AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON DECEMBER 10, 1999
REGISTRATION NO. 333-88575
U.S. SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
____________________
Amendment No. 1 to
FORM SB-2
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
_____________________
LAKOTA TECHNOLOGIES, INC.
(Name of small business issuer in its charter)
_____________________
COLORADO 138203 58-2230297
(State or other (Primary Standard Industrial (I.R.S. Employer
jurisdiction of Classification Code Number) Identification No.)
incorporation or
organization)
_____________________
2849 Paces Ferry Road
Suite 710
Atlanta, Georgia 30339
(770) 433-8250
(Address and telephone number of Registrant's principal
executive offices and principal place of business)
_____________________
R.K. (Ken) Honeyman
2849 Paces Ferry Road
Suite 710
Atlanta, Georgia 30339
(770) 433-8250
(Name, address and telephone number of agent for service)
_____________________
COPIES TO:
Brian A. Lebrecht, Esq.
Cutler Law Group
610 Newport Center Drive, Suite 800
Newport Beach, CA 92660
____________________
Approximate Date of Proposed Sale to the Public.
As soon as practicable after this Registration Statement becomes effective.
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, check the following box and list the
Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
<PAGE>
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
If delivery of the prospectus is expected to be made pursuant to Rule 434, check
the following box. [ ]
----------------------------
CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
CALCULATION OF REGISTRATION FEE
<S> <C> <C> <C> <C>
AMOUNT PROPOSED MAXIMUM PROPOSED MAXIMUM AMOUNT OF
TITLE OF EACH CLASS OF SECURITIES BEING OFFERING PRICE AGGREGATE REGISTRATION
TO BE REGISTERED REGISTERED PER SHARE(1) OFFERING PRICE FEE
- -------------------------------------------- ----------- ----------------- ----------------- -------------
Common Stock offered for sale 10,000,000 $ 0.17 $ 1,700,000 $ 448.80
- -------------------------------------------- ----------- ----------------- ----------------- -------------
Common Stock issuable upon conversion of 10,000,000 $ 0.075(2) $ 750,000 $ 198.00
Convertible Promissory Note
- --------------------------------------------
Common Stock issuable as interest on 1,600,000 $ 0.075(2) $ 120,000 $ 31.68
Convertible Promissory Note(3)
- --------------------------------------------
Common Stock issuable upon exercise of 5,000,000 $ 0.085(4) $ 425,000 $ 112.20
Warrants
- --------------------------------------------
Common Stock issuable upon exercise of 2,500,000 $ 0.10 $ 250,000 $ 66.00
Warrants(5)
- --------------------------------------------
Common Stock issuable upon exercise of 2,750,000 $ 0.15 $ 412,500 $ 108.90
Warrants(5)
- --------------------------------------------
Common Stock issuable upon exercise of 750,000 $ 0.20 $ 150,000 $ 39.60
Warrants(5)
- --------------------------------------------
Common Stock issuable upon exercise of 500,000 $ 0.28 $ 140,000 $ 36.96
Warrants(5)
- --------------------------------------------
Common Stock of certain selling shareholders 3,770,385 $ 0.17 $ 640,965 $ 169.22
- -------------------------------------------- ----------- ----------------- ----------------- -------------
Total Registration Fee $ 1,211.36
- -------------------------------------------- -----------
</TABLE>
1 Estimated solely for the purpose of calculating the registration fee
pursuant to Rule 457. Based on the closing price for the referenced
common stock on the OTC bulletin board maintained by Nasdaq on
December 8, 1999.
2 The Convertible Promissory Note is convertible at a percentage of the
price for the Company's common stock on the day immediately preceding
the conversion. The Price reflects conversion in the event that Company's
common stock is at a price of $0.10 at the standard percentage
conversion. See "Description of Securities."
3 Reflects potential payment of the 8% interest on the Convertible
Promissory Note for a period of 24 months from issuance. The pricing
is calculated as set forth in footnote 2 hereof.
4 The Warrants are exercisable at 50% of the lower of (i) the closing bid
price on the day immediately prior to the exercise, or (ii) the closing
bid price on August 24, 1999 (which was $0.17). The Price reflects a price
of $0.17 per share for the common stock, prior to applying the 50%
discount.
5 See "Selling Shareholders".
THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES
AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE
A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT
SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE
SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT SHALL
BECOME EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
PROSPECTUS 36,870,385 Shares of Common Stock
- ----------
LAKOTA TECHNOLOGIES, INC.
[LAKOTA TECHNOLOGIES LOGO]
Lakota Technologies, Inc. is registering 10,000,000 shares for sale to
investors by Lakota at prices between $0.10 and $0.30. We will only receive the
proceeds from this Offering if a minimum of 1,000,000 shares are sold. Until we
reach that minimum offering, investors' proceeds will be placed in an
interest-bearing trust account. All of the proceeds from the sale of these
shares will go directly to Lakota.
Lakota is also registering up to 26,870,385 shares for resale by:
0 Five individual investors who purchased convertible notes and
warrants, up to 16,600,000 shares;
0 Five individual investors who may obtain shares upon the exercise of
warrants, up to 6,000,000 shares;
0 An individual shareholder and warrantholder, up to 2,000,000 shares;
0 A member of Lakota's board of directors, 1,300,000 shares; and
0 Lakota's legal counsel, 970,385 shares.
Over 72% of the shares being offered in this prospectus are offered by
selling shareholders, most of which will be sold at the prevailing market price.
The sale of shares by selling shareholders will likely have a negative effect on
the market price of our stock, which may affect our ability to sell the
10,000,000 shares we are registering for sale to investors. We have not taken
any precautions, nor made any arrangements to address the effect of concurrent
sales by us and by selling shareholders.
Lakota's common stock is traded on the OTC bulletin board maintained by
Nasdaq under the symbol LAKO. All of the common stock registered by this
prospectus will be sold by the selling shareholders on their own behalf at the
prevailing market price when they are sold. On December 8, 1999, the last
reported sale price for the common stock on the OTC bulletin board was $0.17 per
share.
INVESTING IN THE COMMON STOCK INVOLVES RISKS. SEE RISK FACTORS BEGINNING
ON PAGE 4. YOU SHOULD PURCHASE SHARES ONLY IF YOU CAN AFFORD TO LOSE YOUR
ENTIRE INVESTMENT. NEITHER THE SECURITIES AND EXCHANGE COMMISSION NOR ANY STATE
SECURITIES COMMISSION HAS APPROVED OR DISAPPROVED OF THESE SECURITIES OR PASSED
UPON THE ADEQUACY OR ACCURACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE
CONTRARY IS A CRIMINAL OFFENSE.
This is a direct offering. There is no underwriter for any of the
securities offered.
THE DATE OF THIS PROSPECTUS IS DECEMBER 10, 1999
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PROSPECTUS SUMMARY
LAKOTA TECHNOLOGIES, INC.
Over 72% of the shares being offered in this prospectus are offered by
selling shareholders, most of which will be sold at the prevailing market price.
The sale of shares by selling shareholders will likely have a negative effect on
the market price of our stock, which may affect our ability to sell the
10,000,000 shares we are registering for sale to investors. We have not taken
any precautions, nor made any arrangements to address the effect of concurrent
sales by us and by selling shareholders.
We are a holding company which, through the operations of our three
wholly-owned subsidiaries, is engaged in two very distinct business sectors.
The first, which we have been involved in since early 1997, is oil and gas
exploration and operations. Our subsidiary, Lakota Oil and Gas, Inc.'s strategy
is to invest with joint partners in oil and gas exploration projects that are
already underway. The target joint partners are larger, well-financed entities
that have access to greater pools of resources which we believe will result in
enhanced success rates. This strategy emphasizes a balanced, risk-spreading
approach to create what we believe to be the maximum return on investment.
We are also involved in the rapidly growing high technology Internet
sector. We recently completed two acquisitions which provided our means of
entry into this exciting arena. Our subsidiary, 2-Infinity.com, Inc., provides
low-cost, high-speed, dedicated Internet access, focusing on the hotel and
multiple residential markets. Our subsidiary, AirNexus, Inc., is a retail
provider of commercial voice and data services with an emphasis on wireless, or
ethernet, networks. 2-Infinity and AirNexus gave us the opportunity to diversify
from our traditional oil and gas business into the exciting world of high
technology and the Internet.
Our offices are located at 2849 Paces Ferry Road, Suite 710, Atlanta,
Georgia 30339. Our telephone number is (770) 433-8250.
We maintain an Internet website at http://www.lakotatech.com.
--------------------------
THE OFFERING
Common stock offered by Lakota . . . . . . . . . . . . 10,000,000 shares
Common stock offered by selling shareholders . . . . . up to 26,870,385 shares
Common stock outstanding on December 8, 1999 . . . . 41,868,182 shares
Common stock outstanding after the offering . . . . . Up to 75,063,567 shares
OTC bulletin board symbol . . . . . . . . . . . . . . LAKO.
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NASD Eligibility Rule 6530, issued on January 4, 1999, states that issuers
who do not make current filings pursuant to Sections 13 and 15(d) of the
Securities Act of 1934 are ineligible for listing on the OTC bulletin board.
Issuers who are not current with such filings are subject to de-listing
according to a phase-in schedule depending on each issuer's trading symbol as
reported on January 4, 1999. Accordingly, our common stock is subject to
de-listing on January 19, 2000. On December 20, 1999, if we have not complied
with the Rule, our common stock will have its trading symbol changed to LAKOE.
When we get this registration statement effective, we will become eligible to
remain on the OTC bulletin board or to reapply if we have been de-listed.
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RISK FACTORS
Any investment in our common stock involves a high degree of risk. You
should consider carefully the following information, together with the other
information contained in this prospectus, before you decide to buy our common
stock. If any of the following events actually occurs, our business, financial
condition or results of operations would likely suffer. In this case, the market
price of our common stock could decline, and you could lose all or part of your
investment in our common stock.
RISKS RELATED TO OUR OIL AND GAS BUSINESS AS WELL AS OUR INTERNET AND TECHNOLOGY
BUSINESS
YOU MAY NOT BE ABLE TO SELL YOUR STOCK, OR MAY BE FORCED TO SELL AT REDUCED
PRICES, BECAUSE WE ARE REGISTERING A LARGE NUMBER OF SHARES FOR SELLING
SHAREHOLDERS. Of the 36,870,385 shares registered in this offering, over 72%
are being registered for sale by selling shareholders. The sale of shares by
selling shareholders at the prevailing market prices may have a negative effect
on the market value of our stock. If the market price of our stock declines,
the price at which we are offering shares to investors in this offering may no
longer be attractive, and as a result, we may not be able to raise required
capital.
YOU MAY BE UNABLE TO EFFECTIVELY EVALUATE OUR COMPANY FOR INVESTMENT
PURPOSES BECAUSE OUR OIL AND GAS EXPLORATION AND INTERNET TECHNOLOGY BUSINESSES
HAVE EXISTED FOR ONLY A SHORT PERIOD OF TIME. We began in the oil and gas
exploration business in 1997, and our Internet and technology subsidiaries have
been in operation since early 1999. As a result, we have only a limited
operating history upon which you may evaluate our business and prospects. In
addition, you must consider our prospects in light of the risks and
uncertainties encountered by companies in an early stage of development in new
and rapidly evolving markets.
YOUR INVESTMENT MAY NOT INCREASE IN VALUE UNLESS WE ARE ABLE TO BECOME
PROFITABLE. We have incurred losses in our business operation since inception.
We expect to continue to lose money for the foreseeable future, and we cannot be
certain when we will become profitable, if at all. Failure to achieve and
maintain profitability may adversely affect the market price of our common
stock.
WE ARE PRESENTLY IN UNSOUND FINANCIAL CONDITION WHICH MAKES INVESTMENT IN
OUR SECURITIES HIGHLY RISKY. Our financial statements include an auditor's
report containing a modification regarding an uncertainty about our ability to
continue as a going concern. Our financial statements also include an
accumulated deficit of $6,367,274 as of September 30, 1999 and other indications
of weakness in our present financial position. We have been operating primarily
through the issuance of common stock for services by entities, including
affiliates, that we could not afford to pay in cash. We are consequently deemed
by state securities regulators to presently be in unsound financial condition.
No person should invest in this offering unless they can afford to lose their
entire investment.
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OUR BUSINESS DEPENDS ON A FEW KEY INDIVIDUALS AND MAY BE NEGATIVELY
AFFECTED IF WE ARE UNABLE TO KEEP OUR KEY PERSONNEL. Our future success depends
in large part on the skills, experience and efforts of our key marketing and
management personnel. The loss of the continued services of any of these
individuals could have a very significant negative effect on our business. In
particular, we rely upon the experience of Ken Honeyman and Howard Wilson, our
president and secretary, respectively. We do not currently maintain a policy of
key man life insurance on any of our employees or management team.
OUR BUSINESS PLAN REQUIRES ADDITIONAL PERSONNEL AND MAY BE NEGATIVELY
AFFECTED IF WE ARE UNABLE TO HIRE AND RETAIN NEW SKILLED PERSONNEL. Qualified
personnel are in great demand throughout the software and Internet start-up
industries. Our success depends in large part upon our ability to attract,
train, motivate and retain highly skilled sales and marketing personnel, web
designers, software engineers and other senior personnel. Our failure to attract
and retain the highly trained technical personnel that are integral to our
direct sales, product development, service and support teams may limit the rate
at which we can generate sales and develop new products and services or product
and service enhancements. This could hurt our business, operating results and
financial condition.
OUR TECHNOLOGY BUSINESSES OWN PROPRIETARY TECHNOLOGY AND OUR SUCCESS
DEPENDS ON OUR ABILITY TO PROTECT THAT TECHNOLOGY. The unauthorized
reproduction or other misappropriation of our proprietary technology could
enable third parties to benefit from our technology without paying us for it.
This could have a material adverse effect on our business, operating results and
financial condition. We have relied primarily on the use of trade secrets to
protect our proprietary technology, which may be inadequate. We do not know
whether we will be able to defend our proprietary rights because the validity,
enforceability and scope of protection of proprietary rights in Internet-related
industries are uncertain and still evolving. Moreover, the laws of some foreign
countries are uncertain and may not protect intellectual property rights to the
same extent as the laws of the United States. If we resort to legal proceedings
to enforce our intellectual property rights, the proceedings could be burdensome
and expensive and could involve a high degree of risk.
WE WILL INCUR SIGNIFICANT EXPENSES IF OTHER COMPANIES CLAIM WE HAVE
INFRINGED ON THEIR PROPRIETARY RIGHTS. Although we attempt to avoid infringing
known proprietary rights of third parties, we are subject to the risk of claims
alleging infringement of third party proprietary rights. If we were to discover
that any of our products violated third party proprietary rights, there can be
no assurance that we would be able to obtain licenses on commercially reasonable
terms to continue offering the product without substantial reengineering or that
any effort to undertake such reengineering would be successful. We do not
conduct comprehensive searches to determine whether the technology used in our
products infringes patents, trademarks, tradenames or other protections held by
third parties. In addition, product development is inherently uncertain in a
rapidly evolving technological environment in which there may be numerous patent
applications pending, many of which are confidential when filed, with regard to
similar technologies. Any claim of infringement could cause us to incur
substantial costs defending against the claim, even if the claim is invalid, and
could distract our management from our business. Furthermore, a party making
such a claim could secure a judgment that requires us to
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<PAGE>
pay substantial
damages. A judgment could also include an injunction or other court order that
could prevent us from selling our products. Any of these events could have a
material adverse effect on our business, operating results and financial
condition.
IF WE ARE UNABLE TO RAISE SUFFICIENT CAPITAL IN THE FUTURE, WE MAY NOT BE
ABLE TO STAY IN BUSINESS. Currently, our capital is insufficient to conduct our
business and if we are unable to obtain needed financing, we will be unable to
promote our products and services, engage in and exploit potential business
opportunities and otherwise maintain our competitive position. Since we intend
to grow our business rapidly, it is certain that we will require additional
capital. We have not thoroughly investigated whether this capital would be
available, who would provide it, and on what terms. If we are unable to raise
the capital required to fund our growth, on acceptable terms, our business may
be seriously harmed or even terminated.
WE COULD LOSE REVENUE AND INCUR SIGNIFICANT COSTS IF OUR COMPUTER SYSTEMS
OR THE COMPUTER SYSTEMS OF THIRD-PARTIES ARE NOT YEAR 2000 COMPLIANT. Many
currently installed computer systems and software products accept only two
digits to identify the year in any date. Thus, the year 2000 will appear as
"00," which a system or software might consider to be the year 1900 rather than
the year 2000. This error could result in system failures, delays or
miscalculations that disrupt our operations. The failure of our internal
systems, or any material third-party systems, to be year 2000 compliant could
result in significant liabilities and could seriously harm our business. We have
conducted a review of our business systems, including our computer systems. We
have taken steps to remedy potential problems, but have not yet developed a
comprehensive year 2000 contingency plan. There can be no assurance that we will
identify all year 2000 problems in our computer systems before they occur or
that we will be able to remedy any problems that are discovered. We have also
queried many of our customers, vendors and resellers as to their progress in
identifying and addressing problems that their computer systems may face in
correctly interrelating and processing date information as the year 2000
approaches and is reached. We have received responses from several of these
parties, but there can be no assurance that we will identify all such year 2000
problems in the computer systems of our customers, vendors or resellers before
they occur or that we will be able to remedy any problems that are discovered.
Our efforts to identify and address year 2000 problems, and the expenses we may
incur as a result of such problems, could have a material adverse effect on our
business, financial condition and results of operations. In addition, the
revenue stream and financial stability of existing customers may be adversely
impacted by year 2000 problems, which could cause fluctuations in our revenue.
