage gross
overriding royalty as reserved in this Royalty Procedure in
favour of the Royalty Owner, more particularly described in
the Clause entitled "Overriding Royalty" in this Royalty
Procedure.
(i) PETROLEUM SUBSTANCES means all Crude Oil, Natural Gas,
Condensate, related hydrocarbons, sulphur and every other
substance an interest in which is granted under the Said
Leases.
(j) POINT OF MEASUREMENT means the production tankage in the case
of Crude Oil and Condensate and shall mean the point of
delivery in the case of Natural Gas and all other Petroleum
Substances.
(k) PROSPECT LETTERS means any letters in the form of Schedule "C"
to the Agreement which are attached hereto pursuant to the
provisions of the Agreement.
(l) RAW GAS has the meaning prescribed by the Regulations.
(m) REGULATIONS means all statutes, laws, rules, orders and
regulations in effect from time to time and made by
governments or governmental boards or agencies having
jurisdiction over the Royalty Lands and over the operations to
be conducted thereon.
(n) ROYALTY LANDS means the areal, stratigraphic and substance
rights for lands within areas indicated in Prospect Maps for
which leases or other interests are obtained by Grantor within
two years of Grantor's acceptance of each applicable Prospect
Letter attached hereto pursuant to the provisions of the
Agreement.
(o) ROYALTY OWNER means Thomas L. Davis & Jay S. Namson, each as
to a 50% interest.
(p) SAID LEASES means the title documents relating to the Royalty
Lands, and any extensions, renewals, variations or
replacements of the title documents insofar as they relate to
the Royalty Lands.
<PAGE>
2.00 OVERRIDING ROYALTY
2.01 QUANTIFICATION OF OVERRIDING ROYALTY
(a) The Grantor hereby grants to the Royalty Owner an Overriding
Royalty, which shall comprise an interest in the Petroleum
Substances within, upon and under the Royalty Lands. The
gross volume of Petroleum Substances comprising the
Overriding Royalty shall be quantified as the following
applicable percentage of the Current Market Value of the
gross monthly production of Petroleum Substances from each
well on the Royalty Lands in accordance with the following
applicable Net Revenue Interest for such Royalty Lands:
<TABLE>
<CAPTION>
OVERRIDING ROYALTY PERCENTAGE IF THE NET REVENUE INTEREST IS:
----------------------------- -------------------------------
<S> <C>
3% Greater than 87.5%
2.5% 84% to 87.49%, inclusive
2.0% 81% to 83.99%, inclusive
1.5% Less than 81%
</TABLE>
(b) For the purpose of determining the Overriding Royalty
payable to the Royalty Owner for each well on the Royalty
Lands, the applicable Overriding Royalty percentage set
forth in Subsection (a) shall be multiplied by the
percentage working (participating) interest in the Petroleum
Substances held by the Grantor in that well. Grantor may
agree to grant interests in the Royalty Lands to other
parties in exchange for such other parties agreeing to share
in the costs of acquiring the Royalty Lands and drilling
wells thereon. In such case, Grantor shall ensure that each
such party shall be responsible for its respective share of
the Overriding Royalty payable with respect to such Royalty
Lands.
(c) If any portion of the Royalty Lands is pooled or unitized in
accordance with the provisions of Articles 8 and 9
respectively, the Overriding Royalty will be calculated
based on the quantity of Petroleum Substances thereby
allocated to the affected Royalty Lands.
(d) If Grantor's interest in all or a portion of the Royalty
Lands has been acquired by virtue of an option or farmout
agreement, and the Grantor's interest is subject to an
overriding royalty, carried or net profit or other interest
which may be converted by the optionor or farmor to a
working (participating) interest, any assignment of an
interest to such optionor or farmor upon such conversion
shall not be subject to the Overriding Royalty. After such
conversion, the Overriding Royalty shall be calculated on
the basis of the Grantor's reduced interest.
2.02 SEPARATE QUANTIFICATION FOR CRUDE OIL
If the Grantor completes any well on the Royalty Lands in more than
one zone producing Crude Oil and production therefrom is segregated
and accounted for separately in accordance with the appropriate
regulations, the Overriding Royalty shall be quantified separately
for each producing zone rather than for the total production from
such well, less only those charges permitted herein.
3.00 OVERRIDING ROYALTY NOT TAKEN IN KIND
3.01 PAYMENTS MADE TO ROYALTY OWNER MONTHLY
When and to the extent that the Royalty Owner is not taking its
share of Petroleum Substances in kind, every sale of Petroleum
Substances produced from the Royalty Lands by the Grantor shall
include the Royalty Owner's Overriding Royalty share thereof. The
Grantor shall remit to the Royalty Owner all monies accruing to the
Royalty Owner on account of the Overriding Royalty on or before the
twenty-fifth (25th) working day following the calendar month in
which such Petroleum Substances were sold. The Overriding Royalty
shall be paid to the partners comprising Royalty Owner in the
following proportions:
Jay S. Namson 50%
Thomas L. Davis 50%
3.02 MONTHLY STATEMENTS PROVIDED TO ROYALTY OWNER
The Grantor shall enclose with each monthly payment to the Royalty
Owner the following information:
(a) a statement showing the quantity and kind of the Petroleum
Substances produced, saved and sold from the Royalty Lands
in the immediately preceding calendar month and the Current
Market Value thereof, together with a calculation of the
Overriding Royalty for such immediately preceding calendar
month; and
(b) if requested, a copy of the Grantor's governmental
production statement for the month for which the Overriding
Royalty is calculated.
3.03 PERMITTED DEDUCTIONS
Royalty Owner shall be responsible for any taxes payable with
respect to its share of Petroleum Substances. To the extent that the
Royalty Owner does not take its Overriding Royalty share of
Petroleum Substances in kind, as hereinafter provided, the
Overriding Royalty shall be paid on the Current Market Value of the
Petroleum Substances without any deductions except the following:
(a) with respect to Crude Oil and Condensate, the Overriding
Royalty will bear a proportionate share of the actual costs
of transportation to market connection, where sales are not
made f.o.b. the tanks serving the Royalty Lands; and
(b) with respect to Natural Gas, the cost of gathering,
compressing, treating, processing and transporting the
Overriding Royalty share of the Natural Gas may be deducted
from the Current Market Value of the Natural Gas;
provided that such costs may only be deducted to the extent that
they are actually incurred and are reasonable.
3.04 PETROLEUM SUBSTANCES SOLD AT LESS THAN CURRENT MARKET VALUE
If any Petroleum Substances are sold at less than Current Market
Value in any transactions (including those transactions which are
not at arm's length or any transactions involving any arrangement
from which the Grantor obtains a collateral advantage in
consideration of the reduced price), the gross proceeds of the sale
of such Petroleum Substances shall, for the purposes of calculating
the Overriding Royalty, not be less than the Current Market Value of
those Petroleum Substances when produced from the Royalty Lands.
4.00 OVERRIDING ROYALTY TAKEN IN KIND
4.01 NOTICE TO GRANTOR
The Royalty Owner shall have the right to take in kind the Royalty
Owner's share of Petroleum Substances. Such right may be exercised
separately with respect to Crude Oil, Raw Gas, individual Natural
Gas liquids, Condensate, marketable gas or any other individual
Petroleum Substance. In the case of Crude Oil and Condensate, such
right shall only be exercised on a minimum of forty-five (45) days
notice to the Grantor. In the case of all other Petroleum Substances
such right shall only be exercised on six (6) months notice to the
Grantor. If the Royalty Owner, however, signifies in writing its
consent to the sale of any of the Royalty Owner's share of Petroleum
Substances under a contract made by the Grantor providing for a
minimum term in excess of the said respective notice periods, the
Royalty Owner's right to take in kind any Petroleum Substances
subject to such contract shall be suspended during the term of such
contract. The Royalty Owner may cease to take in kind any Petroleum
Substances upon giving the Grantor the same minimum notice as
required in order to permit the Royalty Owner to take such Petroleum
Substances in kind as aforesaid. The right to take in kind or to
cease to take in kind may be exercised from time to time subject
only to the foregoing provisions of this Subclause.
4.02 GRANTOR'S RESPONSIBILITIES
When the Royalty Owner is taking in kind any of the Royalty Owner's
share of Petroleum Substances other than Raw Gas, the Grantor shall
in respect to Crude Oil and at no cost to the Royalty Owner, remove
basic sediment and water therefrom in accordance with good oilfield
practice so that pipeline specifications in that regard will be met,
and the Royalty Owner shall also have the right to use free of
charge a proportionate share of the Grantor's lease tankage and
storage facilities to store a maximum of ten (10) days accumulation
of the Royalty Owner's share of such Petroleum Substances. In
respect to Crude Oil and Condensate the Grantor shall deliver the
same to the Royalty Owner, or its nominee, at the tank outlets in
accordance with usual and customary pipeline and shipping practice,
free and clear of all charges whatsoever. Grantor shall deliver
Royalty Owner's share of Raw Gas to the Royalty Owner or its nominee
at the wellhead of the relevant well, provided that to the extent
the Royalty Owner so requests on reasonable notice to the Grantor
and the Grantor can reasonably comply with such request, the Grantor
shall gather, compress, transport, treat and process such share of
Raw Gas with the Grantor's share of Raw Gas from the applicable
wells and deliver to the Royalty Owner at the relevant plant outlet,
the Royalty Owner's Overriding Royalty share of marketable gas and
other Petroleum Substances obtained from such share of Raw Gas. In
such event, the Royalty Owner shall be responsible for:
(i) its proportionate share of the costs of gathering,
compressing, transporting, treating and processing such Raw
Gas where the Grantor or an Affiliate thereof does not own
such facilities; or
(ii) where the Grantor or an Affiliate thereof owns such
facilities, such fee as may be agreed upon by the Grantor
and the Royalty Owner for the use of such facilities and the
making of the Royalty Owner's Overriding Royalty share of
Raw Gas marketable.
<PAGE>
5.00 RIGHT TO AUDIT
5.01 EXAMINATION OF RECORDS
The Royalty Owner shall have the right to audit the records of the
Grantor insofar as they relate to any matter or items required to
determine the accuracy of any statements or payments with respect to
the Overriding Royalty. The books, records, vouchers and accounts
maintained by the Grantor shall be open to inspection at all
reasonable times during business hours by an officer, agent,
employee or other person appointed or authorized by the Royalty
Owner, in writing, to examine the same.
5.02 DISCREPANCIES
Any payment made or statement rendered by the Grantor hereunder
which is not disputed by the Royalty Owner on or before the last day
of the twenty-fourth (24th) month following the end of the calendar
year of the month for which such statement or payment was rendered
shall be deemed to have been correct.
5.03 RIGHT TO VIEW OPERATIONS
The Royalty Owner shall also have the right (which may be exercised
through servants or agents) to enter at its sole cost, risk and
expense upon the Royalty Lands at all reasonable times to gauge
tanks, check the quantities of Petroleum Substances in storage,
witness tests and otherwise view operations on the Royalty Lands.
5.04 RIGHTS SUSPENDED
The provisions of Subclauses 5.01 and 5.03 shall be suspended where
the Grantor is drilling a well to obtain information to assist it in
bidding for lands posted for sale by any governmental authority,
until such sale is completed.
6.00 RATEABLE PRODUCTION
6.01 GRANTOR TO MARKET RATEABLY
The Grantor shall, subject to the Clause entitled "Overriding
Royalty Taken In Kind", make every reasonable endeavour within its
legal authority to market any of the Petroleum Substances produced
or capable of being produced from the Royalty Lands rateably with
any other similar substances produced from any lands within the same
pool in which the Grantor or any Affiliate has an interest and
further the Grantor covenants that it will not discriminate against
the Petroleum Substances produced or capable of being produced from
the Royalty Lands in the production and marketing of the same.
7.00 RIGHT TO COMMINGLE
7.01 GRANTOR MAY COMMINGLE PETROLEUM SUBSTANCES
The Grantor shall have the right to commingle Petroleum Substances
produced from the Royalty Lands with Petroleum Substances produced
from other lands, provided methods acceptable to the Royalty Owner
are used to determine the proper measurement of individual well
production. Where governmental regulations or orders require
segregated production tests of individual wells at intervals not
greater than two months, such tests will be deemed acceptable to the
Royalty Owner under this Clause and no further tests will be
required.
8.00 POOLING
8.01 POOLINGS AUTHORIZED BY ROYALTY OWNER
The Grantor shall have the right to pool any portion of the Royalty
Lands forming less than a spacing unit for the production of
Petroleum Substances with lands other than the Royalty Lands in
order to form a complete spacing unit for the production of
Petroleum Substances. Unless otherwise agreed to in writing by the
Royalty Owner or ordered by governmental authority, such pooling
will be on a surface acreage basis; that is, the production of
Petroleum Substances from the well on the pooled lands comprising
the spacing unit shall be divided between the Royalty Lands and the
other lands in such spacing unit in the proportion that the number
of acres of the Royalty Lands in such spacing unit is to the number
of acres of the other lands in such spacing unit. Where, however,
the Overriding Royalty is a sliding scale royalty based upon the
amount of production from the spacing unit, the rate of such sliding
scale royalty shall be calculated upon the total production from the
spacing unit, but such rate shall be applied only upon the
production deemed produced from the Royalty Lands in the spacing
unit in order to determine the Overriding Royalty. If such pooling
is effected, the Overriding Royalty shall thereafter be calculated
and paid in accordance with the foregoing provisions of this Clause.
9.00 UNITIZATION
9.01 ROYALTY OWNER TO CONSENT TO UNITIZATION
The Grantor shall not include the Royalty Lands or any part thereof
in any voluntary plan of unitization comprising more than one
spacing unit without the written consent of the Royalty Owner. The
execution by the Royalty Owner of the applicable unit agreement
shall be deemed to be consent to such unitization under this Clause.
10.00 SURRENDER
10.01 GRANTOR TO KEEP LEASES IN GOOD STANDING
The Grantor shall pay all rentals, royalties, taxes and charges
payable under the provisions of the Said Leases or with respect to
the Royalty Lands and the production therefrom, either directly or
by reimbursing the Royalty Owner, and shall keep the Said Leases in
good standing until surrender thereof as herein provided for and
shall not allow the Said Leases to terminate or become subject to
forfeiture.
10.02 NOTICE OBLIGATIONS ON SURRENDER
The Grantor shall not surrender any portion of the Royalty Lands
without giving notice of such proposed surrender in writing
(hereinafter called "the Surrender Notice") to the Royalty Owner at
least sixty (60) days before the next ensuing anniversary date of
the lease covering the lands or interest therein which it proposes
to surrender. Within thirty (30) days after receipt of the Surrender
Notice, the Royalty Owner may elect in writing to acquire such
interest and if it does so the Grantor shall, without warranty,
forthwith transfer or assign such interest to the Royalty Owner. The
Overriding Royalty shall thereafter cease to be payable with respect
to the interest so assigned to the Royalty Owner. If the Royalty
Owner fails to make the election as provided for herein, the Grantor
may surrender the lands specified in the Surrender Notice.
10.03 SURRENDER SUBJECT TO FORFEITURE
If the Grantor proposes to surrender any portion of the Royalty
Lands to avoid an obligation to drill a well, the provision for
notice and assignment in the preceding Subclause shall apply,
mutatis mutandis, provided that the assignment, if requested by the
Royalty Owner, shall be of the entire interest which is subject to
forfeiture by reason of the failure to drill such well and the
surrender notice shall be given not less than sixty (60) days before
the well must be commenced to meet the obligation.
10.04 ROYALTY OWNER TO ASSUME RIGHTS AND OBLIGATIONS
Upon the Royalty Owner electing to acquire the interest to be
surrendered as set forth herein, the Royalty Owner shall assume all
rights and obligations of the Grantor with respect to the interest
assigned, including indemnification of the Grantor, which rights,
obligations and indemnification accrue from and after the effective
date of such assignment. The effective date of such assignment shall
be the date upon which Royalty Owner elected to acquire the subject
interest as provided herein.
11.00 ASSIGNMENT
11.01 NOMINATION OF ASSIGNEE
If the Royalty Owner transfers, assigns or otherwise disposes of any
part of its interest hereunder to more than one party, it shall
ensure that one of the parties to whom such disposition is made
shall be nominated to receive the payment of the Overriding Royalty
on behalf of all such parties and until written notice of such
nomination is received by the Grantor, the Grantor shall be entitled
to continue to make payments of the Overriding Royalty to the
Royalty Owner.
11.02 ASSIGNMENT BY GRANTOR
If the Grantor disposes, in any manner whatsoever, of its interest
in this Royalty Procedure, the Royalty Lands, the Said Leases or any
portion or portions thereof, it shall at all times continue to be
bound by the provisions of this Royalty Procedure as if there had
been no assignment, until such time as the Royalty Owner shall have
been served with a document reflecting the assignment. Such
assignment document shall be accompanied by a written undertaking by
the Assignee, directly enforceable by the Royalty Owner, to perform
and be bound thereafter by all of the provisions of this Royalty
Procedure to the same extent and degree, with respect to the
interest which has been assigned to it, as it would have been had it
been a party to this Royalty Procedure in the place of the Grantor.