If we fail to identify and remedy year 2000 problems, we could also be at a
competitive disadvantage relative to companies that have corrected such
problems. Any of these outcomes could have significant adverse effects on our
business, financial condition and results of operations.
WE MAY NOT HAVE SUFFICIENT INTEREST IN OUR INTERNET BUSINESSES TO MAKE
MONEY. If the market for the services offered by 2-Infinity.com, Inc. and
AirNexus, Inc. do not grow at a significant rate, our business, operating
results and financial condition will be negatively affected. Our
Internet-related services are a relatively new concept. Future demand for
recently introduced technologies is highly uncertain, and therefore we cannot
guaranty that our business will grow as we expect.
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OUR INTERNET BUSINESSES ARE IN HIGHLY COMPETITIVE INDUSTRIES, AND THUS
THERE MAY NOT BE ENOUGH DEMAND FOR OUR PRODUCTS OR SERVICES FOR US TO MAKE
MONEY. There are numerous competitors offering the services of 2-Infinity.com,
Inc. and AirNexus, Inc. Many of our current and potential competitors have
longer operating histories, larger customer bases, greater brand recognition and
significantly greater financial, marketing and other resources than we do and
may enter into strategic or commercial relationships with larger, more
established and well-financed companies. Some of our competitors may be able to
enter into such strategic or commercial relationships on more favorable terms.
In addition, new technologies and the expansion of existing technologies may
increase competitive pressures on us. Increased competition may result in
reduced operating margins and loss of market share.
REVENUES FROM OUR INTERNET BUSINESSES WILL BE LESS LIKELY TO DEVELOP IF THE
INTERNET DOES NOT REMAIN A VIABLE COMMERCIAL MARKETPLACE. Our ability to
generate revenues is substantially dependent upon continued growth in the use of
the Internet and the infrastructure for providing Internet access and carrying
Internet traffic. We don't know if the necessary infrastructure or complementary
products will be developed or that the Internet will prove to be a viable
commercial marketplace. To the extent that the Internet continues to experience
significant growth in the level of use and the number of users, we cannot
guaranty that the infrastructure will continue to be able to support the demands
placed upon it by such potential growth. In addition, delays in the development
or adoption of new standards or protocols required to handle levels of Internet
activity, or increased governmental regulation may restrict the growth of the
Internet. If the necessary infrastructure or complementary products and services
are not developed or if the Internet does not become a viable commercial
marketplace, our business, operating results and financial condition would be
negatively affected.
WE MAY INCUR A LOSS OF REVENUES AND SIGNIFICANT COSTS IF WE CANNOT MAINTAIN
THE SECURITY OF OUR INTERNET PRODUCTS AND SERVICES. Internet companies rely on
encryption and authentication technology to provide the security and
authentication necessary to effect secure transmission of confidential
information. There can be no assurance that advances in computer capabilities,
new discoveries in the field of cryptography or other developments will not
result in a compromise or breach of the algorithms used by companies to protect
consumer's transaction data. If any such compromise of this security were to
occur, it could have a material adverse effect on our potential clients,
business, prospects, financial condition and results of operations. A party who
is able to circumvent security measures could misappropriate proprietary
information or cause interruptions in operations. We may be required to expend
significant capital and other resources to protect against such security
breaches or to alleviate problems caused by such breaches. Concerns over the
security of transactions conducted on the Internet and the privacy of users may
also hinder the growth of online services generally. To the extent that our
activities or third-party contractors involve the storage and transmission of
proprietary information, such as credit card numbers, or personal data
information, security breaches could damage our reputation and expose us to a
risk of loss or litigation and possible liability. We cannot be sure that our
security measures will not prevent security breaches or that failure to prevent
such security breaches will not have a material adverse effect on our business.
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RISKS RELATED TO OUR OIL AND GAS EXPLORATION BUSINESS
OUR REVENUES MAY VARY WIDELY BECAUSE OIL AND GAS PRICES ARE HIGHLY
VOLATILE. A portion of our future potential revenue is dependent on the
prevailing market price for oil and gas. The prices for oil and gas
historically have been volatile and are subject to wide fluctuations in response
to changes in the supply of and demand for oil and gas, market uncertainties and
a variety of additional factors beyond our control. These factors include the
level of consumer product demand, weather conditions, domestic and foreign
governmental regulation, political conditions in the Middle East, the foreign
supply of oil and gas, the price and availability of alternative fuels and
overall oil and gas market conditions. It is impossible to predict future oil
and gas price movements with any certainty. Any substantial or extended decline
in the price of oil and gas would have a negative effect on our financial
condition and results of operations, as well as reduce the amount of our oil and
gas that we can produce economically.
IF LOCAL OPERATORS DO NOT EFFECTIVELY MANAGE OUR PROPERTIES, WE MAY SUFFER
A LOSS OF REVENUES OR SIGNIFICANT ADDITIONAL EXPENSES. None of our oil and gas
properties are operated by us. As a result, we have limited control over the
manner in which operations are conducted on such properties, including the
safety and environmental standards. Under the terms of the operating agreements
governing operations on the properties in which we have an interest, we do not
have any measurable influence or control over the nature and timing of
exploration and development activities. As a result, the operators of such
properties could undertake exploration or development projects at a time when we
and our joint partners do not have the funds required to finance our share of
the costs of such projects. In such event, in accordance with the operating
agreements relating to properties in which we have an interest, the other
parties to such agreements who fund their share of the cost of such a project
are generally entitled to receive all cash flow from such project, subject to
rights of third party royalty or other interest owners, until they have
recovered a multiple of the costs of such project prior to our receipt of any
production or revenues from such project or, in the event drilling is necessary
to maintain leasehold interests, we may be required to forfeit our interests in
such projects. Conversely, the operators of such properties could refuse to
initiate exploration or development projects, in which case we would be required
to propose such activities and may be required to proceed with such activities
at much higher levels of participation than expected and without receiving any
funding from the other interest owners or the operators may initiate exploration
or development projects on a slower schedule than we prefer. Any of these events
could have a significant effect on our anticipated exploration and development
activities and financing thereof.
OUR REVENUES AND PROFITABILITY WILL BE NEGATIVELY AFFECTED IF THERE ARE
OPERATIONAL ACCIDENTS OR OTHER UNFORSEEN LIABILITIES. Our operations are
subject to risks inherent in the oil and gas industry, such as blowouts,
cratering, explosions, uncontrollable flows of oil, gas or well fluids, fires,
pollution and other environmental risks. These risks could result in substantial
losses to us due to injury and loss of life, severe damage to and destruction of
property and equipment, pollution and other environmental damage and suspension
of operations. In accordance with customary industry practice, we are not fully
insured against all risks incident to its business. Because of the nature of
industry hazards, it is possible that liabilities for pollution and other
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damages arising from a major occurrence could exceed insurance coverage or
policy limits. Any such liabilities could have a materially adverse effect on
our operations and profitability.
OUR SELECTION PROCESS FOR OIL AND GAS INVESTMENTS MAY RESULT IN PROPERTIES
THAT ARE UNPRODUCTIVE. We intend to continue acquiring oil and gas properties.
Although we perform a review of the properties to be acquired that we believe is
consistent with industry practices, our reviews are inherently incomplete.
Generally, it is not feasible to review in-depth every individual property
involved in each acquisition. Ordinarily, we will focus its review efforts on
the higher-valued properties and will sample the remainder. However, even an
in-depth review of all properties and records may not necessarily reveal
existing or potential problems nor will it permit a buyer to become sufficiently
familiar with the properties to assess fully their deficiencies and
capabilities. Inspections may not always be performed on every well, and
environmental problems, such as ground water contamination, are not necessarily
observable even when an inspection is undertaken. Furthermore, we must rely on
information, including financial, operating and geological information, provided
by the seller of the properties without being able to verify fully all such
information and without the benefit of knowing the history of operations of all
such properties.
DUE TO RISKS BEYOND OUR CONTROL, A SIGNIFICANT AMOUNT OF CAPITAL MAY BE
LOST ON INVESTMENTS THAT UNPRODUCTIVE. A high degree of risk of loss of
invested capital exists in almost all exploration and development activities
which we undertake. No assurance can be given that oil or gas will be discovered
to replace reserves currently being developed, produced and sold, or that if oil
or gas reserves are found, they will be of a sufficient quantity to enable us to
recover the substantial sums of money incurred in their acquisition, discovery
and development. Drilling activities are subject to numerous risks, including
the risk that no commercially productive oil or gas reservoirs will be
encountered. The cost of drilling, completing and operating wells is often
uncertain. Our operations may be curtailed, delayed or cancelled as a result of
numerous factors including title problems, weather conditions, compliance with
governmental requirements and shortages or delays in the delivery of equipment.
The availability of a ready market for the our gas production depends on a
number of factors, including, without limitation, the demand for and supply of
natural gas, the proximity of gas reserves to pipelines, the capacity of such
pipelines and government regulations.
IF GOVERNMENTAL REGULATIONS CHANGE, WE MAY INCUR SUBSTANTIAL INCREASED
EXPENSES. Our oil and gas business is subject to a number of federal, state and
local laws and regulations relating to the exploration for and development and
production of oil and gas, as well as environmental and safety matters. Such
laws and regulations have generally become more stringent in recent years, often
imposing greater liability on a larger number of potentially responsible
parties. Because the requirements imposed by such laws and regulations are
frequently changed, we are unable to predict the ultimate cost of compliance
with such requirements and their effect on us.
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RISKS RELATED TO THIS OFFERING AND OWNERSHIP OF OUR STOCK.
OUR BOARD OF DIRECTORS CAN ISSUE PREFERRED STOCK WITHOUT SHAREHOLDER
CONSENT AND DILUTE OR OTHERWISE SIGNIFICANTLY AFFECT THE RIGHTS OF EXISTING
SHAREHOLDERS. Our articles of incorporation provide that preferred stock may be
issued from time to time in one or more series. Our board of directors is
authorized to determine the rights, preferences, privileges and restrictions
granted to and imposed upon any wholly unissued series of preferred stock and
the designation of any such shares, without any vote or action by our
shareholders. The board of directors may authorize and issue preferred stock
with voting power or other rights that could adversely affect the voting power
or other rights of the holders of common stock. In addition, the issuance of
preferred stock could have the effect of delaying, deferring or preventing a
change in control, because the terms of preferred stock that might be issued
could potentially prohibit the consummation of any merger, reorganization, sale
of substantially all of its assets, liquidation or other extraordinary corporate
transaction without the approval of the holders of the outstanding shares of the
preferred stock. We will not offer preferred stock to promoters except on the
same terms as it is offered to all other existing shareholders or to new
shareholder or unless the issuance is approved by a majority of our independent
directors who do not have an interest in the transactions and who have access,
at our expense, to our legal counsel or independent legal counsel.
YOU MAY NOT BE ABLE TO SELL YOUR STOCK, OR MAY BE FORCED TO SELL AT REDUCED
PRICES, BECAUSE THE MARKET FOR OUR COMMON STOCK IS VERY VOLATILE. Our stock is
presently trading on the OTC bulletin board maintained by Nasdaq under the
symbol LAKO. Nevertheless, there has been limited volume in trading in the
public market for the common stock, and there can be no assurance that a more
active trading market will develop or be sustained. The market price of the
shares of common stock is likely to be highly volatile and may be significantly
affected by factors such as fluctuations in our operating results, announcements
of technological innovations or new products and/or services by us or our
competitors, governmental regulatory action, developments with respect to
patents or proprietary rights and general market conditions.
YOU MAY NOT BE ABLE TO SELL YOUR STOCK BECAUSE WE MAY BE DE-LISTED FROM THE
OTC BULLETIN BOARD. NASD Eligibility Rule 6530 issued on January 4, 1999,
states that issuers who do not make current filings pursuant to Sections 13 and
15(d) of the Securities Act of 1934 are ineligible for listing on the OTC
bulletin board. Issuers who are not current with such filings are subject to
delisting according to a phase-in schedule depending on each issuer's trading
symbol as reported on January 4, 1999. Our trading symbol on January 4, 1999
was LAKO. Therefore, under the phase-in schedule, our common stock is subject
to de-listing on January 19, 2000. One month prior to our potential delisting
date, our common stock will have its trading symbol changed to LAKOE, unless we
have then complied. When we get this registration statement effective, we will
have satisfied Rule 6530 and would become eligible to remain on the OTC bulletin
board. If we had previously been delisted, we could reapply for listing when we
have this registration statement effective.
10
<PAGE>
YOU MAY BE FORCED TO SELL YOUR STOCK AT A REDUCED PRICE BECAUSE SALES BY
OUR EXISTING SHAREHOLDERS MAY NEGATIVELY AFFECT THE PRICE. In this offering, we
are registering 10,000,000 shares of common stock for sale to new investors.
The price at which these shares are sold may be reduced because a large number
of shares sold by selling shareholders will negatively affect the price. In
addition, because of the large number of shares held by selling shareholders in
this registration statement, selling shareholders may not be able to sell all or
even a portion of their shares at the current market price. Even without
subsequent registration, these sales could occur under Rule 144 of the
Securities Act of 1933, which permits sales of unregistered, or restricted
securities under certain circumstances.
YOUR INVESTMENT IN OUR STOCK WILL BE IMMEDIATELY AND SUBSTANTIALLY
NEGATIVELY AFFECTED BY DILUTION. The difference between the public offering
price per share of common stock and the net tangible book value per share of
common stock after this offering constitutes the dilution to investors in shares
we are offering to the public in this offering. There has already been dilution
from the shares registered for selling stockholders. Net tangible book value
per share is determined by dividing the net tangible book value by the number of
outstanding shares of common stock. Net tangible book value is calculated as
total assets less intangible assets and total liabilities. The dilution
calculations we have set forth in this section reflect an offering price of
$0.17 per share, although we may sell the shares at prices above or below that
price. As of September 30, 1999, Lakota had a net tangible book value of
($18,747) or ($0.00047) per share of issued and outstanding common stock. If we
sell 1,000,000 shares in this offering, the net tangible book value will be
$151,253, or $0.0037 per share, representing an immediate increase in net
tangible book value of $0.0042 per share to existing shareholders and an
immediate dilution of $0.166 per share to new investors. In the alternative, if
we sell 5,000,000 shares in this offering, the net tangible book value will be
$831,253, or $0.018 per share, representing an immediate increase in net
tangible book value of $0.018 per share to existing shareholders and an
immediate dilution of $0.152 per share to new investors. Finally, in the event
we sell 10,000,000 shares in this offering, the net tangible book value will be
$1,681,253, or $0.033 per share, representing an immediate increase in net
tangible book value of $0.033 per share to existing shareholders and an
immediate dilution of $0.137 per share to new investors.
YOU MAY NOT BE ABLE TO SELL YOUR SHARES BECAUSE OF THE PENNY-STOCK RULES.
The Securities Enforcement and Penny Stock Reform Act of 1990 requires
additional disclosure relating to the market for penny stocks in connection with
trades in any stock defined as a penny stock. The Commission has adopted
regulations that generally define a penny stock to be any equity security that
has a market price of less than $5.00 per share, subject to a few exceptions.
Such exceptions include any equity security listed on Nasdaq and any equity
security issued by an issuer that has
0 net tangible assets of at least $2,000,000, if such issuer has been
in continuous operation for three years,
0 net tangible assets of at least $5,000,000, if such issuer has been
in continuous operation for less than three years, or
11
<PAGE>
0 average annual revenue of at least $6,000,000, if such issuer has
been in continuous operation for less than three years.
Unless an exception is available, the regulations require the delivery,
prior to any transaction involving a penny stock, of a disclosure schedule
explaining the penny stock market and the risks associated therewith.
WE WILL NOT RECEIVE ANY PROCEEDS FROM THE SALE OF SHARES HELD BY SELLING
SHAREHOLDERS, AND MANAGEMENT HAS DISCRETION TO SPEND THE PROCEEDS FROM THE SALE
OF NEWLY ISSUED SHARES. Most of the shares offered in this prospectus are
being sold by shareholders who already have our shares because they invested in
our company or helped us as professionals. The shares which we are trying to
sell will result in proceeds to Lakota which will be used mostly for working
capital and advertising, but our management will have wide discretion to use the
proceeds as they believe is best for Lakota. The proceeds could therefore be
used for items which our management decides is best rather than as listed.
FORWARD LOOKING STATEMENTS. Except for historical information, the
discussion in this registration statement contains some forward-looking
statements that involve risks and uncertainties. These statements may refer to
our future plans, objectives, expectations and intentions. These statements may
be identified by the use of the words such as expect, anticipate, believe,
intend, plan and similar expressions. Our actual results could differ materially
from those anticipated in such forward-looking statements.
12
<PAGE>
PRICE RANGE OF SECURITIES
The following table sets forth the high and low prices for shares of our
common stock for the periods noted, as reported by the National Daily Quotation
Service and the OTC bulletin board maintained by Nasdaq. Quotations reflect
inter-dealer prices, without retail mark-up, mark-down or commission and may not
represent actual transactions. Our stock began trading on September 25, 1997
under the symbol LAKO.
<TABLE>
<CAPTION>
<C> <S> <C> <C>
BID PRICES
YEAR PERIOD HIGH LOW
----- ------ ----- -----
1999 First Quarter 0.27 0.07
Second Quarter 0.62 0.06
Third Quarter 0.37 0.14
Fourth Quarter 0.23 0.10
(through December 8, 1999)
1998 First Quarter 1.22 0.31
Second Quarter 0.44 0.06
Third Quarter 0.38 0.04
Fourth Quarter 0.38 0.02
</TABLE>
The number of beneficial holders of record of the common stock of Lakota as
of the close of business on December 8, 1999 was approximately 110. Many of the
shares are held in street name and consequently reflect numerous additional
beneficial owners.
DIVIDEND POLICY
We have never paid any cash dividends on our common stock and do not
anticipate paying any cash dividends on our common stock in the future.
Instead, we intend to retain future earnings, if any, to fund the development
and growth of our business.
13
<PAGE>
DILUTION
The difference between the public offering price per share of common stock
and the net tangible book value per share of common stock after this offering
constitutes the dilution to investors in shares we are offering to the public in
this offering. There has already been dilution from the shares registered for
selling stockholders. Net tangible book value per share is determined by
dividing the net tangible book value by the number of outstanding shares of
common stock. Net tangible book value is calculated as total assets less
intangible assets and total liabilities. The dilution calculations we have set
forth in this section reflect an offering price of $0.17 per share, although we
may sell the shares at prices above or below that price.
As of September 30, 1999, Lakota had a net tangible book value of ($18,747)
or ($0.00047) per share of issued and outstanding common stock. The following
dilution tables reflect the net tangible book value per share as of that date
assuming the sale of:
0 1,000,000 shares (minimal offering), in which case the net tangible
book value is $151,253, or $0.0037 per share, representing an immediate increase
in net tangible book value of $0.0042 per share to existing shareholders and an
immediate dilution of $0.166 per share to new investors;
0 5,000,000 shares (mid-range offering), in which case the net tangible
book value is $831,253, or $0.018 per share, representing an immediate increase
in net tangible book value of $0.018 per share to existing shareholders and an
immediate dilution of $0.152 per share to new investors; and
0 10,000,000 shares (maximum offering), in which case the net tangible
book value is $1,681,253, or $0.033 per share, representing an immediate
increase in net tangible book value of $0.033 per share to existing shareholders
and an immediate dilution of $0.137 per share to new investors.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
ACTUAL,
AS OF SEPTEMBER 30, MINIMAL OFFERING MID-RANGE OFFERING MAXIMUM OFFERING
1999
--------------------- ----------------- ------------------- -----------------
Proposed public offering price $0.017 $0.017 $0.017 $0.017
(per share)
Net tangible book value per share ($0.00047) ($0.00047) ($0.00047) ($0.00047)
at September 30, 1999
Increase in net tangible book value N/A $0.0042 $0.018 $0.033
per share attributable to the proceeds
of the offering
Pro forma net tangible book value per N/A $0.0037 $0.018 $0.033
share after the offering
Dilution to new investors N/A $0.166 $0.152 $0.137
</TABLE>
14
<PAGE>
The following table sets forth on a pro forma basis at September 30, 1999,
the differences between existing stockholders and new investors with respect to
the number of shares of common stock purchased from Lakota, the total
consideration paid to Lakota, and the average price paid per share, assuming a
proposed public offering price of $0.17 per share, and a minimum offering,
mid-range offering, and maximum offering.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Minimum Offering Mid-range Offering Maximum Offering
------------------ ------------------------ ------------------
(#) (%) (#) (%) (#) (%)
Shares purchased by existing stockholders 40,278,182 97.6 40,278,182 88.9 40,278,182 80.1
Shares purchased by new investors 1,000,000 2.4 5,000,000 11.1 10,000,000 19.9
Total consideration paid by existing stockholders $6,348,527 $6,348,527 $6,348,527
Total consideration paid by new investors $170,000 $850,000 $1,700,000
Average price per share for existing shareholders $0.158 $0.158 $0.158
Average price per share for new investors $0.17 $0.17 $0.17
</TABLE>
15
<PAGE>
CAPITALIZATION
The following table sets forth as of September 30, 1999:
0 our actual capitalization;
0 our pro forma capitalization as adjusted to reflect the sale by
Lakota of 10,000,000 shares of common stock offered in this prospectus at as
assumed price of $0.17 per share and the receipt of the gross proceeds from
those sales.
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, 1999
--------------------
Actual As Adjusted(1)
----------- -------------
Total Liabilities $ 195,305 $ 195,305
Shareholders' equity
Preferred Stock, No par value,
25,000,000 shares authorized,
no shares outstanding - -
Common Stock, No par value,
100,000,000 shares authorized,
40,278,182 shares issued and
outstanding, actual; 50,278,182
shares issued and outstanding,
as adjusted 6,308,527 8,048,527
Deficit accumulated during
development stage (6,367,274) (6,367,274)
Total shareholders' equity (deficit) (18,747) 1,381,253
------------- -------------
Total capitalization 176,558 1,576,558
============ =============
</TABLE>
(1) Adjusted to reflect the sale by the Company of 10,000,000 shares of
common stock at a public offering price of $0.17 per share in the offering, the
gross proceeds of which will be used for equipment ($1,400,000) and working
capital ($300,000).
16
<PAGE>
USE OF PROCEEDS
Lakota does not realize any proceeds from the sale of the shares by the
selling stockholders. Lakota has already received and is utilizing the proceeds
received from those shares sold in private placements in its business and
marketing.
The following table represents the proceeds to Lakota upon the sale of all
of the shares registered for sale to investors, as well as the proceeds to
Lakota upon the exercise of the warrants for which shares are registered in this
registration statement.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
NUMBER OF EXERCISE PRICE OR
SHARES ACQUIRED PROCEEDS PER
UPON EXERCISE OF SHARE TO LAKOTA PROCEEDS TO
WARRANTS OR FROM SALE LAKOTA
REGISTERED FOR
NAME SALE
- ------------------------ ---------------- ------------------ -----------
Shares offered by Lakota 10,000,000 $0.17(1) $1,700,000
Y.L. Hirsch 1,000,000 $0.085(2) $85,000
Sholem Liebenthal 1,000,000 $0.085(2) $85,000
Avram Rothman 1,000,000 $0.085(2) $85,000
Joshua Heimlich 1,000,000 $0.085(2) $85,000
Zvi Y. Zelikovitz 1,000,000 $0.085(2) $85,000
Dipak Bhatt 1,250,000 $0.10 $125,000
Dipak Bhatt 2,000,000 $0.15 $300,000
Dipak Bhatt 750,000 $0.20 $150,000
Michael A. 750,000 $0.10 $75,000
Hancock and
Steven D.
Morrison
Michael A. 750,000 $0.15 $112,500
Hancock and
Steven D.
Morrison
Matt Hensley 500,000 $0.28 $140,000
Jeffrey A. Runner 400,000 $0.10 $40,000
and
Sally D. Runner
Michael Baker 100,000 $0.10 $10,000
Totals 21,500,000 $3,077,500
</TABLE>
(1) Based on the closing price for the common stock on the OTC bulletin
board on December 8, 1999.
(2) The warrants are exercisable at a price equal to 50% of the lower of (i)
the closing bid price for our common stock on the day immediately
prior to exercise, or (ii) the closing bid price on August 24, 1999,
which was $0.17. The exercise price reflects a market price of $0.085
per share for the common stock, prior to applying the 50% discount.
17
<PAGE>
These proceeds would be received from time to time as sales of these shares
are made by us. As set forth in the following table, we will use those proceeds
primarily for our operations and working capital. Our operations expenses
include salaries, consulting fees and other overhead costs. We intend to use
the proceeds with the following priorities:
<TABLE>
<CAPTION>
<S> <C> <C>
Maximum Offering
-----------------
Description of Use Amount Percent
- -------------------- ----------------- --------
Operations and Working Capital for Lakota and $300,000 9.7 %
Subsidiaries
Equipment for 2-Infinity and AirNexus $2,250,000 73.1 %
Oil and Gas Related Investments $527,500 17.2 %
TOTAL $3,077,500 100.0 %
</TABLE>
Our allocation of proceeds represents our best estimate based upon expected
sale of shares, the requirements of our business and our ongoing business and
marketing plan. If any of these factors change, we may reallocate some of the
net proceeds within or to different categories. If we are able to sell the
maximum shares, we believe that the funds generated by this offering, together
with current resources and expected revenues, would be sufficient to fund our
cash requirements, working capital and other capital requirements until the
third quarter of 2000. The portion of the net proceeds not immediately required
will be invested in U.S. governmental securities, certificates of deposit or
similar short-term interest bearing instruments.
18
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
OVERVIEW
Our financial statements include an auditor's report containing a
modification regarding an uncertainty about our ability to continue as a going
concern. Our financial statements also include an accumulated deficit of
$6,367,274 as of September 30, 1999 and other indications of weakness in our
present financial position. We are consequently deemed by state securities
regulators to presently be in unsound financial condition. No person should
invest in this offering unless they can afford to lose their entire investment.
We believe that our current level of cash, plus the proceeds from the
exercise of currently outstanding warrants, will fund operations through the
first quarter of 2000. It is anticipated that by the end of the first quarter
of 2000, each of the subsidiaries will be generating the necessary cash flow to
support themselves. If the subsidiaries are generating sufficient cash flow,
then the proceeds from the sale of shares in this registration statement will be
used for capital expansion and acquisitions, and is anticipated to be sufficient
to last us until the third quarter of 2000. In the event that the proceeds from
the exercise of warrants are insufficient, or in the event that the subsidiaries
do not reach positive cash flow before our current level of cash is depleted, we
will be forced to use a portion of the proceeds from the sale of shares in this
registration statement to investors for working capital purposes. We currently
do not have any operating oil and gas properties.
RESULTS OF OPERATIONS
In early 1999 we commenced a change in our business operations to an
internet and technology business. This included the acquisition of Air Nexus,
Inc. and 2-Infinity.com, Inc. Accordingly, the historical operating results of
Lakota do not reflect its present business strategy and consequently are not
indicative of the probability of its future success or failures.
Nine Months Ended September 30, 1999 (Unaudited) Compared to Year Ended December
31, 1999
Lakota had no revenues during the year ended December 31, 1998, and
revenues of $150,649 for the nine months ended September 30, 1999. These
revenues were derived from our AirNexus and Lakota Oil and Gas subsidiaries.
For the nine months ended September 30, 1999, we had amortization expense
of $2,159,000, which is a one-time write off of goodwill arising out of the
acquisitions of AirNexus, Inc. and 2-Infinity.com, Inc.
General and administrative expenses increased from $351,139 for year ended
December 31, 1999 to $1,780,883 for the nine months ended September 30, 1999,
primarily as a result of salaries and other overhead assumed in the acquisitions
of AirNexus and 2-Infinity.
19
<PAGE>
Year Ended December 31, 1998 Compared to Year Ended December 31, 1997
Lakota had no revenues in either the year ended December 31, 1998 or the
year ended December 31, 1997.
For the year ended December 31, 1997, we had interest expense of $436,061
which is accrued interest on 812,500 shares of Series A redeemable convertible
preferred stock. The accrued interest was satisfied with common stock upon
conversion of the preferred stock in 1997.
FINANCIAL CONDITION
As of September 30, 1999 (Unaudited)
As of September 30, 1999, Lakota had assets of $176,558 consisting
primarily of cash of $97,357, property and equipment of $41,652, and oil and gas
properties of $32,064.
Liabilities as of September 30, 1999 were $195,305, consisting primarily of
notes to related parties of $90,315, accounts payable of $33,649, other notes
payable of $30,000, and accrued expenses of $24,375.
At September 30, 1999, Lakota had an accumulated deficit of $6,367,274 and
total stockholders equity of ($18,747). The accumulated deficit and the
stockholders equity are derived primarily from our oil and gas operations, which
now constitute a minority of our overall business interests.
LIQUIDITY AND CAPITAL RESOURCES
From inception, we have financed substantially all of our operations from
private investment and an insignificant portion has been financed with cash
generated from operations.
Lakota had cash of $97,357 as of September 30, 1999.
We believe that the net proceeds from this offering, together with funds on
hand and any cash flow from operations, will be sufficient through the third
quarter of 2000. Depending on our rate of growth and cash requirements, we may
require additional equity or debt financing to meet future working capital or
capital expenditure needs. There can be no assurance that such additional
financing will be available or, if available, that such financing can be
obtained on satisfactory terms.
YEAR 2000 DISCLOSURE
We have completed a review of our computer systems to identify all software
applications and hardware that could be affected by the inability of many
existing computer
20
<PAGE>
systems to process time-sensitive data accurately beyond the
year 1999, referred to as the Year 2000 or Y2K issue. We have purchased
virtually all of our presently existing systems during 1999 and consequently
believe that those systems and the operating software on those systems is Y2K
compliant. We may be dependent for some functions on third-party computer
systems and applications. We also rely on our own computer systems. As a
result of our review, we have discovered no problems with our computer systems
relating to the Y2K issue. Although we believe that our computer systems are
Y2K compliant, we are continuing to monitor our computer systems in a continual
effort to insure that they are Y2K compliant. We have not obtained written
assurances from our major suppliers and the developers of our web site
indicating that they have completed a review of their respective computer
systems and that such systems are Y2K compliant. Costs associated with our
review were not material to our results of operations.
While we believe that our procedures have been designed to be successful,
because of the complexity of the Y2K issue and the interdependence of
organizations using computer systems, there can be no assurances that our
efforts, or those of third parties with whom we interact, have fully resolved
all possible Y2K issues. Failure to satisfactorily address the Y2K issue could
have a material adverse effect on us. The most likely worst case Y2K scenario
which management has identified to date is that, due to unanticipated Y2K
compliance problems, our Web site may not function at all or not function as
expected, and that we may be unable to bill our customers, in full or in part,
for services used. Should this occur, it would result in a material loss of
some or all of our gross revenue for an indeterminable amount of time, which
could cause us to cease operations. We have not yet developed a contingency
plan to address this worse case Y2K scenario, and do not intend to develop such
a plan in the future.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Lakota is not exposed to material risk based on interest rate fluctuation,
exchange rate fluctuation, or commodity price fluctuation.
21
<PAGE>
BUSINESS OF THE COMPANY
COMPANY OVERVIEW
We are a holding company which, through the operations of our three
wholly-owned subsidiaries, is engaged in two very distinct business sectors.
The first, which we have been involved in since early 1997, is oil and gas
exploration and operations. Our subsidiary, Lakota Oil and Gas, Inc.'s,
strategy is to invest with joint partners in oil and gas exploration projects
that already underway. The target joint partners are larger, well-financed
entities that have access to greater pools of resources which we believe will
result in enhanced success rates. This strategy emphasizes a balanced,
risk-spreading approach to create what we believe to be the maximum return on
investment.
We are also involved in the rapidly growing high technology Internet
sector. We recently completed two acquisitions which provided our means of
entry into this exciting arena. Our subsidiary, 2-Infinity.com, Inc., provides
low-cost, high-speed, dedicated Internet access, focusing on the hotel and
multiple residential markets. Our subsidiary, AirNexus, Inc., is a retail
provider of commercial voice and data services with an emphasis on wireless, or
ethernet, networks. 2-Infinity and AirNexus gave us the opportunity to diversify
from our traditional oil and gas business into the exciting world of high
technology and the Internet.
We maintain an Internet website at http://www.lakotatech.com.
--------------------------
ORGANIZATIONAL HISTORY
On November 14, 1995, our founders formed Lakota Energy, Inc. in the State
of Colorado for the purpose of engaging in oil and gas exploration and
operations. On November 6, 1996, Lakota Energy, Inc. was merged with and into
another Colorado corporation named Chancellor Trading Group, Inc. Chancellor
was a publicly traded corporation which was incorporated on July 14, 1995 and
had no significant operations prior to their merger with us. Immediately
following the merger, the shareholders of Chancellor voted to change its name to
Lakota Energy, Inc.
Immediately prior to the acquisition, Chancellor had 1,801,000 shares of
common stock outstanding. As part of the merger, and in exchange for all of the
outstanding common stock of Lakota Energy, Inc., Chancellor issued 9,187,500
shares to the shareholders of Lakota Energy, Inc. and an additional 118,000
shares were issued to third parties who assisted in closing the transaction.
Therefore, on November 6, 1996, immediately following the acquisition
transaction, we had 11,106,500 shares of common stock outstanding, and no shares
of preferred stock outstanding. Our common stock is currently traded on the OTC
bulletin board under the symbol LAKO.
22
<PAGE>
LAKOTA OIL AND GAS, INC.
On June 9, 1999, we incorporated a Texas corporation named Lakota Oil and
Gas, Inc., which is our wholly-owned subsidiary. Subsequently, on June 14,
1999, we transferred our interest in two oil exploration projects, which
constituted all of our oil-and-gas-related assets at the time, to Lakota Oil.
The purpose of the transactions was to organize our oil and gas related business
into one operating subsidiary, separate and distinct from our other operating
subsidiaries, in order to more accurately reflect our diversified operations.
The strategic plan of Lakota Oil is to participate in projects that have
been developed by other successful, well financed companies. The specific areas
of interest to Lakota Oil are Texas and Louisiana. We are adopting the
philosophy of several highly successful companies, both private and public, that
do not have large or expensive exploration and operating staffs. These
companies utilize the capital they would normally pay in salaries and benefits
to participate in a greater number of sound drilling prospects. We have found,
through experience, that it is more advantageous to use outside consultants who
have worked in a confined geologic area that are familiar with the nuances of
the prospect's geological province. These consultants are located through
existing contacts and relationships of our management, and more specifically
John Hayes, and are typically paid an hourly fee at the going market rate for
their services. Each drilling project has a central operating company or entity
that is responsible for contracting with, hiring, and compensating consultants,
as well as sub-contractors, on the project.
This plan will allow us to operate and finance the growth of Lakota Oil
through cash flow and optional debt financing.
Currently, we are parties to agreements with, among others, Cummins and
Walker Oil Company, York Resources, and other large private investors. Our
partners have the necessary technical, engineering, data acquisition and land
procurement resources already in place, making an affiliation with them
attractive.