12.00 LIABILITY AND INDEMNITY
12.01 GRANTOR'S RESPONSIBILITY
The Grantor shall:
(a) be liable to the Royalty Owner for all losses, costs,
damages and expenses whatsoever (whether contractual or
tortious) which the Royalty Owner may suffer, sustain, pay
or incur; and
(b) in addition, indemnify and hold harmless the Royalty Owner
and its directors, officers, agents and employees against
all actions, causes of action, proceedings, claims, demands,
losses, costs, damages and expenses whatsoever which may be
brought against or suffered by the Royalty Owner, its
directors, officers, agents and employees or which they may
sustain, pay or incur;
insofar as they are either a direct result of or directly
attributable to any act or omission (whether negligent or otherwise)
of the Grantor with respect to operations or activities conducted by
it or on behalf of it.
12.02 ROYALTY OWNER'S RESPONSIBILITY
Where the Royalty Owner conducts operations or activities with
respect to the Royalty Lands, the provisions of the preceding
Subclause shall apply, mutatis mutandis, to determine the Royalty
Owner's responsibility to the Grantor with respect to losses
attributable to such operations or activities.
13.00 CONFIDENTIAL INFORMATION
13.01 CONFIDENTIALITY REQUIREMENT
Except as provided herein, all data and information of any nature
acquired by the parties from any operations pursuant to this Royalty
Procedure, or supplied by one party to the other pursuant hereto,
shall be for the sole and exclusive use and benefit of the parties
hereto unless the parties agree to the dissemination of such
information or unless a party hereto is required to give such
information to any governmental department, body or agency, or any
recognized association within the petroleum industry, of which it is
a member, that engages in the exchange of factual information
relating to the type of operations contemplated by this Royalty
Procedure. In no event shall information of any type or character
relating to wells drilled on a confidential basis to the parties be
disclosed by a party without prior written agreement of the other
party.
13.02 DISCLOSURE TO AFFILIATES
The provisions of this Clause shall not apply to disclosures to
Affiliates provided that such Affiliates agree to be bound by the
terms of this Clause.
14.00 ABANDONMENT
14.01 NOTICE OF INTENTION TO ABANDON
If the Grantor intends to abandon any well drilled on the Royalty
Lands, it shall give notice to the Royalty Owner of such intention
and provide the Royalty Owner with all available well information
which may be reasonably required by the Royalty Owner to determine
whether it wishes to exercise its rights pursuant to this Clause.
Following receipt of such notice and of all other required
information, the Royalty Owner may, within forty-eight (48) hours
when a drilling rig is on location and within thirty (30) days in
all other cases, elect to take over the well at its own cost, risk
and expense.
14.02 GRANTOR ABANDONS WELL
If the Royalty Owner fails to reply to the Grantor within the
applicable aforementioned time period or if the Royalty Owner
advises the Grantor by notice in writing within said period that the
Royalty Owner consents to the proposed abandonment of a well, the
Grantor shall, at its sole cost, risk and expense, abandon the well
in accordance with good oilfield practice and the Regulations.
14.03 ROYALTY OWNER ELECTS TO TAKE OVER WELL
If the Royalty Owner elects to take over a well within the time
period aforesaid, then:
(a) the entire interest granted under this Royalty Procedure by
the Royalty Owner to the Grantor in the spacing unit on
which the well is situated shall be assigned by the Grantor
to the Royalty Owner;
(b) the Royalty Lands comprising the production spacing unit for
such well shall no longer be subject to this Royalty
Procedure;
(c) the Royalty Owner shall thereafter own such spacing unit and
well and all material, equipment and production therein and
thereon or relating thereto; and
(d) the Royalty Owner shall reimburse the Grantor for the
salvage value of any material and equipment on the spacing
unit or relating thereto which the Royalty Owner wishes to
retain, less the estimated cost of salvaging such material
and equipment.
14.04 OBLIGATIONS AND LIABILITIES UPON ABANDONMENT
If the Royalty Owner takes over a well pursuant to this Clause, the
Royalty Owner shall, effective as of the date of the Royalty Owner's
election to take over that well, assume all rights and obligations
of the Grantor with respect to the interest assigned, including
indemnification of the Grantor, and the Grantor shall be released
and discharged from all obligations thereafter accruing with respect
to the well. The Grantor shall not be released from any obligation
which ought to have been performed by it or any liability which may
have accrued prior to takeover of such well by the Royalty Owner.
14.05 PRODUCTION EXCLUDED
A spacing unit surrendered by the Grantor to the Royalty Owner
pursuant to an abandonment notice as aforesaid, shall exclude
Petroleum Substances being produced or that are capable of being
produced from any other well or wells, the production from which is
attributable to any other horizons or formations underlying that
portion of the Royalty Lands on which the well subject to the
abandonment notice is located.
15.00 DEFAULT
15.01 RIGHTS OF ROYALTY OWNER
If the Grantor defaults in respect of any obligations or covenants
on its part to be satisfied and performed, the satisfaction or
performance of which has not been waived in writing by the Royalty
Owner, the Royalty Owner may give to the Grantor written notice
requiring it to remedy the default.
15.02 DEFAULT NOT TO APPLY TO PRODUCTION
Any default pursuant to the preceding Subclause shall not apply to
any spacing unit on which there is located a well capable of
producing Petroleum Substances in paying quantities or on which a
well is being drilled at the time of cancellation and termination,
unless the default aforesaid is in respect of the spacing unit or
some portion thereof, either alone or together with any other
portion or portions of the Royalty Lands.
15.03 RIGHTS ARE IN ADDITION TO OTHER RIGHTS
The rights herein granted to the Royalty Owner shall be in addition
to and not be in substitution for any other right or remedy which
the Royalty Owner may have.
16.00 LIEN
16.01 ROYALTY OWNER'S LIEN
The Royalty Owner shall be entitled to and shall have a first and
paramount lien upon the Grantor's share of all Petroleum Substances
from time to time produced from the Royalty Lands to secure the
payment of the Overriding Royalty. Such lien shall not operate to
release the Grantor from personal liability for monies due to the
Royalty Owner. Such lien shall not attach to the Grantor's share of
Petroleum Substances sold or otherwise disposed of from the Royalty
Lands, but immediately upon default occurring in payment by the
Grantor of monies payable to the Royalty Owner such lien shall
operate as an assignment to the Royalty Owner of the consideration
thereafter payable to the Royalty Owner for the Petroleum Substances
sold, up to the amount owed to the Royalty Owner and not so paid by
the Grantor.
16.02 SERVICE OF AGREEMENT TO CONSTITUTE AUTHORITY
Service of a copy of this agreement upon any purchaser of Petroleum
Substances together with written notice from the Royalty Owner shall
constitute written authorization on the part of the Grantor for such
purchaser to pay the Royalty Owner the proceeds from any sale or
sales of the Grantor's share of Petroleum Substances, up to the
amount owed to the Royalty Owner by the Grantor, and such purchaser
is authorized to rely solely upon the statement of the Royalty Owner
as to the amount owed to the Royalty Owner by the Grantor.
16.03 PROOF OF DEFAULT
The books and records kept by the Royalty Owner shall constitute
written proof of the existence of such default, although no
purchaser shall be obliged to examine the same before acting upon
such notice of default.
17.0 WELL INFORMATION
17.01 INFORMATION TO ROYALTY OWNER
The Grantor shall, with respect to each well drilled or being
drilled (or reworked, deepened or plugged back) on the Royalty
Lands:
(a) give the Royalty Owner notice, not later than forty-eight
(48) hours before the date of spudding the well, that the
Grantor proposes to drill the well, and promptly give the
Royalty Owner notice when actual drilling operations have
commenced on the well;
(b) during the drilling of the well, furnish the Royalty Owner
with daily drilling and geological reports; and
(c) provide the Royalty Owner promptly with all information
relative to mud samples and drill stem test fluid samples,
copies of all drill stem tests and service reports thereon,
copies of pressure charts and copies of all logs run in the
well, together with a copy of the completion report
including the details and results of all production tests
carried out with respect to the well.
17.02 LIMITS ON USE OF INFORMATION
Royalty Owner may not use any information provided pursuant to
Subclause 17.01 to acquire lands or leases or otherwise compete with
Grantor within the area of the applicable Prospect.
18.00 NOTICES
18.01 SERVICE OF NOTICES
Whether or not so stipulated herein all notices, communications and
statements (herein called "notices") required or permitted hereunder
shall be in writing. Any notice to be given hereunder shall be
deemed to be served properly if served in any of the following
modes:
(a) personally, by delivering the notice to the party on whom it
is to be served at that party's address for service, which
notice shall be deemed received by the addressee when
actually delivered as aforesaid, if such delivery is during
normal business hours; provided that if a notice is not
delivered during the addressee's normal business hours, such
notice shall be deemed to have been received by such party
at the commencement of the next ensuing business day
following the date of delivery;
(b) by telefacsimile (or by any other like method by which a
written and recorded message may be sent) directed to the
party on whom it is to be served at that party's address for
service, which notice shall be deemed received by the
respective addressees thereof: (i) when actually received by
them, if received within normal business hours; or (ii) at
the commencement of the next ensuing business day following
transmission thereof, if such notice is not received during
such normal business hours; or
(c) by mailing it first class (air mail if to or from a location
outside Canada) double registered post, postage prepaid,
directed to the party on whom it is to be served at that
party's address for service, which notice shall be deemed to
be received by the addressee at noon, local time, on the
earlier of the actual date of receipt or the fourth (4th)
day (excluding Saturdays, Sundays and statutory holidays)
following the mailing thereof; provided that, if postal
service is interrupted or operating with unusual or imminent
delay, notice shall not be served by such means during such
interruption or period of delay.
For notice periods of forty-eight (48) hours or less, the applicable
notice shall be given in accordance with paragraph (a) or (b) of
this Subclause.
18.02 ADDRESSES FOR NOTICES
The address for service of notices hereunder of each of the parties
shall be as follows:
The Grantor: SAN JOAQUIN OIL & GAS LTD.
53 Stratford Place S.W.
Calgary, Alberta T3H 1H7
Fax: (403) 246-5056
The Royalty Owner: DAVIS & NAMSON CONSULTING GEOLOGISTS
301 S. Maclay Street, Suite 201
San Fernando, California 91340
Fax: (818) 838-0366
18.03 RIGHT TO CHANGE ADDRESS
Any party may change its address for service by notice to the other
parties.
19.00 MISCELLANEOUS
19.01 DEVELOPMENT OF LANDS
Nothing in this Royalty Procedure is to be construed as an express
or implied covenant by the Grantor to develop the Royalty Lands.
19.02 PERPETUITIES
Notwithstanding anything contained in this Royalty Procedure, any
right under this Royalty Procedure of a party to acquire any
interest from another party shall terminate not later than the
expiration of twenty-one (21) years after the death of the last
surviving descendant now living of the Governor of the State of
California.
19.03 PARTIES TO DO ALL FURTHER ACTS
The parties hereto shall from time to time and at all times do all
such further acts and execute and deliver all such further deeds and
documents as shall be reasonably required in order fully to perform
and carry out the terms of this Royalty Procedure.
19.04 NO WAIVER EXCEPT IN WRITING
No waiver by any party hereto of any breach of any of the covenants,
conditions or provisos herein contained shall be effective or be
binding upon another party unless the same be expressed in writing,
and any waiver so expressed shall not limit or affect its right with
respect to any other or future breach.
19.05 TIME OF ESSENCE
Time is of the essence of this Royalty Procedure.
19.06 ROYALTY RUNS WITH LANDS
The obligation of the Grantor to pay the Overriding Royalty shall be
a covenant running with the Royalty Lands during the term of this
Royalty Procedure.
<PAGE>
19.07 HEADINGS
The headings of the Clauses of this Royalty Procedure are inserted
for convenience of reference only and shall not affect the
construction or interpretation of this Royalty Procedure.
19.08 CONFLICTS
Wherever any term or condition of this Royalty Procedure conflicts
or is at variance with any term or condition of the Agreement, the
provisions of the Agreement shall prevail.
Exhibit 10.3
Agreement with Canyon Oil
<PAGE>
JOINT VENTURE AGREEMENT
DATED DECEMBER 1, 1999
BETWEEN:
SAN JOAQUIN OIL & GAS LTD., a corporation incorporated under the laws
of the State of Nevada and having an office in the City of Calgary,
in the Province of Alberta ("San Joaquin")
- and -
CANYON OIL & GAS , a Limited Liability Company incorporated under the
laws of the State of California and having an office in the City of
Sacramento, in the State of California ("Canyon")
WHEREAS:
A. San Joaquin is engaged in the exploration and development of oil and
gas prospects in the San Joaquin and Sacramento basin of California;
B. Canyon has agreed to provide San Joaquin with technical information for
oil and gas Prospects that may be acquired by San Joaquin in the San
Joaquin and Sacramento basin of California;
C. San Joaquin has agreed to pay certain overhead costs incurred by Canyon
in exchange for provision of such technical information; and
D. The Parties have further agreed that San Joaquin will grant Canyon a
Carried Interest on all Acquired Prospects, which Carried Interest
shall be a 14% working interest in the Acquired Prospects, all in
accordance with the terms of this Agreement.
THE PARTIES AGREE AS FOLLOWS:
ARTICLE 1 - INTERPRETATION
1.1 DEFINITIONS
In this Agreement, unless the context otherwise requires, the following terms
shall have the following meanings:
"ACCOUNTING PROCEDURE" means the COPAS - 1984 - Onshore Accounting
Procedure attached as Exhibit C to Schedule "A" hereto;
"ACQUIRED PROSPECTS" means Prospects in which an interest is acquired
by San Joaquin pursuant to this Agreement;
"BROCHURE" means written material describing a Prospect, containing the
information set forth in Section 2.2;
"CARRIED INTEREST" means the right to acquire a working (participating)
interest without incurring any of the costs specified in Section 4.2;
"CONFIDENTIAL INFORMATION" means all technical information and data,
evaluations, reports, proprietary information and trade secrets
contained in a Brochure or otherwise provided by Canyon with respect to
a Prospect;
"EFFECTIVE DATE" means December 1, 1999;
"EXCLUSION AREA" means all lands included in a Prospect presented to
San Joaquin by Canyon pursuant to Section 2.3;
"FARMOUT AND JOINT OPERATING AGREEMENT" means an agreement in the form
attached hereto as Schedule "A", including the Exhibits attached
thereto;
"INITIAL PERIOD" means the period from the Effective Date until March
31, 2000, inclusive;
"NON-ACQUIRED PROSPECTS" means all Prospects other than Acquired
Prospects;
"NOTICES" is defined in Section 7.1;
"OPERATING PROCEDURE" means the A.A.P.L. Form 610 - 1989 Model Form
Operating Agreement attached as Exhibit 2 to Schedule "A" hereto ;
"PARTICIPANTS" means Persons who may participate with San Joaquin in
acquiring and developing a Prospect;
"PARTIES" means San Joaquin and Canyon, and "PARTY" means either of
them;
"PERIOD" means the Initial Period or one of the Renewal Periods;
"PERSON" includes a corporation or limited liability company, an
individual, a partnership, a firm, an association and a syndicate;
"PROSPECTS" means all prospects relating to interests in lands or the
hydrocarbon rights thereto acquired or generated by Canyon and
presented to San Joaquin pursuant to the terms of this Agreement, and
"PROSPECT" means one of such Prospects;
"RENEWAL PERIODS" is defined in Section 5.1;
"REPRESENTATIVES" means employees, consultants, agents, officers,
directors, subsidiaries or affiliates of a Party;
"STUDY AREAS" means lands and geological formations within the San
Joaquin and Sacramento Basin area of California;
"TERM" means the period commencing on the Effective Date and ending on
the Termination Date;
"TERMINATION DATE" is defined in Section 5.1.
1.2 INTERPRETATION
a) The headings of the articles and sections of this Agreement are
inserted for convenience of reference only and shall not be used in
construing or interpreting any provisions hereof.
b) Whenever the singular or masculine or neuter is used in this Agreement,
the same shall be construed as meaning the plural or feminine or body
politic or corporate and vice versa as the context or reference to the
Parties may require.
1.3 SCHEDULES
All Schedules attached hereto are incorporated herein by reference as fully as
though contained in the body hereof. The Schedules are as follows:
a) Schedule "A" which is the form of Farmout and Joint Operating
Agreement to be entered into with respect to Acquired
Prospects, including Exhibit 2 which is the Operating
Procedure and other Exhibits attached thereto; and
b) Schedule "B" which lists for the Initial Period, the Acquired
Prospects, along with the interests to be acquired by San
Joaquin therein. Should there be a conflict between the
provisions of the body of this Agreement and an agreement
entered into in the form of Schedule "A", the latter shall
prevail.