Our investment in the South Halter Island Prospect, located in St. Mary and
Tennebonne Parishes, Louisiana, in which we are under contract with Panaco,
Inc., York Resources, Inc., Janivo Realty, Inc., and Carson Energy, Inc.,
entitled us to a 7.5% working interest with a 75% net revenue interest in the
specific oil well. Our initial investment into the project was $24,000, plus an
additional $163,748, which represented our share of the operating expenses. On
July 27, 1999, the decision was made to plug and abandon the well.
Our investment in the Union Central Life Insurance Co. Well No. 1, located
in Colorado County, Texas, in which we are under contract with Everest Minerals
Corporation and Cummins & Walker Oil Company, Inc., entitled us to a 20% working
interest with a 75% net revenue interest in the specific oil well. Our initial
investment into the project was $57,225, plus an additional $36,649, which
represented our share of the operating expenses. Development of this well is
currently ongoing.
23
<PAGE>
Our investment in the well known as the VUA: Bernard #1, located in
Lafayette Parish, Louisiana, entitles us to a 100% working interest with a
73.74% net revenue interest in the specific oil well. Our initial investment in
this project was $35,000, plus an additional $55,112, which represented our
shares of the operating and work-over expenses. Currently, the well is awaiting
further downhole work.
Our investment in the Glass Mountain Prospect, located in Pecos County,
Texas, in which we own the land leases solely, entitles us to a 100% working
interest with a 81.25% net revenue interest in the 1,159 acres in this lease.
Our initial investment in the project was 414,375 shares of Lakota Energy, Inc.
preferred stock, which has since been retired.
In general, we are seeking projects with the following criteria:
0 2D and 3D seismic interpretation
0 Analog production data
0 Reasonable lease terms
0 Infrastructure must be in place and accessible
0 Risked economic model must fit the following profile: pay out less
than one year, minimum of 3:1 PV10 return on investment
0 Prospect must have multi-pay potential with minimum of 10 BCF, or
billion cubic feet, potential
Once we have screened projects using the above criteria, we generally
acquire an interest in the project ranging from 5% to 20%, depending on its cost
and our available capital. Although we have no specific goal for the number of
investments during the next 12 months, we do intend to continue to seek
investments which we believe are consistent with our business plan.
Lakota Oil currently has one employee, its president John Hayes.
We own an 99.9% interest in another Texas corporation, West Bolt Energy,
Inc., which previously owned and operated a small number of oil and gas
properties. West Bolt Energy, Inc. is not engaged in any significant operations
and has not been for several years, and does not represent a measurable
percentage of the assets or revenues of Lakota.
2-INFINITY.COM, INC.
On May 28, 1999, we acquired all of the outstanding stock of
2-Infinity.com, Inc., a Texas corporation. As consideration for the
acquisition, we issued 3,000,000 shares of our common stock to Majed Jalali, the
sole shareholder of 2-Infinity. In addition, Mr. Jalali is entitled to receive
up to an additional 6,000,000 shares of our common stock if 2-Infinity reaches
gross revenue goals ranging from $1,000,000 to $4,650,000. As part of the
acquisition, 2-Infinity entered into a three year employment agreement with
Majed Jalali, president of 2-Infinity. Our management located and negotiated
the transaction, and as a result there were no finders or brokers' fees.
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The acquisition of 2-Infinity triggered the beginning of our changed
business focus into the high technology and Internet markets. 2-Infinity offers
high-speed, dedicated Internet access, focusing initially on the Houston, Texas
residential area during the next 12 months, and with plans to expand world-wide
in the near future. Currently, 2-Infinity has approximately 5 customers.
Tut Systems, Inc.
2-Infinity has entered into a Value Added ReSeller Agreement with Tut
Systems, Inc., which gives them the non-exclusive right to sell Tut's products.
Under the terms of the VAR Agreement, 2-Infinity has the right to purchase Tut's
products at prices according to regularly published price lists from Tuts and
re-sell them to their customers. 2-Infinity is obligation to purchase a minimum
of $1,000,000 in products per year. There are no limits on the re-sale prices
2-Infinity can charge on the products. The agreement is automatically renewed
for successive one year terms, but can be terminated by either party on 90 days
notice.
Tut's is in the business of delivering plug-and-play network solutions for
local loop, enterprise, and residential environments. Tut's products deliver
high-speed data over normal telephone wires using their FastCopper (tm)
technology. Tut's products are easy to install and use, providing customers
with a dedicated connection 24 hours a day, while still allowing full use of the
telephone line for voice use. More importantly, Tut's products require no
additional wiring or modifications to the telephone lines. Through the VAR
Agreement, 2-Infinity can offer its clients Tut's-enhanced Internet access at a
very reasonable price.
2-Infinity management will market the Tut's products through existing
contacts and personal introductions, and is seeking to enter into agreements
with the owners and managers of multi dwelling units, such as apartment
complexes, hotels, high rise apartment buildings, and residential developers to
become the Internet service provider for the entire developments.
At the present time, given 2-Infinity's exclusive focus on the Houston
area, there are no direct competitors. However, there are many competitors
offering traditional dial-up Internet service, both in the Houston area and
worldwide. In addition to traditional dial-up Internet access, many other
companies are offering alternative forms of Internet access, such as through
cable and wireless via satellite. There can be no assurance that 2-Infinity's
current method of technology will be accepted on a widespread basis, nor can
there be any assurance that it will be able to compete with larger,
well-financed competitors within their marketplace.
2-Infinity offers its products in two different packages. The first option
allows the subscriber to rent equipment monthly on a low cost-per-unit basis.
The second option allows the subscriber to purchase the equipment. In either
case, in addition to the rental or purchase of the equipment, subscribers will
pay a monthly subscription fee expected to be approximately $50.00 per
subscriber. In addition to the basic Internet access, subscribers will receive
a value-added package including:
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0 A guarantee of over 1Mbps dedicated access for each resident
0 Creation and maintenance of a web site for each specific complex,
property, or community
0 Community pages and chat rooms
0 Technical support
0 On-site hardware support
0 Software updates
0 Complete billing services
0 Multimedia and videoconferencing capabilities and assistance
0 Advertising and merchandising support
0 Static IP addresses
0 Multiple email accounts
0 Internet training programs
2-Infinity currently has 10 employees, all of which are located at their
offices at 4828 Loop Central Drive, Suite 150, Houston, Texas 77081.
AIRNEXUS, INC.
On June 8, 1999, we acquired all of the outstanding stock of Voice Design,
Inc., a Texas corporation which later changed its name to AirNexus, Inc. As
consideration for the acquisition, we issued an aggregate of 3,000,000 shares of
our common stock to Patrick Cody Morgan, Candice Morgan, and Charles H. Downey,
Jr. We also paid the cash sum of $60,000. In addition, Mr. Morgan is entitled
to receive up to an additional 3,000,000 shares of our common stock if net
revenue goals ranging from $32,400 to $762,400 per year are met. As part of the
acquisition, AirNexus entered into three year employment agreements with each of
Patrick Cody Morgan and Charles H. Downey, their chief executive officer and
president, respectively. Our management located and negotiated the transaction,
and as a result there were no finders or brokers' fees.
The acquisition of AirNexus furthered our changed business plan to enter
the high technology and Internet markets. AirNexus is a Houston based provider
of business telephone and voice mail systems. As part of these services,
AirNexus is a reseller of equipment manufactured by third parties such as 3Com,
Panasonic, ESI, Vodavi, Maisoft, and Cortelco.
Strategic Alliances
AirNexus has developed a relationship with 3COM Corporation to deliver
their new NBX 100 product to the Houston market. This "Product of the Year/Best
of Show in 1998", as awarded by Computer Telephony Magazine at the Computer
Telephony Expo 1998, along with wireless Ethernet technology enables the NBX 100
to give businesses the ability to consolidate voice, video and data on one
single cable. This creates an unprecedented integration between computers,
telephone networks and the Internet.
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Under the terms of the 3Com agreement, AirNexus has the non-exclusive
rights to license and distribute specific 3Com products in the Houston, Texas
and surrounding areas. 3Com may terminate the agreement in certain situations,
including breach of the agreement by AirNexus and the failure of AirNexus to
purchase a minimum of $200,0000 worth of product per year.
AirNexus also can, and in the near future intends to, deliver the Tuts
system to commercial properties as well as school and small to medium sized
businesses as a target market. Recently, AirNexus has signed an agreement to
become a re-seller of Cortelco Systems' Millennium PBX, a communication platform
that offers state of the art switching and call routing. AirNexus currently has
approximately 25 material customers.
Target Markets
The target market for AirNexus is businesses with between 20-100 employees.
This sector of the market typically does not have a systems manager or network
administrator on staff, and due to this, AirNexus believes they are an excellent
target candidate for their integrated services. A high percentage of these
companies have a network in place and are receptive to new advancements and
technology. AirNexus intends to provide this sector with a convenient and
easily acceptable avenue to outsource voice, data and Internet services by
utilizing the referenced product line and by continually seeking further
business solutions that fit the customer profile.
AirNexus obtains leads for potential customers in a variety of ways:
0 Manufacturers provide leads from their customers
0 Outside telemarketers are utilized
0 Referrals from existing customers
0 Marketing lists are purchased
0 Yellow Pages advertising, and
0 Print advertising.
All leads are given to individual account managers to follow-up with each
customer. Once a customer has agreed to purchase the equipment and services,
AirNexus does the installation and provides all the follow-up customer support.
Sales Strategy
AirNexus has designed a strategy intended to make them a leader in the
telephony marketplace.
0 Develop product lines which give clients the latest features at a
discount over competing systems.
0 Waive activation fees and hardware costs in return for long term
contracts.
0 Lease-to-own all wireless equipment required to build the network,
with terms up to 60 months.
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0 Develop contracts with commercial management companies to deliver the
services to their tenants. This value-added approach allows these
management companies the ability to maintain long term occupancy and
generate new tenants.
0 Commence an advertising campaign that targets technology buyers.
0 Build an interactive demonstration room that provides potential
clients a hands-on approach to the products and services.
AirNexus currently employs 6 employees, all located at their offices at 333
N. Sam Houston Parkway East, Suite 870, Houston, Texas 77060.
INTELLECTUAL PROPERTY
We regard our copyrights, service marks, trademarks, trade secrets and
similar intellectual property as critical to our success, and rely on trademark
and copyright law, trade secret protection and confidentiality and/or license
agreements with our employees, customers, partners and others to protect our
proprietary rights. We have no registered trademarks or service marks to date.
It may be possible for unauthorized third parties to copy some or all of our
products or reverse engineer or obtain and use information that we regard as
proprietary. In addition, the laws of some foreign countries do not protect
proprietary rights to the same extent as do the laws of the United States.
There can be no assurance that our means of protecting our proprietary rights in
the United States or abroad will be adequate.
Other parties may assert, from time to time, infringement claims against
us. We may also be subject to legal proceedings and claims from time to time in
the ordinary course of our business, including claims of alleged infringement of
the trademarks and other intellectual property rights of third parties by us and
our licensees, if any. Such claims, even if not meritorious, could result in
the expenditure of significant financial and managerial resources.
GOVERNMENTAL REGULATION
Because our strategy is to be minority investors in a number of different
oil and gas exploration projects, we are not directly subject to industry
regulations. Each of the agreements to which we are currently a party provides
that the central operator of the project will identify and address any
compliance requirements and expenses associated with that particular project.
As a result, we do not believe we have any obligations to identify and comply
with environmental regulations in our oil and gas business. Because we often
are responsible for a pro-rata share of ongoing operating expenses, however, the
return on our investment in any particular project may be negatively effected if
unforseen environmental or regulatory expenses are incurred.
Although there are currently few laws and regulations directly applicable
to the Internet and e-commerce, it is possible that a number of laws and
regulations may be adopted with respect to the Internet or e-commerce covering
issues such as user privacy, pricing, content, copyrights, distribution,
antitrust and characteristics and quality of products and services. Further,
the growth and development of the market for Internet services may prompt calls
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for more stringent consumer protection laws that may impose additional burdens
on those companies conducting business online. The adoption of any additional
laws or regulations may impair the growth of the Internet or commercial online
services, which could, in turn, decrease the demand for our products and
services and increase our cost of doing business, or otherwise have a material
adverse effect on our business, operating results and financial condition.
Moreover, the applicability to the Internet of existing laws in various
jurisdictions governing issues such as property ownership, sales and other
taxes, libel and personal privacy is uncertain and may take years to resolve.
Any such new legislation or regulation, the application of laws and regulations
from jurisdictions whose laws do not currently apply to our business or the
application of existing laws and regulations to the Internet could have a
material adverse effect on our business, operating results and financial
condition.
RESEARCH AND DEVELOPMENT
We have not spent any measurable amount of time on research and development
activities.
EMPLOYEES
As of October 1, 1999, Lakota Technologies, Inc. had 3 full-time employees,
2-Infinity had 10 full-time employees, AirNexus had 6 full-time employees, and
Lakota Oil had 1 full-time employee. None of our employees is covered by any
collective bargaining agreement. We believe that our relations with our
employees are good.
FACILITIES
Our principal executive offices are located at 2849 Paces Ferry Road, Suite
710, Atlanta, Georgia 30339, which we occupy under a lease ending January 14,
2000 for $2,261.86 per month. At the end of such term, we believe that we can
lease the same or comparable offices at approximately the same monthly rate,
however, we can make no guarantees or assurances of that fact.
2-Infinity.com maintains executive offices located at 4828 Loop Central
Drive, Suite 150, Houston, Texas 77081, which they occupy under a lease ending
June 30, 2002 for $1,668.94 per month. At the end of such term, we believe that
we can lease the same or comparable offices at approximately the same monthly
rate, however, we can make no guarantees or assurances of that fact.
AirNexus maintains executive offices located at 333 N. Sam Houston Parkway
East, Suite 870, Houston, Texas 77060, which they occupy under a lease ending
October 1, 2004 for $5,621.00 per month. At the end of such term, we believe
that we can lease the same or comparable offices at approximately the same
monthly rate, however, we can make no guarantees or assurances of that fact.
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<PAGE>
Lakota Oil maintains executive offices located at 3303 FM 1960 West Suite F,
Houston, Texas 77068, which they occupy under a lease ending July 31, 2000 for
$495.00 per month. At the end of such term, we believe that we can lease the
same or comparable offices at approximately the same monthly rate, however, we
can make no guarantees or assurances of that fact.
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MANAGEMENT
DIRECTORS AND EXECUTIVE OFFICERS
The following table sets forth the names and ages of our current directors
and executive officers, their principal offices and positions and the date each
such person became a director or executive officer of Lakota. Our executive
officers are elected annually by the board of directors. Our directors serve
one year terms until their successors are elected. The executive officers serve
terms of one year or until their death, resignation or removal by the board of
directors. There are no family relationships between any of the directors and
executive officers. In addition, there was no arrangement or understanding
between any executive officer and any other person whereby any person was
selected as an executive officer.
The directors and executive officers of Lakota are as follows:
Name Age Positions
- ---- --- ---------
R.K. ("Ken") Honeyman 45 President, Director
Howard N. Wilson 52 Vice President and Secretary,
Director
Nicholas R. Athens 40 Director
John B. Hayes 57 Director, President of Lakota
Oil and Gas,Inc.
Majed M. Jalali 25 Director, President of
2-Infinity.com, Inc.
Patrick ("Cody") Morgan 32 Director, President of
AirNexus, Inc.
R.K. ("KEN") HONEYMAN brings to us significant oil and gas experience as
well as experience in the fields of retail brokerage and investment banking.
Prior to founding Lakota over three years ago, Mr. Honeyman started Can Am
Resources, Inc., an independent oil and gas exploration company headquartered in
Atlanta, Georgia, which he operated for 8 years. Can Am Resources drilled over
33 wells in various oil and gas provinces in the United States. In addition,
Can Am re-worked existing oil-producing properties, mineral interest purchases,
and the contributed to the building of two pipelines to transport natural gas
from its wells in the Appalachian Basin. Prior to founding Can Am, Mr. Honeyman
was an executive/principal and stockbroker at three brokerage firms over a
period of 12 years, dealing primarily in mergers and acquisitions and oil and
gas evaluations. Mr. Honeyman graduated from Mount Royal College with a degree
in Business Administration.
HOWARD N. WILSON has been with us since our inception, and was previously
with Can Am Resources, Inc. for a period of 3 years serving as its head of
marketing and finance. His experience in oil and gas economics has allowed us
to uncover projects that we anticipate will be financially beneficial by
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providing for past pay-outs while managing the accompanying risk. Prior to
joining Can Am, Mr. Wilson was employed in the field of advertising, marketing
design, and corporate communications. Mr. Wilson graduated from Cal State
University, Long Beach, with a Bachelor of Arts degree.
NICHOLAS R. ATHENS brings to us over 12 years of petroleum geology
experience. Prior to joining us upon inception in 1996, he was involved in land
acquisition and geologic investigations on behalf of Can Am Resources, Inc. for
over 2 years. He has supervised numerous oil well re-completions and
work-overs, and has served as exploration manager for a number of oil companies
in Texas. Mr. Athens graduated from Valparaiso State University.
JOHN B. HAYES is the president of our subsidiary, Lakota Oil and Gas, Inc.,
as well as a member of our board of directors. Mr. Hayes has over 35 years of
experience in the areas of petroleum engineering and exploration. Prior to
joining us in 1998, he was the owner of a private engineering and consulting
firm, Cactus Petroleum, Inc., for over 24 years, working for such industry
leaders as Conoco, Superior Oil Co., Humble Oil and Gulf Oil, all in the
Texas/Gulf Coast areas. He began his career with EXXON after graduating from
Texas A&M University with a degree in Petroleum Engineering.