ARTICLE 2 - PROSPECTS
2.1 EXCLUSIVE RIGHTS OF SAN JOAQUIN
San Joaquin shall have exclusive access to all Prospects located in the Study
Areas. San Joaquin acknowledges, however, that the following prospects and
activities are specifically excluded from this Agreement:
Conaway Ranch Gas Field
Conaway Ranch Extension
Crossroads Gas Field
Crossroads Extension
North San Joaquin Project (Harwood Capital)
Raisin City Oil Field
Vemalis Gas Field
<PAGE>
Vemonia Gas Field (Oregon)
Winters Gas Field
Equinax/E&B Natural Resources Acquisition Broker
Personal Working Interest Investments with Capitol Oil Corporation and
others
Prospect Review for several investors/oil companies
2.2 PRESENTATION OF PROSPECT BROCHURES
The Parties acknowledge that a Brochure has been provided with respect to
Prospects for the Initial Period, as outlined in Schedule "B" hereto. Six (6)
weeks prior to the commencement of each Renewal Period, Canyon shall provide San
Joaquin with a Brochure for all Prospects to be initiated during each such
Renewal Period. Each Brochure shall contain the following information:
a) a map outlining the area covered by each Prospect;
b) description of and vintage of seismic data available for the
Prospect;
c) proposed budget for the Prospect including details of the
following costs:
(i) lease acquisition costs;
(ii) seismic data costs;
(iii) geological data costs; and
(iv) well costs; and
d) terms of the Canyon Carried Interest where the number of
Carried Interest wells in a Prospect is to be greater than one
(1).
2.3 PRESENTATION OF PROSPECTS
a) Within one week of receiving a Brochure, San Joaquin shall elect, by
written notice to Canyon, to receive additional information with regard
to any or all of the Prospects contained within the Brochure. Should a
Prospect included in a Brochure conflict with or cover the same area as
prior activities of San Joaquin, San Joaquin shall elect not to acquire
any additional information with respect to such Prospect from Canyon.
Any Prospects for which San Joaquin does not elect to receive
additional information shall not be subject to the provisions of
Article 6.
b) One week after San Joaquin receives a Brochure for a Prospect, or on
such date as mutually agreed by the Parties, Canyon shall provide San
Joaquin with additional information, including geological, geophysical
and engineering description, and ownership of petroleum and natural gas
leases with respect to all Prospects for which San Joaquin has elected
to receive such information. The additional information shall be
provided in Sacramento, California by way of a presentation, commonly
called a "show and tell", regarding each such Prospect.
c) Canyon shall provide San Joaquin with access to all geological,
geophysical, engineering and land data provided in the presentations so
as to enable San Joaquin to provide all such data to its Participants.
In any cases where Canyon is not permitted under its arrangements with
other Persons to allow such data to be provided for review outside
Canyon's offices, Canyon shall provide the Participants with access to
such data at Canyon's offices.
2.4 ACCEPTANCE OF PROSPECTS
Within twenty-five (25) days of receiving a presentation with respect to a
Prospect, San Joaquin shall indicate in writing if it intends to accept a
Prospect, and the interest that it shall acquire therein, in which case the
Parties shall forthwith enter into a Farmout and Joint Operating Agreement in
the form attached hereto as Schedule "A" with respect to the lands included in
such Acquired Prospect.
2.5 PARTICIPATION LEVEL
San Joaquin may elect to acquire an interest in a Prospect in any amount up to
100% of the interest in such Prospect. The participation level may vary from
Prospect to Prospect. If San Joaquin elects to acquire less than 100% of the
interest in a Prospect, San Joaquin may attempt to locate other Participants to
acquire the remaining interest, which Participants would enter into the same
Farmout and Joint Operating Agreement to be entered into by the Parties for that
Prospect and be subject to the same terms and conditions.
2.6 OPERATORSHIP OF PROSPECTS
a) San Joaquin shall be operator of all Acquired Prospects for purposes of
drilling, and thereafter operating, each well.
b) Canyon shall be operator for acquisition of all seismic data.
2.7 REJECTION OF PROSPECTS BY SAN JOAQUIN
Subject to Article 6, San Joaquin may reject any or all Prospects after
receiving a presentation with respect thereto. If San Joaquin rejects a
Prospect, Canyon may find another Person or Persons to acquire such Non-Acquired
Prospect without any further obligation to San Joaquin.
ARTICLE 3 - COMPENSATION
3.1 OVERHEAD COSTS
In consideration for the provision by Canyon of the Prospects hereunder, San
Joaquin shall pay for Canyon's overhead costs in the amount of $70,000.00 for
the Initial Period and for each Renewal Period, payable in advance at the
beginning of the Initial Period and of each Renewal Period. It is intended that
such payments will cover costs for salaries of Canyon's Representatives, office
costs, and geological and geophysical data in Canyon's possession, provided
however that all ownership rights to such geological and geophysical data shall
remain with Canyon. It is understood and agreed that:
a) Canyon shall be solely responsible for any additional salaries and
wages, cost of holidays, vacation, sickness and disability benefits,
insurance coverage and other customary allowances which may be payable
to any of Canyon's Representatives; and that
b) the above-referenced fees cover all office overhead costs and include
all engineering, geological and geophysical data relating to the
Prospects currently in the possession of Canyon.
3.2 NO OTHER INTEREST
Except as provided in Section 3.1 and Article 4, Canyon shall not be entitled to
any other fees nor any share of the interest of San Joaquin in any Acquired
Prospect and that San Joaquin shall be solely entitled to the rights and
benefits in respect to the Acquired Prospects. Without limiting the generality
of the foregoing, Canyon shall not be entitled to an overriding royalty interest
on any Acquired Prospect and any costs passed on from Canyon to San Joaquin and
any of San Joaquin's Participants shall be at Canyon's cost without any markup.
ARTICLE 4 - CANYON INTERESTS IN ACQUIRED PROSPECTS
4.1 STANDARD TERMS AND CONDITIONS
The provisions of this Article 4 contain the standard terms and conditions that
shall be included in the Farmout and Joint Operating Agreement to be entered
into by the Parties for each Acquired Prospect.
4.2 CANYON CARRIED INTEREST
San Joaquin and any Participants in an Acquired Prospect shall pay 100% of the
following costs: a) costs of acquiring seismic data to evaluate such Acquired
Prospect for purposes of drilling a test well
thereon;
b) lease acquisition costs for such Acquired Prospect;
c) first year rental and bonus costs for leases acquired for such Acquired
Prospect; d) acquisition of geological data for the Acquired Prospect; e) all
costs associated with the test well, including drilling to contract depth,
testing, logging and
abandoning, or, if San Joaquin and its Participants elect to
complete and equip the test well, costs to complete and equip
the test well; and
f) in those exceptional cases where the Parties have agreed that
the Carried Interest shall apply to more than the initial well
on a Prospect, costs for a second well, only if negotiated and
agreed by the Parties in writing at the time that San Joaquin
agrees to acquire an interest in such Acquired Prospect.
4.3 CANYON WORKING INTEREST
Canyon shall be entitled to a 14% working interest in the leases and test well
in all Acquired Prospects and shall thereupon be responsible for its working
interest share of all future costs incurred on the Acquired Prospect, including
any future well costs relating to the test well.
4.3 PARTICIPANTS WITH SAN JOAQUIN
It is acknowledged that San Joaquin may have Participants acting with it in
acquiring an interest in any Prospect. The Participants will pay 100% of the
costs listed in Section 4.2 to earn a 75% working (participating) interest.
However, Canyon need only deal with San Joaquin for purposes of this Agreement.
ARTICLE 5 - TERM OF AGREEMENT
5.1 RENEWAL PERIODS
This Agreement may be continued beyond the Initial Period by written agreement
of the Parties. If so continued beyond the Initial Period, this Agreement shall
continue in effect for successive four month periods (the "Renewal Periods")
until terminated by either Party by written notice given at least two (2)
calendar months prior to the end of any Period. The Agreement shall thereupon
terminate on the last day of the Period in which such notice has been given (the
"Termination Date").
5.2 TERM
The Term of this Agreement shall be from the Effective Date until the
Termination Date.
ARTICLE 6 - CONFIDENTIALITY AND EXCLUSION
6.1 CONFIDENTIALITY
In consideration of the disclosure of Confidential Information by Canyon to San
Joaquin, San Joaquin hereby agrees, for a period of one year from the date it
receives a Brochure for a Prospect to keep confidential any and all of the
Confidential Information relating to such Prospect and that it shall only use or
permit the use of the Confidential Information for the purpose of evaluating and
acquiring the Prospects in accordance with this Agreement. San Joaquin shall not
under any circumstances disclose the Confidential Information, either directly
or indirectly, to any third party or parties or to any of its Representatives
not having a need to know for the purpose of appraising the Prospects. The
Confidential Information shall only be disclosed to San Joaquin's Participants
and Representatives on a "need to know" basis. San Joaquin shall ensure that all
such Persons having access to the Confidential Information comply with the
provisions of this Agreement.