MAJED M. JALALI is the president of our subsidiary, 2-Infinity.com, Inc.,
as well as a member of our board of directors. Mr. Jalali has an extensive
entrepreneurial background as the founder of numerous companies, including
Infinity Communications, which offers a fully interactive, virtual high school
learning environment called Infinity International School. Mr. Jalali's past
credits include involvement in bringing Internet access to the Middle East
through Bahrain Online and Arablink.
PATRICK "CODY" MORGAN is the president of our subsidiary, AirNexus, Inc.,
as well as a member of our board of directors. Mr. Morgan has an extensive
background in the telecommunications field dating back to 1988. From 1988 to
1990, he was the top sales representative for Celltech, a cellular service
provider in the Houston area. From 1990 to 1994, Mr. Morgan was the founder and
operator of Mobiltel, a Houston based provider of cellular telephones and car
alarms. In 1994, Mr. Morgan became the General Manager of Digitec Business
Systems in Houston, a provider of business telephones and voicemail systems. In
October of 1996, when the owner of Digitec filed bankruptcy, Mr. Morgan and a
partner formed Digiphone, which reached $170,000 in annual sales before the
partners dissolved the business. Since May of 1998, Mr. Morgan was owned and
operated Data and Voice Design, Inc., now known as AirNexus, Inc.
Disclosure of Commission Position on Indemnification for Securities Act
Liabilities
Our articles of incorporation limit the liability of directors to the
maximum extent permitted by Colorado law. This limitation of liability is
subject to exceptions including intentional misconduct, obtaining an improper
personal benefit and abdication or reckless disregard of director duties. Our
articles of incorporation and bylaws provide that we may indemnify its
directors, officer, employees and other agents to the fullest extent permitted
by law.
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Our bylaws also permit us to secure insurance on behalf of any officer,
director, employee or other agent for any liability arising out of his or her
actions in such capacity, regardless of whether the bylaws would permit
indemnification. We currently do not have such an insurance policy.
Insofar as indemnification for liabilities arising under the Securities Act
of 1933 may be permitted to directors, officers and controlling persons of the
small business issuer pursuant to the foregoing provisions, or otherwise, the
small business issuer has been advised that in the opinion of the Securities and
Exchange Commission such indemnification is against public policy as express in
the Act and is, therefore, unenforceable.
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EXECUTIVE COMPENSATION
Summary Compensation Table
The Summary Compensation Table shows selected compensation information for
services rendered in all capacities for the fiscal year ended December 31, 1998
and the six months ended June 30, 1999. Other than as set forth, no executive
officer's salary and bonus exceeded $100,000 in any of the applicable years.
The following information includes the dollar value of base salaries, bonus
awards, the number of stock options granted and selected other compensation, if
any, whether paid or deferred.
<TABLE>
<CAPTION>
Annual Compensation Long Term Compensation
-------------------------- -------------------------------
Awards Payouts
------------------- -------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
OTHER ANNUAL RESTRICTED UNDERLYING LTIP ALL OTHER
NAME AND PRINCIPAL SALARY BONUS COMPENSATION STOCK AWARDS OPTIONS PAYOUTS COMPENSATION
POSITION YEAR ($) ($) ($) ($) SARS(#) ($) ($)
R.K. (Ken) 1999 245,861 -0- -0- 134,114 -0- -0- -0-
Honeyman (6/30)
(President)
1998 96,240 -0- -0- -0- -0- -0- -0-
(12/31)
Howard N. Wilson 1999 171,114 -0- -0- 98,371 -0- -0- -0-
(VP, Secretary) (6/30)
1998 46,250 -0- -0- -0- -0- -0- -0-
(12/31)
</TABLE>
<TABLE>
<CAPTION>
OPTION/SAR GRANTS IN LAST FISCAL YEAR
(INDIVIDUAL GRANTS)
<S> <C> <C> <C> <C>
NUMBER OF SECURITIES PERCENT OF TOTAL
UNDERLYING OPTIONS/SAR'S GRANTED
OPTIONS/SAR'S GRANTED TO EMPLOYEES IN FISCAL EXERCISE OF BASE PRICE
(#) YEAR ($/SH) EXPIRATION DATE
NAME
R.K. (Ken) Honeyman - 0 - N/A N/A N/A
- ------------------- ---------------------- ---------------------- ----------------------- ---------------
Howard N. Wilson - 0 - N/A N/A N/A
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
AGGREGATED OPTION/SAR EXERCISES IN LAST FISCAL YEAR
AND FY-END OPTION/SAR VALUES
<S> <C> <C> <C> <C>
NUMBER OF UNEXERCISED
SECURITIES UNDERLYING VALUE OF UNEXERCISED IN-THE
OPTIONS/SARS AT FY-END (#) MONEY OPTION/SARS
SHARES ACQUIRED ON EXERCISABLE/UNEXERCISABLE AT FY-END ($)
EXERCISE (#) VALUE REALIZED ($) EXERCISABLE/UNEXERCISABLE
NAME
- ------------------- ------------------ ------------------- -------------------------- --------------------------
R.K. (Ken) Honeyman -0- -0- - 0 - --
Howard N. Wilson -0- -0- - 0 - -
</TABLE>
Employment Agreements
In June 1999, Voice Design, Inc., now known as AirNexus, Inc., entered into
an employment agreement with its president, Charles Downey, Jr. The contract is
for a term of three years at an annual salary of $75,000 and may be terminated
at any time for cause or good reason, as defined in the agreement.
In June 1999, Voice Design, Inc., now known as AirNexus, Inc., entered into
an employment agreement with its chief executive officer, Patrick "Cody" Morgan.
The contract is for a term of three years at an annual salary of $75,000 and may
be terminated at any time for cause or good reason, as defined in the agreement.
In June 1999, 2-Infinity entered into an employment agreement with its
president and chief executive officer, Majed Jalali. The contract is for a term
of three years at an annual salary of $96,000 and may be terminated at any time
for cause or good reason, as defined in the agreement.
Restricted Stock Issuances
In February 1999, we issued 1,000,000 shares of restricted common stock to
Cactus Petroleum, Inc., an entity controlled by John B. Hayes, as consideration
for services related to the negotiation and consummation of a transaction with
Optima Investments. Mr. Hayes assisted in the identification, negotiation, and
closing of the transaction with Optima.
In April 1999, we issued 1,676,429 and 1,229,643 shares of restricted
common stock to Ken Honeyman and Howard Wilson, respectively, as consideration
for accrued compensation for past services rendered. Mr. Honeyman and Mr.
Wilson had each verbally agreed to forego any cash compensation up to the date
of issuance for their services as chief executive officer and secretary,
respectively, in exchange for the shares.
In July 1999, we issued 300,000 shares of restricted common stock to John
B. Hayes as consideration for accrued compensation for past services rendered.
Mr. Hayes had verbally agreed to forego any cash compensation up to the date of
issuance for services rendered as president of the oil and gas division of
Lakota Energy, Inc., and subsequently as president of Lakota Oil and Gas, Inc.
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Stock Option Plan
Effective August 1, 1999, our directors and shareholders approved the
Lakota Energy, Inc. Omnibus Stock Option Plan. Under the terms of the Option
Plan, the board of directors has the sole authority to determine which of the
eligible persons shall receive options, the number of shares which may be issued
upon exercise of an option, and other terms and conditions of the options
granted under the Plan to the extent they don't conflict with the terms of the
Plan. An aggregate of 3,000,000 shares of common stock are reserved for
issuance under the Plan during the year August 1, 1999 to July 31, 2000. For
each subsequent year beginning August 1, 2000, there shall be reserved for
issuance under the Plan that number of shares equal to 10% of the outstanding
shares of common stock on August 1 of that year. The exercise price for all
options granted under the Plan shall be 100% of the fair market value of our
common stock on the date of grant, unless the recipient is the holder of more
than 10% of the already outstanding securities of Lakota, in which case the
exercise price shall be 110% of the fair market value of our common stock on the
date of grant. All options shall vest equally over a period of five years from
the date of issuance. On August 11, 1999, the board of directors approved the
grant of an aggregate of 2,000,000 options under the Plan as follows: Ken
Honeyman, 775,000 options; Howard Wilson, 775,000 options; John Hayes, 400,000
options; Simone Robinson, 50,000 options.
Compensation of Directors
The directors have not received any compensation for serving in such
capacity, and we do not currently contemplate compensating our directors in the
future for serving in such capacity.
CERTAIN TRANSACTIONS
Effective November 6, 1996, Lakota Energy, Inc., a Colorado corporation,
merged with and into Chancellor Trading Group, Inc., a Colorado corporation, in
a business combination described as a reverse acquisition, with Chancellor being
the surviving corporation. For accounting purposes, the transaction has been
treated as the acquisition of Chancellor (the Registrant) by Lakota Energy. As
part of the transaction, Chancellor changed its name to Lakota Energy.
Immediately prior to the transaction, Chancellor had 1,801,000 shares of common
stock outstanding. As part of Chancellor's reorganization with Lakota Energy,
Chancellor issued 9,187,500 shares of its common stock to the shareholders of
Lakota Energy in exchange for 4,593,750 shares of Lakota Energy common stock,
and an additional 118,000 shares to third parties, so that subsequent to the
transaction, there were 11,106,500 shares of common stock issued and
outstanding.
All future material affiliated transactions and loans will be made or
entered into on terms that are no less favorable to the Company than those that
can be obtained from unaffiliated third parties, and all future material
affiliated transactions and loans, and any forgiveness of loans, must be
approved by a majority of our independent directors who do not have an interest
in the transactions and who had access, at our expense, to our legal counsel or
to independent legal counsel.
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SELLING STOCKHOLDERS
Shares Offered by Note Holders
The five individuals who are equal holders of our 8% convertible notes due
August 24, 2001 are as follows:
0 Y.L. Hirsch
0 Sholem Liebenthal
0 Avram Rothman
0 Joshua Heimlich
0 Zvi Y. Zelikovitz
The five individuals are offering up to 10,000,000 shares of common stock
which they can obtain by converting the full $750,000 principal amount of the
notes into common stock. The notes are convertible at 75%, or 65% in the event
we default on the notes, of the closing bid price for our common stock on the
day immediately prior to conversion. If the notes were converted today, the
five individuals could obtain approximately 5,882,353 shares of common stock.
The number of shares of common stock we are registering to potentially give to
the five individuals when they convert the notes reflects the basic conversion
ratio and a market price of our stock of $0.10. We are also registering
1,600,000 shares of common stock which we may use to pay the 8% per year
interest payments on the notes before they are converted. We are also
registering 5,000,000 shares of common stock which the five individuals may
obtain by exercising warrants which they received with their investment. The
warrants are exercisable at a price equal to 50% of the lower of (i) the closing
bid price for our common stock on the day immediately prior to exercise, or (ii)
the closing bid price on August 24, 1999, which was $0.17.
Shares Underlying Investor Warrants
We are registering 4,000,000 shares of common stock which may be obtained
by Dipak Bhatt by exercising warrants which he received as part of a prior
investment. Bhatt is the holder of the following:
0 a warrant expiring November 30, 1999 (verbally extended until
December 17, 1999) to acquire 1,250,000 shares at $0.10 per share;
0 a warrant expiring November 30, 2000 to acquire 1,250,000 shares at
$0.15 per share;
0 a warrant expiring December 22, 1999 (verbally extended until
December 17, 1999) to acquire 750,000 shares at $0.15 per share;
and
0 a warrant expiring December 22, 2000 to acquire 750,000 shares at
$0.20 per share.
Mr. Bhatt is the owner of 2,000,000 shares of common stock in addition to
the warrants.
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<PAGE>
We are also registering 1,500,000 shares of common stock which may be
obtained by Michael A. Hancock and Steven D. Morrison by exercising warrants
which they received as part of a prior investment. Morrison and Hancock are the
holders of the following:
0 a warrant expiring December 10, 1999 (verbally extended to December
17, 1999) to acquire 500,000 shares at $0.10 per share;
0 a warrant expiring December 10, 2000 to acquire 500,000 shares at
$0.15 per share;
0 a warrant expiring December 17, 1999 to acquire 250,000 shares at
$0.10 per share; and
0 a warrant expiring December 17, 2000 to acquire 250,000 shares at
$0.15 per share.
Mr. Hancock and Mr. Morrison are the owners of 750,000 shares of common
stock in addition to the warrants.
We are also registering 400,000 shares of common stock which may be
obtained by Jeffrey A. Runner and Sally D. Runner by exercising warrants which
they received as part of a prior investment. Mr. and Mrs. Runner are the
holders of the following:
0 a warrant expiring October 29, 1999 (verbally extended until
December 17, 1999) to acquire 200,000 shares at $0.10 per share;
0 a warrant expiring October 23, 1999 (verbally extended until
December 17, 1999) to acquire 200,000 shares at $0.10 per share.
We are also registering 100,000 shares of common stock which may be
obtained by Michael Baker by exercising warrants which he received as part of a
prior investment. Mr. Baker is the holder of the following:
0 a warrant expiring October 30, 1999 (verbally extended until
December 17, 1999) to acquire 100,000 shares at $0.10 per share.
Cutler Law Group Shares
We are registering for potential sale by MRC Legal Services Corporation and
its employees a total of 475,000 shares of common stock. MRC Legal Services
Corporation does business as Cutler Law Group, which is our legal counsel. We
issued these shares to Cutler Law Group in consideration for legal services.
The Cutler Law Group shares were issued as follows:
MRC Legal Services Corporation 356,250 shares
Brian A. Lebrecht 118,750 shares
38
<PAGE>
Hayes Shares
We are registering for potential sale by John Hayes and Cactus Petroleum,
Inc., his affiliated entity, a total of 1,300,000 shares of common stock.
Cavasos Shares
We are registering for potential sale by Brent Cavasos, Texas litigation
counsel to Lakota, a total of 495,385 shares of common stock.
Hensley Shares
We are registering for potential sale by investor Matt Hensley 1,500,000
shares of common stock. In addition, we are registering for potential sale by
Hensley an additional 500,000 shares which he may acquire by exercising a
warrant at $0.28 per share until September 28, 2001.
This prospectus relates to the potential sale by the selling stockholders
of the securities described above. These shares of common stock may be sold as
set forth under Plan of Distribution. The securities offered by this prospectus
by the selling stockholders may be offered from time to time by the selling
stockholders named below or their nominees, and this prospectus will be required
to be delivered by persons who may be deemed to be underwriters in connection
with the offer or sale of such securities. No selling stockholder has had any
position, office or other material relationship with Lakota since its inception,
except that (i) shares issued to John Hayes and Cactus Petroleum, Inc. are held
beneficially and of record by an employee, officer and director as set forth
above and (ii) Cutler Law Group is legal counsel for Lakota.
39
<PAGE>
The table below sets forth with respect to the selling shareholders, based
upon information available to Lakota as of December 8, 1999, the number of
shares owned, the number of shares registered by this prospectus and the number
and percent of outstanding shares that will be owned after the sale of the
registered shares assuming the sale of all of the registered shares.
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Number of No. of Shares Number of % of Shares
Selling Shares Owned Registered in Shares Owned Owned After
Stockholders Before Sale Prospectus After Sale Sale
- ----------------------------------------- ------------ ------------- ----------------------- ------------
Y.L. Hirsch - 3,320,000 - -
Sholem Liebenthal - 3,320,000 - -
Avram Rothman - 3,320,000 - -
Joshua Heimlich - 3,320,000 - -
Zvi Y. Zelikovitz - 3,320,000 - -
Dipak Bhatt 6,000,000 4,000,000 2,000,000 2.6 %
Michael A. Hancock and Steven D. Morrison
2,250,000 1,500,000 750,000 less than 1 %
Jeffrey A. Runner and Sally D. Runner - 400,000 - -
Michael Baker - 100,000 - -
MRC Legal Services Corporation 356,250 356,250 - -
Brian A. Lebrecht 118,750 118,750 - -
John Hayes and Cactus Petroleum, Inc. 1,300,000 1,300,000 - -
Brent Cavasos 495,385 495,385 - -
Matt Hensley 2,000,000 2,000,000 - -
Total 12,425,000 26,275,000 2,750,000
</TABLE>
Pursuant to agreements with each of the selling shareholders, all selling
expenses for the sale of their shares, except for selling commissions and
expenses incurred by individual selling shareholders, will be paid by Lakota.
40
<PAGE>
PLAN OF DISTRIBUTION
This is a direct participation offering, and Lakota intends to offer up to
10,000,000 shares to potential investors through its officers and directors.
Lakota does not presently have an underwriter for these shares, but may pay
brokers' commissions of up to 10%.
Lakota will sell the shares at prices between $0.10 and $0.30 per share.
We will only receive proceeds of this Offering in the event a minimum of
$170,000 is raised. Prior to receipt of that minimum amount, investors funds
will be placed in an interest-bearing trust account. If we are unable to reach
this minimum by May 31, 2000, investors funds will be returned. While we
presently do not anticipate that they will do so, it is possible that officers,
directors or other promoters of the Company may purchase shares at the Offering
price for the purpose of meeting this impound requirement.
We will only sell the common stock to be sold by the Company to potential
investors who meet the following minimum suitability requirements: (a) A
minimum annual gross income of $65,000 and a minimum net worth of $65,000,
exclusive of automobile, home and home furnishings, or (b) A minimum net worth
of $150,000, exclusive of automobile, home and home furnishings.
Our officers and directors intend to seek to sell the common stock to be
sold by the Company in this Offering by contacting persons with whom they have
had prior contact who have expressed interest in the Company, and by seeking
additional persons who may have interest through various methods such as mail,
telephone and email. The Company does not intend to offer the securities over
the internet or through general solicitation or advertising.
Over 72% of the shares being offered in this prospectus are offered by
selling shareholders, most of which will be sold at the prevailing market price.
The sale of shares by selling shareholders will likely have a negative effect on
the market price of our stock, which may affect our ability to sell the
10,000,000 shares we are registering for sale to investors. We have not taken
any precautions, nor made any arrangements to address the effect of concurrent
sales by us and by selling shareholders.
All securities referenced above under Selling Stockholders will be offered
by the selling stockholders from time to time on the OTC bulletin board, in
privately negotiated sales or in sales utilizing the services of a
broker-dealer. We believe that virtually all of such sales will occur on the
OTC bulletin board in transactions at prevailing market rates. Any securities
sold in brokerage transactions will involve customary brokers' commissions. No
underwriters will participate in any such sales on behalf of the selling
stockholders.
41
<PAGE>
PRINCIPAL STOCKHOLDERS
Common Stock
The following table sets forth selected information regarding beneficial
ownership of common stock as of December 8, 1999 by:
0 each person or entity known to Lakota to own beneficially more than
5% of Lakota's common stock;
0 each of Lakota's directors;
0 each of Lakota's named executive officers; and
0 all executive officers and directors as a group.
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
--------------------- --------------------- -----------
Title of Class
- ---------------
Common stock R.K. (Ken) Honeyman(1) 3,606,429 8.6 %
c/o Lakota Technologies, Inc.
2849 Paces Ferry Road
Suite 710
Atlanta, Georgia 30339
Common stock Howard N. Wilson(1) 1,329,643 3.1 %
c/o Lakota Technologies, Inc.
2849 Paces Ferry Road
Suite 710
Atlanta, Georgia 30339
Common stock Nicholas R. Athens 50,000 less than 1%
c/o Lakota Technologies, Inc.
2849 Paces Ferry Road
Suite 710
Atlanta, Georgia 30339
Common stock John B. Hayes(1) 1,300,000 3.1 %
c/o Lakota Technologies, Inc.
2849 Paces Ferry Road
Suite 710
Atlanta, Georgia 30339
Common stock Majed Jalali 3,000,000 7.1 %
c/o Lakota Technologies, Inc.
2849 Paces Ferry Road
Suite 710
Atlanta, Georgia 30339
Common stock Patrick (Cody) Morgan(2) 2,000,000 4.8 %
c/o Lakota Technologies, Inc.
2849 Paces Ferry Road
Suite 710
Atlanta, Georgia 30339
Common stock Dipak Bhatt(2)(3) 6,000,000 14.3 %
4107 Vaughn Creek Court
Sugarland, Texas 77479
All Officers and
Directors as a
Group
(6 Persons)(2) 11,286,072 27.0 %
===================== ========
</TABLE>
(1) Does not include shares issued under Lakota's Omnibus Stock Option Plan
because they cannot be exercised within sixty days.
(2) Includes shares held as joint tenants with spouse, or directly in
spouse's name.
(3) Includes warrants to purchase an aggregate of 4,000,000 shares of common
stock.
42
<PAGE>
DESCRIPTION OF SECURITIES
Our authorized capital stock consists of 100,000,000 shares of common
stock, no par value, and 25,000,000 shares of preferred stock, no par value.
The following summary of provisions of our common stock, preferred stock, and
warrants is qualified in its entirety by reference to our articles of
incorporation, amendments to our articles of incorporation, and bylaws, which
have been filed as exhibits to the registration statement of which this
prospectus is a part.
Common Stock
As of December 8, 1999, there were 41,868,182 shares of common stock
outstanding, held by approximately 110 shareholders of record.
Holders of our common stock are entitled to one vote for each share held of
record on all matters submitted to a vote of the shareholders, including the
election of directors, and do not have cumulative voting rights. Subject to
preferences that may be applicable to any then outstanding preferred stock,
holders of common stock are entitled to receive ratably such dividends, if any,
as may be declared by the board of directors out of funds legally available
therefor. Upon a liquidation, dissolution or winding up of Lakota, the holders
of common stock will be entitled to share ratably in the net assets legally
available for distribution to shareholders after the payment of all debts and
other liabilities of Lakota, subject to the prior rights of any preferred stock
then outstanding. Holders of common stock have no preemptive or conversion
rights or other subscription rights and there are no redemption or sinking funds
provisions applicable too the common stock. All outstanding shares of common
stock are, and the common stock to be outstanding upon completion of this
offering will be, fully paid and nonassessable.
Preferred Stock
Our board of directors has the authority, without further action by the
shareholders, to issue from time to time the preferred stock in one or more
series and to fix the number of shares, designations, preferences, powers and
relative, participating, optional or other special rights and the qualifications
or restrictions thereof. The preferences, powers, rights and restrictions of
different series of preferred stock may differ with respect to dividend rates,
amounts payable on liquidation, voting rights, conversion rights, redemption
provisions, sinking fund provisions and purchase funds and other matters. The
issuance of preferred stock could decrease the amount of earnings and assets
available for distribution to holders of common stock or affect adversely the
rights and powers, including voting rights, of the holders of common stock, and
may have the effect of delaying, deferring or preventing a change in control of
Lakota. No shares of preferred stock have been authorized, issued, or are
outstanding.
We will not offer preferred stock to promoters except on the same terms as
it is offered to all other existing shareholders or to new shareholder or unless
the issuance is approved by a majority of our independent directors who do not
have an interest in the transactions and who have access, at our expense, to our
legal counsel or independent legal counsel.
43
<PAGE>
Convertible Notes
On August 24, 1999, we issued a $150,000 face value convertible promissory
note to each of five non-affiliated individuals. The notes pay interest at the
rate of 8% per year, and are convertible by the holders thereof into shares of
our common stock at a price equal to 75%, or 65% in the event we default on the
notes, of the closing bid price for our common stock on the day immediately
prior to conversion. If the notes were converted today, the Note Holders could
obtain approximately 5,882,353 shares of common stock. Our president, Ken
Honeyman, personally guaranteed repayment of the notes and pledged 1,958,000
shares of common stock held in his name as collateral.
We are not currently in default on any of our outstanding notes.
Warrants
Lakota currently has outstanding warrants to acquire an aggregate of
13,252,800 shares of its common stock, at exercise prices ranging from $0.10 per
share to $3.00 per share. We are registering an aggregate of 11,500,000 shares
of common stock underlying the exercise of these warrants.
Transfer Agent
The transfer agent for the common stock is American Securities Transfer,
12039 West Alameda Parkway, Z-2, Lakewood, Colorado 80228.
44
<PAGE>
LEGAL MATTERS
The validity of the securities offered will be passed upon for Lakota by
Cutler Law Group, Newport Beach, California. MRC Legal Services Corporation, a
California corporation which does business as Cutler Law Group, is presently the
beneficial owner of an aggregate of 356,250 shares of common stock. Employees
of Cutler Law Group own an additional 118,750 shares of common stock. These
shares of common stock are being registered in this registration statement.
AVAILABLE INFORMATION
Lakota has filed with the Securities and Exchange Commission a registration
statement on Form SB-2, together with all amendments and required exhibits,
under the Securities Act of 1933 with respect to the common stock offered. This
prospectus does not contain all of the information set forth in the registration
statement and its exhibits and schedules. Statements contained in this
prospectus as to the contents of any contract or other document referred to are
not necessarily complete and in each instance reference is made to the copy of
such contract or other document filed as an exhibit to the registration
statement, each such statement being qualified in all respects by such
reference.
A copy of the registration statement may be inspected by anyone without
charge at the public reference facilities maintained by the Commission in Room
1024, 450 Fifth Street, N.W., Washington, D.C. 20549, and at the regional
offices of the Commission located at Seven World Trade Center, 13th Floor, New
York, New York 10048 and Citicorp Center, 500 West Madison Street, Suite 1400,
Chicago, Illinois 60661. Copies of all or any part of the registration
statement may be obtained from the Public Reference Section of the Commission at
450 Fifth Street, N.W., Washington, D.C. 20549, telephone number 1-800-SEC-0330,
and its public reference facilities in New York, New York and Chicago, Illinois,
upon the payment of the fees prescribed by the Commission. The registration
statement is also available through the Commission's World Wide Web site at the
following address: http://www.sec.gov.
EXPERTS
The consolidated financial statements of Lakota as of December 31, 1998
included in this prospectus have been so included in reliance on the report of
Jones, Jensen and Company, independent accountants, given on the authority of
said firm as experts in auditing and accounting.
45
<PAGE>
YOU MAY RELY ON THE INFORMATION
CONTAINED IN THIS PROSPECTUS. WE HAVE
NOT AUTHORIZED ANYONE TO PROVIDE
INFORMATION DIFFERENT FROM THAT CONTAINED
IN THIS PROSPECTUS. NEITHER THE DELIVERY
OF THIS PROSPECTUS NOR SALE OF COMMON STOCK
MEANS THAT INFORMATION CONTAINED IN THIS
PROSPECTUS IS CORRECT AFTER THE DATE OF THIS
PROSPECTUS. THIS PROSPECTUS IS NOT AN OFFER
TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THESE SHARES OF THE COMMON STOCK IN ANY
CIRCUMSTANCES UNDER WHICH THE OFFER 36,870,385 SHARES OF COMMON STOCK
OR SOLICITATION IS UNLAWFUL.
_____________________
LAKOTA
TABLE OF CONTENTS TECHNOLOGIES, INC.
[LOGO]
Page
----
Prospectus Summary . . . . . . . . 2
Risk Factors. . . . . . . . . . . 4
Price Range of Securities . . . 13
Dividend Policy . . . . . . . . . 13
Dilution . . . . . . . . . . . . 14
Capitalization . . . . . . . . . . 16 -----------------
Use of Proceeds . . . . . . . . . . 17 PROSPECTUS
Management's Discussions and
Analysis of Financial Conditions -----------------
and Results of Operations . . . . . 19
Business . . . . . . . . . . . . . . . . 22
Management . . . . . . . . . . . . . . . 31
Executive Compensation . . . . . . . . 34
Certain Transaction . . . . . . . . . . 36
Selling Stockholders . . . . . . . . . . 37
Plan of Distribution . . . . . . . . . 41
Principal Stockholders . . . . . . . . . 42
Description of Securities . . . . . . . 44
Legal Matters . . . . . . . . . . . . . 46
Available Information . . . . . . . . . 46
Experts . . . . . . . . . . . . . . . . . 46
Dealer Prospectus Delivery Obligation Until
___________, 19__; all dealers that effect
transactions in these securities, whether or
not participating in this offering, may be required
to deliver a prospectus. This is in addition to the
dealers' obligation to deliver a prospectus when acting
as underwriters and with respect to their unsold allotments
or subscriptions.
<PAGE>
LAKOTA TECHNOLOGIES, INC.
AND SUBSIDIARIES
(A DEVELOPMENT STAGE COMPANY)
CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
F-1
<PAGE>
C O N T E N T S
Independent Auditors' Report . . . . . . . . . . . . . . . . . 3
Consolidated Balance Sheets . . . . . . . . . . . . . . . . . 4
Consolidated Statements of Operations . . . . . . . . . . . 6
Consolidated Statements of Stockholders' Equity (Deficit) . . 7
Consolidated Statements of Cash Flows . . . . . . . . . . . . 10
Notes to the Consolidated Financial Statements . . . . . . . 12
F-2
<PAGE>
INDEPENDENT AUDITORS' REPORT
----------------------------
The Board of Director
Lakota Technologies, Inc. and Subsidiaries
(A Development Stage Company)
Denver, Colorado
We have audited the accompanying consolidated balance sheet of Lakota
Technologies, Inc. and Subsidiaries (a development stage company) as of December
31, 1998 and the related consolidated statements of operations, stockholders'
equity (deficit), and cash flows for the years ended December 31, 1998 and 1997.
These consolidated financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the consolidated financial statements are
free of material misstatement. An audit includes examining, on a test basis,
evidence supporting the amounts and disclosures in the consolidated financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of Lakota Technologies,
inc. and Subsidiaries (a development stage company) as of December 31, 1998 and
the results of their operations and their cash flows for the years ended
December 31, 1998 and 1997 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 3 to
the financial statements, the Company is a development stage company with no
significant operating results to date, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The consolidated financial statements do
not include any adjustments that might result from the outcome of this
uncertainty.
Jones, Jensen & Company
Salt Lake City, Utah
September 15, 1999
F-3
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets
ASSETS
------
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1999 1998
---------------- ------------
(Unaudited)
CURRENT ASSETS
Cash $ 97,357 $ 92,090
Security deposit 5,485 2,077
------------ -------------
Total Current Assets 102,842 94,167
-------------- ------------
PROPERTY AND EQUIPMENT (Note 2)
Leasehold improvements 673 673
Furniture and fixtures 11,188 4,382
Equipment 35,878 2,745
Less: accumulated depreciation (6,087) (2,400)
--------------- ------------
Total Property and Equipment 41,652 5,400
---------------- -------------
OIL AND GAS PROPERTIES (Notes 1, 2 and 5) 32,064 32,064
---------------- -------------
TOTAL ASSETS $ 176,558 $ 131,631
============== =================
</TABLE>
F-4
<PAGE>
The accompanying notes are an integral part of these financial statements.