6.2 EXCEPTIONS
San Joaquin's confidentiality obligations hereunder shall not apply to any of
the Confidential Information that San Joaquin can demonstrate:
a) to have been known to San Joaquin prior to the disclosure to
San Joaquin by Canyon;
b) to be in the public domain through no fault of San Joaquin or
any of its Representatives; or
c) to have been lawfully obtained from a source independent of
Canyon where San Joaquin has made reasonable efforts to ensure
that such source is not a party to or bound by any
confidentiality agreement with Canyon.
d) is required to be disclosed to a court of competent
jurisdiction or to any regulatory body having jurisdiction,
provided that:
(i) San Joaquin shall take reasonable steps to maintain
the confidentiality of the Confidential Information
by the court or regulatory body; and
(ii) San Joaquin shall provide Canyon with immediate
written notice of any request for disclosure.
6.3 EXCLUSION AREA
a) San Joaquin shall not obtain any interest in petroleum and natural gas
rights within the Exclusion Area for a period of one year after the
date that it receives the Brochure applicable to such Exclusion Area.
San Joaquin agrees that if it acquires any right or interest within the
Exclusion Area within one year after the date that it receives the
Brochure applicable to such Exclusion Area, 100% of such right or
interest shall immediately be offered to Canyon for a like amount of
the consideration expended by San Joaquin for the said right or
interest, whether such consideration be monetary, incurred obligations,
or otherwise. The foregoing provisions shall not apply to any interest
acquired by San Joaquin from Canyon in accordance with the provisions
of this Agreement.
b) The Parties acknowledge and agree that San Joaquin shall be permitted
to acquire prospects and resulting leases in prospects outside areas
covered by the Prospects and that San Joaquin has no obligation to
offer Canyon the right to participate in any such other prospects.
6.4 LIABILITY AND INDEMNITY
San Joaquin shall:
a) be liable to Canyon for all loss and damages whatsoever which
Canyon may sustain or incur; and, in addition
b) indemnify and hold harmless Canyon from and against all loss
and damages whatsoever which may be suffered by Canyon or
which it may sustain or incur by reason of the failure of San
Joaquin or its Representatives or Participants to comply with
the obligations contained in Sections 6.1, 6.2 and 6.3 of this
Agreement.
ARTICLE 7 - GENERAL CONTRACT PROVISIONS
7.1 NOTICES
All notices, requests, demands or other communications (collectively, "Notices")
by the terms hereof required or permitted to be given by one Party to the other,
or to any other person, shall be given in writing by personal delivery or by
facsimile transmission to such other Party at the following address:
To San Joaquin at: 53 STRATFORD PLACE S.W.
CALGARY, ALBERTA T3H 1H7
FAX: (403) 246-5056
To Canyon at: SUITE 1, 2625 FAIR OAKS BOULEVARD
SACRAMENTO, CA 95864
FAX: (916) 486-9197
or such other address as may be given by a Party to the other Party hereto in
writing from time to time.
All such Notices shall be deemed to have been received when delivered or
transmitted, provided that any Notice received after normal business hours or on
a holiday or weekend shall be deemed to be received on the next day business
day.
7.2 FURTHER ASSURANCES
The Parties shall sign such further and other documents, cause such meetings to
be held, resolutions passed and by-laws enacted, exercise their vote and
influence, do and perform and cause to be done and performed such further and
other acts and things as may be necessary or desirable in order to give full
effect to this Agreement and every part hereof.
7.3 COUNTERPARTS
This Agreement may be executed in several counterparts, each of which so
executed shall be deemed to be an original and such counterparts together shall
be one and the same instrument.
7.4 TIME OF THE ESSENCE
Time shall be of the essence of this Agreement and of every part hereof and no
extension or variation of this Agreement shall operate as a waiver of this
provision.
7.5 ENTIRE AGREEMENT
This Agreement constitutes the entire Agreement between the Parties with respect
to all the matters herein and its execution has not been induced by, nor do
either of the Parties rely upon or regard as material, any representations or
writings whatever not incorporated herein and made a part hereof. This Agreement
may not be amended or modified in any respect except by written instrument
signed by the Parties. Any schedules referred to herein are incorporated herein
by reference and form part of this Agreement.
7.6 ENUREMENT
This Agreement shall enure to the benefit of and be binding upon the Parties and
their respective legal personal representatives, heirs, executors,
administrators or successors.
7.7 ASSIGNMENT
Neither Party may assign its rights and obligations under this Agreement. The
Parties acknowledge that San Joaquin may bring in Participants who will become
parties to Farmout and Joint Operating Agreements entered into in the form of
Schedule "A". Such Participants shall not, however, become parties to this
Agreement.
7.8 CURRENCY
Unless otherwise specifically provided for herein, all monetary amounts
specified herein shall refer to the lawful money of the United States of
America.
7.9 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of California and each Party irrevocably attorns to the non-exclusive
jurisdiction of the Courts of such State.
7.10 CALCULATION OF TIME
When calculating a period of time within which or following which any act is to
be done or step taken pursuant to this Agreement, the date which is the
reference date shall, unless otherwise specifically included, be excluded. If
the last day of a period is not a business day, then the time period in question
shall end on the first business day following such non-business day.
7.11 SEVERABILITY
If any portion of this Agreement is determined to be invalid or unenforceable
for any reason whatsoever, that invalidity or unenforceablity shall not affect
the validity or enforceability of remaining portions of this Agreement and such
invalid or unenforceable portion shall be severed from the remainder of this
Agreement.
IN WITNESS WHEREOF the Parties have executed this Agreement as of the day and
year first above written.
SAN JOAQUIN OIL & GAS LTD. CANYON OIL & GAS
PER: /s/ J. Timothy Bowes PER: /s/ Monty Doris
---------------------------- ---------------------------
J. TIMOTHY BOWES,
PRESIDENT
PER: ______________________
<PAGE>
Exhibit 10.4
Agreement with Consolidated Stewards Inc., as amended
<PAGE>
JOINT VENTURE AGREEMENT DATED NOVEMBER 16, 1999
BETWEEN:
SAN JOAQUIN OIL & GAS LTD., a corporation incorporated under the laws
of the State of Nevada and having an office in the City of Calgary, in
the Province of Alberta ("San Joaquin")
and
CONSOLIDATED EARTH STEWARDS INC., a corporation incorporated under the
laws of the Province of British Columbia and having an office in the
City of Kelowna, in the Province of British Columbia ("CEW")
WHEREAS:
A. San Joaquin is engaged in the exploration and development of oil and
gas prospects in the San Joaquin and Sacramento basins in California;
and
B. The Parties wish to make provision for the granting of a right of first
refusal to CEW; and
C. The Parties wish to provide for the terms under which such right of
first refusal may be exercised; and
D. The Parties wish to provide for the terms of any resulting joint
ventures between San Joaquin and CEW.
THE PARTIES AGREE AS FOLLOWS:
ARTICLE 1 - INTERPRETATION
1.1 DEFINITIONS
In this Agreement, unless the context otherwise requires, the following terms
shall have the following meanings:
"AGREEMENT" means this agreement and all schedules attached hereto.
<PAGE>
2
"INDIVIDUAL PROSPECT" means a Prospect described in a Prospect Notice.
FARMOUT AND JOINT OPERATION AGREEMENT" means an agreement in the form attached
hereto as Schedule "A", including the Exhibits attached thereto.
"PARTIES" means San Joaquin and CEW and "Party" means either of them.
"PRIVATE PLACEMENT" means the private placement which was press released by CEW
on September 21, 1999.
"PROSPECT NOTICE" means a written notification containing the following
information:
(a) a map outlining the area covered by the Individual Prospect;
(b) information regarding any leases acquired to date and the cost
of such acquisitions; and
(c) the date, time and location of the Presentation to be
provided.
"PROSPECTS" means all petroleum and natural gas exploration prospects acquired
or generated by San Joaquin in the San Joaquin and Sacramento Basins located in
California, but shall not include:
(a) San Joaquin's interest in the Hilton Petroleum Greater San
Joaquin Basin Joint Venture LLC; or
(b) any oil or gas production acquired by San Joaquin in the San
Joaquin and Sacramento basins located in California.