4
F-5
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Balance Sheets (Continued)
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
----------------------------------------------
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
CURRENT LIABILITIES
Accounts payable $ 33,649 $ 2,104
Notes payable (Note 9) 30,000 -
Notes payable - related party (Note 4 and 9) 90,315 54,914
Accrued interest - related party (Note 4) 16,966 13,193
Accrued expenses 24,375 6,622
--------------- --------------
Total Current Liabilities 195,305 76,833
--------------- --------------
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock 25,000,000 shares authorized,
no par value; no shares outstanding - -
Common stock 100,000,000 shares authorized, no par
value; 40,278,182 and 20,678,733 shares issued
and outstanding, respectively 6,348,527 1,650,389
Loan receivable - related party - (36,507)
Interest receivable - related party - (1,763)
Deficit accumulated during the development stage (6,367,274) (1,557,321)
--------------- --------------
Total Stockholders' Equity (Deficit) (18,747) 54,798
--------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY
(DEFICIT) $ 176,558 $ 131,631
=============== ==============
</TABLE>
F-6
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Operations
<TABLE>
<CAPTION>
<BTB>
For the From
Nine Months For the Inception on
Ended Years Ended November 14,
September 30, Deeember 31, 1995 Through
1999 1998 1998 1997 September 30, 1999
------------ ------------ ---------- ------------ ------------------
(Unaudited) (Unaudited) (Unaudited)
REVENUES
<S> <C> <C> <C> <C> <C>
Data revenues $ 150,649 $ - $ - $ - $ 150,649
Oil and gas sales 5,255 - 5,255
------------ ------------ ------------ ------------- -----------
Net Revenues 155,904 - - - 155,904
------------ ------------ ------------ -------------- -------------
COST OF SALES 114,405 - - - 114,405
------------ ------------ ------------ -------------- ---------------
GROSS MARGIN 41,499 - - - 41,499
------------ ------------ ------------ -------------- ---------------
EXPENSES
Depreciation expense 3,687 900 1,200 1,200 6,087
Amortization expense 2,159,000 - - - 2,159,000
Oil and gas properties expenditures 133,071 - - - 133,071
General and administrative 1,780,883 160,985 351,139 303,897 2,543,938
------------ ------------ ------------ -------------- -------------
Total Expenses 4,076,641 161,885 352,339 305,097 4,842,096
------------ ------------ ------------ -------------- -------------
Loss from Operations (4,035,142) (161,885) (352,339) (305,097) (4,800,597)
------------ ------------ ------------ -------------- ---------------
OTHER INCOME (EXPENSE)
Interest expense (784,979) - (5,491) (436,061) (1,578,607)
Interest income 10,168 - 1,362 400 11,930
------------ ------------ ------------ --------------- ------------
Total Other Income (Expense) (774,811) - (4,129) (435,661) (1,566,677)
------------ ------------ ------------ -------------- ------------
MINORITY INTEREST - - - - -
------------ ------------ ------------ -------------- -----------
NET LOSS $(4,809,953) $ (161,885) $ (356,468) $ (740,758) $(6,367,274)
============ ============ ============ ============== ==============
BASIC LOSS PER SHARE $ (0.21) $ (0.01) $ (0.03) $ (0.06)
============ ============ ============ ==============
WEIGHTED AVERAGE NUMBER OF
SHARES OUTSTANDING 23,012,307 12,677,753 13,371,602 11,983,904
============ ============ ============ ===============
</TABLE>
F-7
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Deficit
Accumulated
During the
Common Stock Development
Shares Amount Stage
------------ ------------ ------------
Balance at inception on
November 14, 1995 - $ - $ -
Net loss for the period ended
December 31, 1995 - - (1,683)
------------ ------------ ------------
Balance, December 31, 1995 - - (1,683)
Issuance of common stock to founders
at approximately $0.00 per share 9,187,500 1,250 -
Issuance of common stock in merger with
Chancellor Trading Group, Inc. at
approximately $0.002 1,801,000 3,908 -
Issuance of common stock for cash 108,000 108,000 -
at $1.00 per share
Issuance of common stock for services 20,000 20,000 -
at $1.00 per share
Net loss for the year ended
December 31, 1996 - - (458,412)
------------ ------------ ------------
Balance, December 31, 1996 11,116,500 133,158 (460,095)
Common stock issued for cash at $1.00
per share 212,500 212,500 -
Conversion of preferred stock to common
stock at $1.00 per share 812,500 812,500 -
Net loss for the year ended
December 31, 1997 - - (740,758)
------------ ------------ ------------
Balance, December 31, 1997 12,141,500 $ 1,158,158 $(1,200,853)
------------ ------------ ------------
</TABLE>
F-8
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Deficit
Accumulated
During the
Common Stock Development
Shares Amount Stage
------------- ------------ ------------
Balance, December 31, 1997 12,141,500 $ 1,158,158 $(1,200,853)
Common stock issued for cash at
approximately $0.10 per share 3,608,800 344,378 -
Common stock issued for services
at approximately $0.03 per share 4,928,433 147,853 -
Net loss for the year ended
December 31, 1998 - - (356,468)
------------- ------------ ------------
Balance, December 31, 1998 20,678,733 1,650,389 (1,557,321)
Common stock issued for cash
at approximately $0.19 per share 360,000 67,600 -
Common stock issued for debt
at approximately $0.07 per share 7,685,581 550,000 -
Common stock issued in business
combinations at $0.35 per share (Note 12) 6,000,000 2,100,000 -
Common stock issued for services
at approximately $0.08 per share 6,054,977 688,538 -
Options issued for cash at approximately
$0.02 per share - 70,000 -
Common stock canceled (Note 11) (3,846,325) - -
Common stock issued for conversion of
debt at $0.09 per share (unaudited) 1,185,216 97,500 -
Common stock issued for cash at $0.30
per share (unaudited) 5,000 1,500 -
------------- ------------ ------------
Balance Forward 38,123,182 $ 5,225,527 $(1,557,321)
------------- ------------ ------------
</TABLE>
F-9
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Stockholders' Equity (Deficit) (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Deficit
Accumulated
During the
Common Stock Development
Shares Amount Stage
------------ ------------ ------------
Balance Forward 38,123,182 $ 5,225,527 $(1,557,321)
Common stock issued for cash at $0.12
per share (unaudited) 40,000 4,800 -
Common stock issued for services at
$0.15 per share (unaudited) 2,115,000 337,825 -
Issuance of convertible debt and
warrants at less than market price
(unaudited) - 780,375 -
Net loss for the nine months ended
September 30, 1999 (unaudited) - - (4,809,953)
------------ ------------
Balance, September 30, 1999
(unaudited) 40,278,182 $ 6,348,527 $(6,367,274)
============ ============ ============
</TABLE>
F-10
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
From
For the For the Inception on
Nine Months Years Ended November 14,
Ended December 31, 1995 Through
September 30, September 30,
1999 1998 1998 1991 1999
-------------- --------------- -------------- --------------- ----------------
(Unaudited) (Unaudited) (Unaudited) (Unaudited)
CASH FLOWS FROM OPERATING
ACTIVITIES
Net (loss) $ (4,809,953) $ (161,885) $ (356,468) $ (740,758) $(6,367,274)
Adjustments to reconcile net (loss to net
cash flows from operating activities:
Depreciation expense 3,687 900 1,200 1,200 6,087
Amortization expense 2,159,000 - - - 2,159,000
Common stock issued for services 1,026,363 - 147,853 - 1,224,216
Convertible debt and warrants issued
at less than market price 780,375 - - - 780,375
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable 31,545 - 2,104 (14,511) 33,649
Increase (decrease) in accrued expenses 21,526 - 6,476 (370,801) 25,633
Increase (decrease) in other assets 3,408 - - 6,693 (5,485)
Increase in related party receivable 88,270 53,990 (33,870) (400) -
-------------- --------------- -------------- ----------------- ------------
Net Cash (Used) by Operating Activities (695,779) (106,995) (232,705) (1,118,577) (2,143,799)
-------------- --------------- -------------- ----------------- ------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (39,939) - - (7,800) (44,621)
-------------- --------------- -------------- ----------------- ------------
Net Cash (Used) by Investing Activities (39,939) - - (7,800) (44,621)
-------------- --------------- -------------- ----------------- ------------
CASH FLOWS FROM FINANCING ACTIVITIES
Payment on notes payable (26,399) (22,098) (22,098) - (48,497)
Proceeds from notes payable/debenture 623,484 - - 77,012 707,838
Conversion of preferred stock to common
stock - - - 812,500 812,500
Issuance of common stock 143,900 126,578 344,378 212,500 813,936
-------------- --------------- -------------- ----------------- ------------
Net Cash Provided by Financing Activities 740,985 104,480 322,280 1,102,012 2,285,777
-------------- --------------- -------------- ----------------- ------------
NET INCREASE (DECREASE) IN CASH 5,267 (2,515) 89,575 (24,365) 97,357
CASH AT BEGINNING OF PERIOD 92,090 2,515 2,515 26,880 -
-------------- --------------- -------------- ----------------- ------------
CASH AT END OF PERIOD $ 97,357 $ - $ 92,090 $2,515 $ 97,357
============== =============== ============== ================= ============
</TABLE>
F-11
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Consolidated Statements of Cash Flows (Continued)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
From
For the Inception on
Nine Months For the November 14,
Ended Years Ended 1995 Through
September 30, December 31, September 30,
1999 1998 1998 1997 1999
-------------- --------------- ------------- ----- ----------------
(Unaudited) (Unaudited) (Unaudited)
CASH PAID DURING THE PERIOD FOR:
Interest $ 731 $ - $ - $ - $ 731
Income taxes $ - $ - $ - $ - $ -
NON-CASH TRANSACTIONS
Common stock issued for services $ 1,026,363 $ - $ 147,853 $ - $1,224,216
Issuance of convertible debt and
warrants at less than market price $ 780,375 $ - $ - $ - $ 780,375
Organization costs paid by related party $ - $ - $ - $ - $ 5,472
Issuance of preferred stock for oil and
gas properties $ - $ - $ - $ - $ 812,500
Common stock issued for business
acquisitions $ 2,100,000 $ - $ - $ - $2,100,000
Common stock issued for debt $ 647,500 $ - $ - $ - $ 647,500
</TABLE>
F-12
<PAGE>
The accompanying notes are an integral part of these financial statements.
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 1 - HISTORY AND ORGANIZATION
The consolidated financial statements presented are those of Lakota
Technologies, Inc. (formerly Chancellor Trading Group, Inc.) (the Company) (a
development stage company) and its wholly owned subsidiaries Lakota Energy, Inc.
(Lakota), Air Nexus, Inc., Lakota Oil and Gas, Inc. and 2-Infinity.com, Inc.
The Company was incorporated in the State of Colorado on July 14, 1995.
Effective November 6, 1996, the Company and (Lakota) completed an Agreement and
Plan of Reorganization whereby the Company issued 9,187,500 shares of its common
stock in exchange for 100% of the issued and outstanding common stock of
(Lakota). The Company also changed its name on this date from Chancellor
Trading Group, Inc. to Lakota Energy, Inc. (the same name as its subsidiary).
In 1999, the Company changed its name to Lakota Technologies, Inc.
Lakota was incorporated in the State of Colorado on November 14, 1995. Lakota
was incorporated to engage in the acquisition and exploration of oil and gas
properties.
On November 11, 1996, Lakota exercised its option agreements and acquired
399,999 shares of common stock or 99.9% of the issued and outstanding shares of
West Bolt Energy, Inc. (West Bolt) for 812,500 of its series A redeemable
convertible preferred stock. The original issuance of the Series A redeemable,
convertible preferred stock was valued at $36,716,560 which was the redemption
price of the preferred stock which equaled the reserve report valuation of the
oil and gas properties acquired. Due to the redemption provisions of the
preferred stock, it was accounted for as a liability and not equity. On
February 26, 1997, the Company converted the 812,500 shares of preferred stock
into 812,500 shares of common stock. At the time of conversion, the common
stock was determined to have a value of $1.00 per share. In addition, the
preferred shareholders forgave the accrued interest of $780,436 associated with
the preferred shares which also reduced the cost of the oil and gas properties
received. The revaluation caused the oil and gas properties to be valued at
$32,064 based upon similar issuance for cash. The acquisition was accounted for
as a combination under the purchase method of accounting with acquired oil and
gas properties were recorded at their cost to the Company (see Note 5).
F-13
<PAGE>
15
At the time of reorganization, the Company had very little activity with minimal
operations and assets. Additionally, the exchange of the Company's common stock
for the common stock of Lakota resulted in the former stockholders of Lakota
obtaining control of the Company. Accordingly, Lakota became the continuing
entity for accounting purpose, and the transaction was accounted for as a
recapitalization of Lakota with no adjustment to the basis or assets acquired or
liabilities assumed by the Company. The two companies merged into a single
entity "Lakota Energy, Inc." on December 27, 1996.
On June 9, 1999, the Company formed Lakota Oil & Gas, Inc., a 100% owned
subsidiary. The Company transferred their interest in two oil exploration
projects into Lakota Oil and Gas, Inc. As of June 30, 1999, Lakota Oil & Gas,
Inc. had no significant operations.
F-14
<PAGE>
F-15
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
The Company's financial statements are prepared using the accrual method of
accounting. The Company has elected a December 31 year end.
The Company uses the successful efforts method of accounting for oil and gas
producing activities. Costs to acquire mineral interests in oil and gas
properties, to drill and equip exploratory wells that find proved reserves, and
to drill and equip development wells are capitalized. Costs to drill
exploratory wells that do not find proved reserves, geological and geophysical
costs, and costs of carrying and retaining unproved properties are expensed.
b. Provision for Taxes
At September 30, 1999 and December 31, 1998, the Company had net operating loss
carryforwards of approximately $6,360,000 and $1,560,000, respectively, that may
be offset against future taxable income through 2014. No tax benefit has been
reported in the financial statements because the Company believes that there is
a 50% chance the net operating loss carryforwards will expire unused, therefore
the potential tax benefits of the loss carryforwards are offset by a valuation
allowance of the same amount.
c. Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
d. Basic Loss Per Share
The computation of income basic loss per share of common stock is based on the
weighted average number of shares outstanding at the date of the financial
statements. Fully diluted net loss per common share is not materially different
from basic loss per share.
e. 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
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
Significant estimates include the valuation of proved, undeveloped reserves
related to the oil and gas properties. The ultimate recovery of proved,
undeveloped reserves is dependent on the success of future development of the
properties and in the Company's ability to complete the development.
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. Amortization
Fixed assets are stated at cost. Oil and gas wells will be amortized using the
units-of-production method on the basis of total estimated units of proven
reserves. Amortization will not be recorded until reserves are extracted.
g. Consolidation
The consolidated financial statements are those of the Lakota Energy,
Inc.(formerly Chancellor Trading Group, Inc.), its wholly owned subsidiaries,
Air Nexus, Inc, 2-Infinity.com, Inc. and Lakota Energy, Inc. and its 99.9% owned
subsidiary West Bolt Energy, Inc. (West Bolt). All intercompany accounts have
been eliminated in the consolidation. No losses have been attributed to the
0.01% minority interest owed because there was not any basis to allocate.
h. Unaudited Financial Statements
The accompanying unaudited financial statements include all of the adjustment
which, in the opinion of management, are necessary for a fair presentation.
Such adjustments are of a normal recurring nature.
i. Property and Equipment
Property and equipment are stated at cost. Expenditures for small tools,
ordinary maintenance and repairs are charged to operations as incurred. Major
additions and improvements are capitalized. Depreciation is computed using the
straight-line method over estimated useful lives as follows
Leasehold improvements 7 years
Furniture and fixtures 7 years
Equipment 5 years
Depreciation expense for the periods ended September 30, 1999, September 30,
1998, December 31, 1998 and December 31, 1997 was $3,687, $900, $1,200 and $-0-,
respectively.
j. Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
F-16
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. New Accounting Pronouncements
The Financial Accounting Standards Board has issued Statement of Financial
Accounting Standards ("SFAS") No. 128, "Earnings Per Share" and Statement of
Financial Accounting Standards No. 129 "Disclosures of Information About an
Entity's Capital Structure." SFAS No. 128 provides a different method of
calculating earnings per share than was previously used in accordance with APB
Opinion No. 15, "Earnings Per Share." SFAS No. 128 provides for the calculation
of "Basic" and "Dilutive" earnings per share. Basic earnings per share includes
no dilution and is computed by dividing income available to common shareholders
by the weighted average number of common shares outstanding for the period.
Diluted earnings per share reflects the potential dilution of securities that
could share in the earnings of an entity, similar to fully diluted earnings per
share. SFAS No. 129 establishes standards for disclosing information about an
entity's capital structure. SFAS No. 128 and SFAS No. 129 are effective for
financial statements issued for periods ended after December 15, 1997. In
fiscal 1998, the Company adopted SFAS No. 128, which did not have a material
impact on the Company's financial statements. The implementation of SFAS No.
129 did not have a material effect on the Company's financial statements.
The Financial Accounting Standards Board has also issued SFAS No. 130,
"Reporting Comprehensive Income" and SFAS No. 131, "Disclosures about Segments
of an Enterprise and Related Information." SFAS No. 130 establishes standards
for reporting and display of comprehensive income, its components and
accumulated balances. Comprehensive income is defined to include all changes in
equity except those resulting from investments by owners and distributions to
owners. Among other disclosures, SFAS No. 130 requires that all items that are
required to be recognized under current accounting standards as components of
comprehensive income be reported in a financial statement that displays with the
same prominence as other financial statements. SFAS No. 131 supersedes SFAS No.
14 "Financial Reporting for Segments of a Business Enterprise." SFAS No. 131
establishes standards on the way that public companies report financial
information about operating segments in annual financial statements and requires
reporting of selected information about operating segments in interim financial
statements issued to the public. It also establishes standards for disclosure
regarding products and services, geographic areas and major customers. SFAS No.
131 defines operating segments as components of a company about which separate
financial information is available that is evaluated regularly by the chief
operating decision maker in deciding how to allocate resources and in assessing
performance.
SFAS No. 130 and 131 are effective for financial statements for periods
beginning after December 15, 1997 and requires comparative information for
earlier years to be restated. The implementation of SFAS No. 130 and 131 did
not have a material affect on the financial statements.
F-17
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
k. New Accounting Pronouncements (Continued)
In February 1998, the Financial Accounting Standards Board ("FASB") has issued
Statement of Financial Accounting Standard ("SFAS") No 132. "Employers'
Disclosures about Pensions and other Postretirement Benefits" which standardizes
the disclosure requirements for pensions and other Postretirement benefits and
requires additional information on changes in the benefit obligations and fair
values of plan assets that will facilitate financial analysis. SFAS No. 132 is
effective for years beginning after December 15, 1997 and requires comparative
information for earlier years to be restated, unless such information is not
readily available. The adoption of this statement had no material impact on the
Company's financial statements.
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" which requires companies to record
derivatives as assets or liabilities, measured at fair market value. Gains or
losses resulting from changes in the values of those derivatives would be
accounted for depending on the use of the derivative and whether it qualifies
for hedge accounting. The key criterion for hedge accounting is that the
hedging relationship must be highly effective in achieving offsetting changes in
fair value or cash flows. SFAS No. 133 is effective for all fiscal quarters of
fiscal years beginning after June 15, 1999. The adoption of this statement had
no material impact on the Company's financial statements.
l. Goodwill
The Company assesses long-lived assets for impairment under FASB Statement No.
121, Accounting for the Impairment of long-Lived Assets. Under those rules,
goodwill associated with assets acquired in a purchase business combination
where determined to be impaired because circumstances exist that indicate the
carrying amount of those assets may not be recoverable. The purchase of the two
subsidiaries described in Note 12 resulted in the creation of goodwill of
$2,159,000. The goodwill is the excess of the purchase price of the two
subsidiaries over the net value of the tangible assets acquired from the two
subsidiaries. The purchase price was determined to be the trading prices of the
shares issued to purchase the subsidiaries on the date of issuance. The
Company's policy is evaluate the recoverability of its intangible assets on a
quarterly basis. At September 30, 1999, the two subsidiaries had minimal
revenues and substantial losses, which together raised doubt about the
recoverability of the goodwill. Accordingly, a valuation allowance was made for
the goodwill in full at September 30, 1999.
m. Revenue Recognition Policies
The Company recognizes oil and gas revenue upon the sale of the product. The
data revenues are recognized as billed.
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 3 - GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has not established revenues sufficient to cover its
operating costs and allow it to continue as a going concern. Management
believes that in the next 12 months, the Company will be able to generate
revenues sufficient to cover its operating costs. Currently shareholders are
committed to pay all operating and other costs until sufficient revenues are
generated. These costs will be recorded as a liability to the shareholders and
as expenses on the Company's books when incurred.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company had notes payable to related companies totaling $90,315 at September
30, 1999. The notes bear interest at 10% per annum. Accrued interest at
September 30, 1999 and December 31, 1998 was $16,966 and $13,193, respectively.
The notes are unsecured and are due on demand.
NOTE 5 - CONVERSION OF PREFERRED STOCK
On February 26, 1997, the Board of Directors authorized the conversion of
812,500 shares of convertible preferred restricted stock into 812,500 shares of
the Company's restricted common shares.
In 1997, the preferred shareholders converted their shares to common stock on a
conversion rate of one share of preferred stock for one share of common stock.
At the time the stock was redeemed the Company was issuing stock for cash at
$1.00 per share. The more readily available market price of the common stock
caused the valuation of the oil and gas properties to be revalued using the
common share price. In addition, the preferred shareholders forgave the accrued
interest of $780,436 associated with the preferred shares which also reduced the
cost of the oil and gas properties received. The revaluation caused the oil and
gas properties to be valued at $32,064.
NOTE 6 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its offices under a lease agreements accounted for as
operating leases. Real estate taxes, insurance and maintenance expenses are
obligations of the Company.