1.2 INTERPRETATION
(a) The headings of the articles and sections of this Agreement
are inserted for convenience of reference only and shall not
be used in construing or interpreting any provisions hereof.
(b) Whenever the singular or masculine or neuter is used in this
Agreement, the same shall be construed as meaning the plural
or feminine or body politic or corporate entity and vice versa
as the context or reference to the Parties may require.
<PAGE>
3
1.3 SCHEDULES
All schedules attached hereto are incorporated herein by reference as fully as
though contained in the body hereof. The schedules are as follows:
(a) Schedule "A" which is the form of Farmout Agreement and AAPL
Joint Operating Agreement.
(b) Schedule "B" which is the form of Confidentiality and
Exclusion Agreement.
Should there be a conflict between the provision of the body of this Agreement
and an agreement entered into in the form of Schedule "A", the latter shall
prevail.
ARTICLE 2 - RIGHT OF FIRST REFUSAL
2.1 RIGHT OF FIRST REFUSAL
CEW shall have a right of first refusal to participate for a nineteen percent
(19%) share of costs in all of the Prospects (hereinafter referred to as the
"ROFR") upon the terms contained herein.
2.2 TERM
Subject to Paragraph 8.1, the ROFR shall be in existence for a period of two
years, from October 1, 1999 to October 1, 2001 inclusive.
2.3 CONSIDERATION
The cost of the ROFR shall be $150,000.00 in US funds which sum shall be payable
by CEW within three (3) business days of the closing of the Private Placement.
<PAGE>
4
ARTICLE 3 - NOTICE OF PROSPECT
3.1 PROSPECT NOTICE
San Joaquin shall provide notification to CEW of an Individual Prospect by
provision of a Prospect Notice.
3.2 ELECTION OF CEW
Within one week of receipt of a Prospect Notice, CEW must advise San Joaquin in
writing whether it elects to review the Individual Prospect.
3.3 CONFIDENTIALITY AND EXCLUSION AGREEMENT
In the event that CEW elects to review the Individual Prospect, CEW shall
execute a Confidentiality and Exclusion Agreement in the form of Schedule "B".
3.4 ELECTION NOT TO REVIEW
In the event that CEW elects not to review the Individual Prospect, San Joaquin
shall reimburse CEW for its share of any monies used to purchase leases and
incur seismic expenditures for the Individual Prospect if any. Such
reimbursement shall be provided to CEW within two weeks of its election not to
review the Individual Prospect.
3.5 CEW PROSPECTS
Nothing in this Article or in this Agreement shall be construed as creating an
obligation on CEW's part to show San Joaquin prospects that it may have in the
San Joaquin or Sacramento Basins.
<PAGE>
5
ARTICLE 4 - GEOLOGICAL AND GEOPHYSICAL PRESENTATION
4.1 SAN JOAQUIN'S OBLIGATIONS
Upon CEW electing to review an Individual Prospect as provided for in Paragraph
3.2, San Joaquin shall provide to CEW a review of the Individual Prospect
(herein referred to as the "Presentation").
4.2 VENUE
The Presentation shall take place at a location to be determined by San Joaquin.
4.3 CONTENTS OF PRESENTATION
The Presentation shall include the following:
(a) a geological and if available, geophysical review of the
Individual Prospect;
(b) a review of any petroleum and natural gas leases acquired to
date in relation to the Individual Prospect and the status of
the remaining land within the Individual Prospect boundaries;
(c) a review of the estimated seismic expenditures required to
define the Individual Prospect such that a test well can be
drilled on the Individual Prospect;
(d) a summary of the terms of earning an interest in the
Individual Prospect if those terms differ from the standard
earning terms contained in Article 6 of this Agreement;
(e) information regarding an area of mutual interest and exclusion
to be established; and
(f) information regarding test well contract depth.
4.4 ELECTION TO PARTICIPATE
Within fourteen days of viewing the Presentation, CEW shall notify San Joaquin
in writing whether or not it wishes to participate in the Individual Prospect.
<PAGE>
6
ARTICLE 5 - LAND AND SEISMIC FUNDS
5.1 LAND FUND
Within eight (8) business days of the closing of the Private Placement, CEW
shall provide San Joaquin with the initial sum of $130,000.00 in US funds to be
used as a land fund by San Joaquin as follows:
(a) the aforementioned sum shall be held by San Joaquin in a
segregated bank account and shall be used only for CEW's share
of costs associated with the acquisition of oil and gas leases
and the payment of land rentals and bonuses for Individual
Prospects;
(b) San Joaquin may co-mingle funds provided by CEW with funds
provided by other participants in Individual Prospects but
shall keep an accounting of all monies exended;
(c) San Joaquin shall be entitled to draw monies from the land
fund as necessary to acquire oil and gas leases for Individual
Prospects in which CEW is a participant;
(d) In the event that CEW's portion of the land fund is depleted
at any time below the amount of $30,000.00 US, San Joaquin
shall notify CEW of same and CEW shall be obligated to provide
a further $100,000.00 US within one (1) month of receipt of
said notice, to San Joaquin;
(e) all interest accrued in the land fund shall be for the
account; and
(f) CEW shall have the right to audit the land fund.
5.2 SEISMIC FUND
Upon execution of this agreement, CEW will pay to San Joaquin the sum of
US$70,000 on the following terms.
(a) the funds will be received by San Joaquin and used by it
exclusively toward its past and future costs of undertaking
and completing seismic work or acquiring seismic lines on
Prospects; and
(b) the funds will be an irrevocable payment by CEW of such
seismic costs.
<PAGE>
7
Following the expenditure of the said US$70,000, San Joaquin shall notify CEW of
the same and CEW shall be obliged to provide a further US$70,000 within one
month of receipt of said notice, which funds will be received by San Joaquin on
the following terms:
(a) The aforementioned sum shall be held by San Joaquin in a
segregated bank account and shall be used only for CEW's share
of costs associated with acquiring, reprocessing, and
conducting seismic programs over the Individual Prospects;
(b) San Joaquin may co-mingle funds provided by CEW with funds
provided by other participants in the Individual Prospects but
shall keep an accounting of all monies expended;
(c) San Joaquin shall be entitled to draw monies from the seismic
fund as necessary for seismic expenditures associated with
Individual Prospects in which CEW is a participant;
(d) In the event that CEW's portion of the seismic fund is
depleted at any time below the amount of $15,000.00 US, San
Joaquin shall notify CEW of same and CEW shall be obligated to
provide a further $70,000.00 US within one (1) month of
receipt of said notice; to San Joaquin;
(e) all interest accrued in the seismic fund shall be for the
account; and
(f) CEW shall have the right to audit the seismic fund.
ARTICLE 6 - EARNING TERMS
6.1 STANDARD TERMS AND CONDITIONS
The provisions of this Article 6 contain the standard terms and conditions that
shall be included in the Farmout and Joint Operating Agreement in the form of
Schedule "A", to be entered into by the Parties for each Individual Prospect.
6.2 COSTS
CEW shall pay nineteen per cent (19%) of the following costs for each Individual
Prospect in which it participates:
(a) general and administrative costs associated with the
Individual Prospect including costs incurred by Davis & Namson
Consulting Geologists, Canyon Oil & Gas
<PAGE>
8
Limited Liability Company, San Joaquin Oil & Gas Ltd. and any
other parties or entities which perform services for the
Individual Prospect;
(b) the cost of any seismic data previously acquired in connection
with the Individual Prospect and the cost of any seismic
program deemed necessary by San Joaquin, acting reasonably, to
define the Individual Prospect so that the test well can be
drilled;
(c) the cost of leases acquired covering the Individual Prospect
together with land agent fees, bonus costs and first year
rental payments; and
(d) test well costs including drilling to contract depth as
specified in the Presentation, testing, logging, capping,
abandoning or completing and equipping.
6.3 EARNING
Upon CEW incurring the costs referred to in Paragraph 6.2, it shall earn a
fourteen and one-quarter percent (14.25%) interest in all leases and lands
acquired in the Individual Prospect as well as a fourteen and one-quarter
percent (14.25%) interest in the test well associaed with the Individual
Prospect.
ARTICLE 7 - NET REVENUE INTEREST
7.1 NET REVENUE INTEREST IN LEASES
San Joaquin shall attempt to provide CEW with leases that have a net revenue
interest of seventy eight percent (78%). However should San Joaquin acquire a
lease which is subject to a lessor royalty as well as gross overriding royalties
which cause the net revenue interest to be less than 78%, San Joaquin shall not
be permitted to further reduce the net revenue interest with a gross overriding
royalty payable to San Joaquin.
ARTICLE 8 - TERMINATION
8.1 TERMINATION
Nothwithstanding Paragraph 2.2 hereof, the ROFR shall immediately terminate
under any of the following circumstances:
<PAGE>
9
(a) Where CEW fails to pay to San Joaquin the initial sum as
provided for in Paragraphs 5.1 and 5.2;
(b) where CEW fails to pay to San Joaquin amounts required in
accordance with Paragraphs 5.1(d) and 5.2(d);
(b) where CEW elects not to participate in two concurrent
Prospects offered by San Joaquin by way of Prospect Notices;
or
(c) where CEW does not pay to San Joaquin, the sum referred to in
Paragraph 2.3 on or before December 31, 1999.
ARTICLE 9 - JOINT OPERATIONS
9.1 JOINT OPERATING AGREEMENTS
Each Individual Prospect shall be governed by a separate Farmout Agreement and
Joint Operating Agreement in the form set forth in Schedule "A" to this
Agreement. A Farmout Agreement and Joint Operating Agreement in the form of
Schedule "A" shall be executed by CEW upon its election to participate in an
Individual Prospect as set forth in Paragraph 4.4.
9.2 OPERATOR
San Joaquin shall be the operator under the Farmout and Joint Operating
Agreements referred to in Paragraph 9.1.
9.3 PARTICIPANTS
San Joaquin shall be permitted to include other participants in an Individual
Prospect without the prior approval of CEW.
ARTICLE 10 - GENERAL CONTRACT PROVISIONS
10.1 NOTICES
<PAGE>
10
All notices, requests, demands or other communications (collectively "Notices")
by the terms hereof required or permitted to be given by one Party to the other,
or to any other person, shall be given in writing by personal delivery or by
prepaid courier, or by facsimile transmission to such other party at the
following address:
(a) to San Joaquin at: 53 Stratford Place SW
Calgary, Alberta
T3H 1H7
Fax: (403) 246-5056
(b) to CEW at: 700, 595 Howe Street
Vancouver, British Columbia
V6C 2T5
or such other address as may be given by a Party to the other Party hereto in
writing from time to time.
All such Notices shall be deemed to have been received when delivered or
transmitted.
10.2 FURTHER ASSURANCES
The Parties shall sign such further and other documents, cause such meetings to
be held, resolutions passed and by-laws enacted, exercise their vote and
influence, do and perform and cause to be done and performed such further and
other acts and things as may be necessary or desirable in order to give full
effect to this Agreement and every part hereof.
10.3 TIME OF THE ESSENCE
Time shall be of the essence in this Agreement and every part hereof and no
extension or variation of this Agreement shall operate as a waiver of this
provision.
10.4 ENTIRE AGREEMENT
This Agreement constitutes the entire agreement between the Parties with respect
to all the matters herein and its execution has not been induced by, nor do
either of the Parties rely upon or regard as material, any representations or
writings whatsoever not incorporated herein and
<PAGE>
11
made a part hereof. This Agreement may not be amended or modified in any respect
except by written instrument signed by the Parties.
10.5 ENUREMENT
This Agreement shall enure to the benefit of and be binding upon the Parties and
their respective legal personal representatives, heirs, executors,
administrators or successors.
10.6 ASSIGNMENT
Neither San Joaquin nor CEW may assign its rights and obligations under this
Agreement.
10.7 CURRENCY
Unless otherwise specifically provided for herein, all monetary amounts
specified herein shall refer to the lawful money of the United States of
America.
10.8 GOVERNING LAW
This Agreement shall be governed by and construed in accordance with the laws of
the State of California and each Party irrevocably attorns to the non-exclusive
jurisdiction of the Courts of such State.
10.9 CALCULATION OF TIME
When calculating a period of time within which or following which any act is to
be done or step taken pursuant to this Agreement, the date which is the
reference date shall, unless otherwise specifically included, be excluded. If
the last day of a period is not a business day, then the time period in question
shall end on the first business day following such non-business day.
<PAGE>
12
10.10 SEVERABILITY
If any portion of this Agreement is determined to be invalid or unenforceable
for any reason whatsoever, that invalidity or uneforceability shall not affect
the validity or enforceability of remaining portions of this Agreement and such
invalid or unenforceable portion shall be severed from the remainder of this
Agreement.
IN WITNESS WHEREOF the Parties have executed this Agreement this 17 day of
NOVEMBER 1999.
SAN JOAQUIN OIL & GAS LTD. CONSOLIDATED EARTH STEWARDS INC.
Per: /S/ J. TIMOTHY BOWES Per: /S/ UNKNOWN
------------------------------------ -----------------
J. Timothy Bowes
President and Assistant Secretary By: DIRECTOR (ALTERNATE)
-----------------------
<PAGE>
THIS AMENDMENT AGREEMENT DATED FEBRUARY 8, 2000
BETWEEN:
SAN JOAQUIN OIL & GAS LTD., a corporation incorporated under the laws
of the State of Nevada and having an office at 53 Stratford Place SW,
Calgary, Alberta T3H 1H7. ("San Joaquin")
AND:
CONSOLIDATED EARTH STEWARDS INC., a corporation incorporated under the
laws of Province of British Columbia and having an office at the Suite
106 - 1460 Pandosy Street, Kelowna, B.C. V1Y 1P3 ("CEW")
WHEREAS:
A. The parties entered into a Joint Venture Agreement dated November 16,
1999 (the "Joint Venture") providing CEW with a right of first refusal
to participate in the exploration and development of oil and gas
prospects in the San Joaquin and Sacramento basins in California;
B. The Joint Venture has secured interests in a number of oil and gas
prospects in the San Joaquin and Sacramento basins (the "Prospects")
and expenditures to date total approximately US$270,000;
C. CEW is responsible for 19% of the costs to date of the Joint Venture
calculated to be US$78,000 and CEW has advanced US$70,000 to San
Joaquin for exploration and development expenditures on the Prospects;
and
D. The parties wish to amend the terms of the Joint Venture to suspend any
further obligations of CEW pending a review of developments in the San
Joaquin and Sacramento basins.
THE PARTIES AGREE AS FOLLOWS:
1. The terms of the Joint Venture shall be amended to suspend any further
obligations of CEW pending a review of developments in the San Joaquin
and Sacramento basins.
<PAGE>
-2-
2. CEW hereby confirms that any monies advanced to San Joaquin to date may
be used by San Joaquin to pay for any exploration and development
expenses incurred by the Joint Venture.
3. CEW shall advance to San Joaquin a further US$8,000 to pay for its
share of Joint Venture administrative expenses.
4. Paragraph 2.3 of the Joint Venture agreement shall be amended by
replacing "within (3) business days of the closing of the Private
Placement" to "Within eight (8) business days of CEW electing to
participate in an Individual Prospect under paragraph 4.4."
5. Paragraph 5.1 of the Joint Venture agreement shall be amended by
replacing "of closing" to "of CEW electing to participate in an
Individual Prospect under paragraph 4.4."
6. Paragraph 5.2 of the Joint Venture agreement shall be amended by
replacing "Upon execution of this agreement" to "Within eight (8)
business days of CEW electing to participate in an Individual Prospect
under paragraph 4.4."
7. Sub-paragraph 8.1(c) is deleted of the Joint Venture agreement is
deleted.
8. The Joint Venture agreement continues in full force and effect, as
amended hereby.
IN WITNESS WHEREOF the Parties have executed this agreement this 14th day of
February, 2000.
SAN JOAQUIN OIL & GAS LTD. CONSOLIDATED EARTH STEWARDS
INC.
Per: /S/ J. TIMOTHY BOWES Per:/S/DEVINDER RANDHAWA
------------------------------------- ---------------------
J. Timothy Bowes, Devinder Randhawa,
President President
<PAGE>
Exhibit 21
List of Subsidiaries
<PAGE>
LIST OF SUBSIDIARIES:
- --------------------
The Company has one subsidiary, San Joaquin Oil & Gas, Ltd., a Nevada
corporation.
<PAGE>
Exhibit 27
Financial Data Schedule
<PAGE>
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<S> <C>
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<PERIOD-START> MAR-01-1999
<PERIOD-END> DEC-31-1999
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<CURRENT-ASSETS> 398,198
<PP&E> 514,260
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<TOTAL-ASSETS> 912,458
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<BONDS> 0
0
0
<COMMON> 1,177
<OTHER-SE> 837,118
<TOTAL-LIABILITY-AND-EQUITY> 912,458
<SALES> 0
<TOTAL-REVENUES> 5,784
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<OTHER-EXPENSES> 155,058
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> (149,274)
<INCOME-TAX> 0
<INCOME-CONTINUING> (147,604)
<DISCONTINUED> 0
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