F-18
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 6 - COMMITMENTS AND CONTINGENCIES (Continued)
Minimum rental payments under the non-cancelable operating lease is as follows:
<TABLE>
<CAPTION>
<S> <C>
Periods Ended
December 31,
- --------------
1999 $ 66,160
2000 35,707
2001 20,318
2002 26,608
2003 -
All other years -
--------------
148,793
====================
</TABLE>
Rent expense was approximately $49,620, $19,510, $26,013 and $26,364 for the
periods ended September 30, 1999, September 30, 1998, December 31, 1998 and
December 31, 1997, respectively. It is expected that expiring leases will be
renewed in the ordinary course of business.
NOTE 7 - WARRANTS
A summary of the status of the Company's warrants as of September 30, 1999 and
December 31, 1999 and changes during the period ending September 30, 1999:
<TABLE>
<CAPTION>
<S> <C> <C>
Average
Exercise
Shares Price
--------------- ------
Outstanding, December 31 1998 - $ -
Granted 14,005,600 0.30
Expired (278,800) 0.30
Exercised (310,000) 0.15
--------------- ------
Outstanding, September 30, 1999 13,416,800 $ 0.30
=============== ===============
Exercisable, September 30, 1999 8,920,000 $ 0.30
=============== ===============
</TABLE>
All warrants were issued at or above the market price at the date of issue with
the exception of the 5,000,000 warrants issued on September 1, 1999 (see Note
8).
F-19
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 8 - CONVERTIBLE DEBT
On March 16, 1999, the Company issued convertible debentures with a face value
of $550,000. The debentures were convertible into common stock at a 25%
discount. The Company has recorded $137,500 of additional interest expense to
compensate for the discount. All of the debentures were converted into
7,685,581 shares of common stock prior to May 31, 1999.
On July 13, 1999, the Company issued convertible debentures with a face value of
$74,000. The debentures were convertible into common stock at a 50% discount.
The Company has recorded $37,000 of additional interest expense to compensate
for the discount. All of the debentures were converted into 793,966 shares of
common stock prior to August 31, 1999.
On August 22, 1999, the Company issued a convertible debenture with a face value
of $23,500. The debenture was convertible into common stock at a 25% discount.
The Company has recorded $5,875 of additional interest expense to compensate for
the discount. The debenture was converted into 391,250 shares of common stock
on September 2, 1999.
On August 24, 1999, the Company issued convertible debentures with a face value
of $750,000. The debentures are convertible into common stock at a 25%
discount. The Company has recorded $187,500 of additional interest expense to
compensate for the discount.
On August 24, 1999, the Company issued options to purchase 5,000,000 warrants at
a 50% discount from the market price. The options vested immediately. The
Company has recorded $412,500 of additional interest expense to compensate for
the discount.
NOTE 9 - LONG-TERM DEBT
Notes payable as of September 30, 1999 and December 31, 1998 are detailed in the
following summary:
<TABLE>
<CAPTION>
<S> <C> <C>
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
Notes payable to individuals; convertible to stock within three
years; interest at 9.75%, paid quarterly until converted,
unsecured. $ 30,000 $ -
Note payable to an individual; interest imputed at 10%
due in 90 days, unsecured. 40,000 -
Notes payable to related party at 10% interest, due on demand,
unsecured. 50,315 54,914
--------------- --------------
Total long-term debt 120,315 54,914
Less: current portion (120,315) (54,914)
--------------- --------------
Long-term portion $ - $ -
=============== ==============
</TABLE>
F-20
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 9 - LONG-TERM DEBT (Continued)
Maturities of long term debt are summarized below:
<TABLE>
<CAPTION>
<S> <C> <C>
Period ending December 31, 1999 $120,315
2000 -
2001 -
2002 -
2003 -
--------
Total $120,315
========
</TABLE>
NOTE 10 - INCOME TAXES
The income tax benefit differs from the amount computed at federal statutory
rates as follows:
<TABLE>
<CAPTION>
<S> <C> <C>
For the For the
Period Ended Year Ended
September 30, December 31,
1998 1998
--------------- --------------
(Unaudited)
Income tax benefit at statutory rate $ 1,053,600 $ 329,423
Change in valuation allowance (1,053,600) (329,423)
--------------- --------------
$ - -
=============== ==============
</TABLE>
Deferred tax assets (liabilities) at September 30, 1999 are comprised of the
following:
<TABLE>
<CAPTION>
<S> <C> <C>
For the For the
Period Ended Year Ended
September 30, December 31,
1998 1998
--------------- --------------
(Unaudited)
Net operating loss carryforward $ 1,583,170 $ 495,000
Valuation allowance (1,583,170) (495,000)
--------------- --------------
$ - -
=============== ==============
</TABLE>
NOTE 11 - COMMON STOCK TRANSACTIONS
In 1998, the Company issued approximately 4,500,000 shares for services valued
at $0.03 per share, which approximated a value of a transaction for services
recorded by the Company on November 20, 1998 with a third party. In 1999, the
Company renegotiated the number of shares due to the fact that the services had
not been performed as anticipated. The Company received back and canceled
3,846,325 shares.
F-21
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 12 - BUSINESS COMBINATIONS
On June 9, 1999, the Company acquired all of the outstanding shares of Air
Nexus, Inc., a retail provider of commercial voice and data services.
The Company issued 3,000,000 shares of common stock for all of the outstanding
shares of Air Nexus, Inc.
The acquisition has been accounted for as a purchase and the results of
operations of Air Nexus, Inc. since the date of acquisition are included in the
Company's consolidated financial statements.
Unaudited proforma consolidated results of operations for the nine months ended
September 30, 1999 and for the year ended December 31, 1998 as though Air Nexus,
Inc. had been acquired as of January 1, 1998 follows:
<TABLE>
<CAPTION>
<S> <C> <C>
For the
Nine Months For the
Ended Year Ended
September 30, December 31,
1999 1998
--------------- --------------
(Unaudited)
Sales $ 155,904 $ -
Net income (loss) (4,809,953) (356,468)
Earnings per common and common
equivalent share $ (0.21) $ (0.03)
</TABLE>
In addition, the Company acquired all of the outstanding shares of
2-Infinity.com, Inc. through issuance of 3,000,000 shares of common stock.
2-Infinity.com, Inc. had only been in existence for a short period of time and
had no prior operations and, accordingly, no proforma financial statements are
presented.
<TABLE>
<CAPTION>
<S> <C> <C>
Air Nexus, 2-Infinity.com,
Allocation of Purchase Price Inc. Inc.
-------------- -----------
Goodwill $1,020,000 $1,139,000
Cash 515 104,479
Property and equipment - 5,731
Other assets 9,238 1,669
Liabilities assumed (129,753) (50,879)
----------- -----------
Total Purchase Price $ 900,000 $1,200,000
=========== ===========
</TABLE>
ffective September 30, 1999, the Company adopted SFAS No. 131, "Disclosure about
Segments of an Enterprise and Related Information." The Company conducts its
operations principally in the oil and gas industry through Lakota Energy, Inc.,
in the high speed internet access industry with 2-Infinity.com, Inc. and in the
commercial voice and data services industry with Air Nexus, Inc.
F-22
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
(A Development Stage Company)
Notes to the Consolidated Financial Statements
September 30, 1999 and December 31, 1998
NOTE 13 - OPERATING SEGMENTS (Continued)
Certain financial information concerning the Company's operations in different
industries is as follows:
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
For the Nine Months
Ended September 30, 1999
-------------------------
Lakota Air 2-Infinity .
Energy, Inc. Nexus, Inc. Com, Inc. Consolidated
--------------- --------------- ------------- -------------
Net sales $ 5,255 $ 150,649 $ - $ 155,904
Operating loss applicable to
industry segment 1,790,500 999,462 1,245,180 4,035,142
Writedown of goodwill - 1,020,000 1,139,000 2,159,000
Interest expense 784,911 68 - 784,979
Other income (expenses) -
interest income 10,168 - - 10,168
Assets 74,963 54,591 47,004 176,558
Depreciation expense 900 987 1,800 3,687
Property and equipment
acquisition - 28,801 11,138 39,939
</TABLE>
24
Prior to 1999, the Company only operated in the oil and gas industry.
NOTE 14 - STOCK OPTION PLAN
Effective August 1, 1999, the Directors and Shareholders approved the Lakota
Energy, Inc. Omnibus Stock Option Plan. Under the terms of the Option Plan, the
Board of Directors has the sole authority to determine which of the eligible
persons shall receive options, the number of shares which may be issued upon
exercise of an option, and other terms and conditions of the options granted
under the Plan to the extent they don't conflict with the terms of the Plan. An
aggregate of 3,000,000 shares of common stock are reserved for issuance under
the Plan during the year August 1, 1999 to July 31, 2000. For each subsequent
year beginning August 1, 2000, there shall be reserved for issuance under the
Plan that number of shares equal to 10% of the outstanding shares of common
stock on August 1 of that year. The exercise price for all options granted
under the Plan shall be 100% of the fair market value of the Company's common
stock on the date of grant, unless the recipient is the holder of more than 10%
of the already outstanding securities of the company, in which case the exercise
price shall be 110% of the fair market value of the Company's common stock on
the date of grant. All options shall vest equally over a period of five years
from the date of issuance. On August 11, 1999, the Board of Driectors approved
the grant of an aggregate of 2,000,000 options under the Plan.
F-23
<PAGE>
2-INFINITY.COM, INC.
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
JUNE 30, 1999
F-24
<PAGE>
C O N T E N T S
Independent Auditors' Report . . . . . . . . . . . 3
Balance Sheet . . . . . . . . . . . . . . . . . . . 4
Statement of Operations . . . . . . . . . . . . . 5
Statement of Stockholders' Equity (Deficit) . . 6
Statement of Cash Flows . . . . . . . . . . . . . 7
Notes to the Financial Statements . . . . . . . 8
F-25
<PAGE>
INDEPENDENT AUDITORS' REPORT
------------------------------
The Board of Directors
2Infinity.com, Inc.
(A Development Stage Company)
Denver, CO
We have audited the accompanying balance sheets of 2Infinity.com, Inc. (a
development stage company) as of June 30, 1999 and the related statements of
operations, stockholders' equity, and cash flows from inception on May 7, 1999
through June 30, 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of 2Infinity.com, Inc. (a
development stage company) as of June 30, 1999 and the results of its operations
and its cash flows from inception on May 7, 1999 through June 30, 1999 in
conformity with generally accepted accounting principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company is a development stage company with no
significant operating results to date, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Jones, Jensen & Company
Salt Lake City, Utah
September 15, 1999
F-26
<PAGE>
2-INFINITY.COM, INC.
(A Development Stage Company)
Balance Sheet
ASSETS
------
<TABLE>
<CAPTION>
<S> <C>
June 30,
1999
----------
CURRENT ASSETS
Cash $ 104,479
Security deposit 1,669
----------
Total Current Assets 106,148
----------
PROPERTY AND EQUIPMENT (Note 2)
Equipment 11,138
Less: accumulated depreciation (186)
----------
Total Property and Equipment 10,952
----------
TOTAL ASSETS $ 117,100
==========
</TABLE>
F-27
<PAGE>
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
--------------------------------------------------
<TABLE>
<CAPTION>
<S> <C>
CURRENT LIABILITIES
Accounts payable $ -
Notes payable - related party (Note 4) 150,000
---------
Total Current Liabilities 150,000
---------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 2,000 shares authorized, $0.01 value
2,000 shares issued and outstanding 20
Additional paid-in capital 980
Deficit accumulated during the development stage (33,900)
---------
Total Stockholders' Equity (Deficit) (32,900)
---------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) $117,100
=========
</TABLE>
F-28
<PAGE>
2-INFINITY.COM, INC.
(A Development Stage Company)
Statement of Operations
<TABLE>
<CAPTION>
<S> <C>
From
Inception on
May 7, 1999
Through
June 30,
1999
--------------
REVENUES $ -
--------------
EXPENSES
Depreciation expense 186
General and administrative 33,714
--------------
Total Expenses 33,900
--------------
NET LOSS $ (33,900)
==============
BASIC LOSS PER SHARE $ (16.95)
==============
</TABLE>
F-29
<PAGE>
2-INFINITY.COM, INC.
(A Development Stage Company)
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Deficit
Accumulated
Additional During the
Common Stock Paid-In Development
Shares Amount Capital Stage
------------ ----------- ------------ ---------
Balance at inception on May 7, 1999 - $ - $ - $ -
Issuance of common stock to founders
at approximately $0.50 per share 2,000 20 980 -
Net loss from inception on May 7, 1999
through June 30, 1999 - - - (33,900)
------------ ----------- ------------ ---------
Balance, June 30, 1999 2,000 $ 20 $ 980 $(33,900)
============ =========== ============ =========
</TABLE>
F-30
<PAGE>
2-INFINITY.COM, INC.
(A Development Stage Company)
Statement of Cash Flows
<TABLE>
<CAPTION>
<S> <C>
From
Inception on
May 7, 1999
Through
June 30,
1999
--------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (33,900)
Adjustments to reconcile net (loss) to net cash
flows from operating activities:
Depreciation expense 186
Changes in operating assets and liabilities:
Increase (decrease) in other assets (1,669)
--------------
Net Cash (Used) by Operating Activities (35,383)
--------------
CASH FLOWS FROM INVESTING ACTIVITIES
Purchase of property and equipment (11,138)
--------------
Net Cash (Used) by Investing Activities (11,138)
--------------
CASH FLOWS FROM FINANCING ACTIVITIES
Proceeds from notes payable - related party 150,000
Issuance of common stock 1,000
--------------
Net Cash Provided by Financing Activities 151,000
--------------
NET INCREASE (DECREASE) IN CASH 104,479
CASH AT BEGINNING OF PERIOD -
--------------
CASH AT END OF PERIOD $ 104,479
==============
CASH PAID DURING THE PERIOD FOR:
Interest $ -
Income taxes $ -
</TABLE>
F-31
<PAGE>
2-INFINITY.COM, INC.
(A Development Stage Company)
Notes to the Financial Statements
June 30, 1999
NOTE 1 - HISTORY AND ORGANIZATION
2-Infinity.com, Inc. (the Company) was incorporated in the State of Texas on May
7, 1999. The Company was incorporated for any lawful purpose under Texas law,
but primarily to operate in the internet industry.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
The Company's financial statements are prepared using the accrual method of
accounting. The Company has elected a December 31 year end.
b. Provision for Taxes
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $33,000 that may be offset against future taxable income through
2014. No tax benefit has been reported in the financial statements because the
Company believes that there is a 50% chance the net operating loss carryforwards
will expire unused, therefore the potential tax benefits of the loss
carryforwards are offset by a valuation allowance of the same amount.
c. Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
d. Basic Loss Per Share
The computation of income basic loss per share of common stock is based on the
weighted average number of shares outstanding at the date of the financial
statements. Fully diluted net loss per common share is not materially different
from basic loss per share.
e. 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
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
F-32
<PAGE>
2-INFINITY.COM, INC.
(A Development Stage Company)
Notes to the Financial Statements
June 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. Property and Equipment
Property and equipment are stated at cost. Expenditures for small tools,
ordinary maintenance and repairs are charged to operations as incurred. Major
additions and improvements are capitalized. Depreciation is computed using the
straight-line method over estimated useful lives as follows
Leasehold improvements 7 years
Furniture and fixtures 7 years
Equipment 5 years
Depreciation expense for the period ended June 30, 1999 was $186.
g. Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
NOTE 3 - GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has not established revenues sufficient to cover its
operating costs and allow it to continue as a going concern. Management
believes that the Company will soon be able to generate revenues sufficient to
cover its operating costs. Currently shareholders are committed to pay all
operating and other costs until sufficient revenues are generated.
NOTE 4 - RELATED PARTY TRANSACTIONS
The Company had signed notes payable to a related company totaling $150,000 at
June 30, 1999. The notes bear interest at 10% per annum. Accrued interest at
June 30, 1999 was $-0-. The notes are unsecured and are due on demand.
NOTE 5 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its offices under a lease agreements accounted for as
operating leases. Real estate taxes, insurance and maintenance expenses are
obligations of the Company.
F-33
<PAGE>
F-34
<PAGE>
2-INFINITY.COM, INC.
(A Development Stage Company)
Notes to the Financial Statements
June 30, 1999
NOTE 6 - ACQUISITION
During June 1999, the Company entered into an agreement whereby it was acquired
by Lakota Technology, Inc. for 3,000,000 shares of restricted common stock.
F-35
<PAGE>
AIR NEXUS, INC.
(FORMERLY VOICE DESIGN, INCORPORATED)
(A DEVELOPMENT STAGE COMPANY)
FINANCIAL STATEMENTS
JUNE 30, 1999
F-36
<PAGE>
C O N T E N T S
Independent Auditors' Report . . . . . . . . . . . . 3
Balance Sheet . . . . . . . . . . . . . . . . . . . 4
Statement of Operations . . . . . . . . . . . . . . 5
Statement of Stockholders' Equity (Deficit) . . . 6
Statement of Cash Flows . . . . . . . . . . . . . 7
Notes to the Financial Statements . . . . . . . 8
F-37
<PAGE>
INDEPENDENT AUDITORS' REPORT
------------------------------
The Board of Directors
Air Nexus, Inc.
(Formerly Voice Design, Incorporated)
(A Development Stage Company)
Denver, CO
We have audited the accompanying balance sheets of Air Nexus, Inc. (formerly
Voice Design, Incorporated) (a development stage company) as of June 30, 1999
and the related statements of operations, stockholders' equity, and cash flows
from inception on June 2, 1999 through June 30, 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 consolidated financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the financial position of Air Nexus, Inc. (formerly Voice
Design, Incorporated) (a development stage company) as of June 30, 1999 and the
results of its operations and its cash flows from inception on June 2, 1999
through June 30, 1999 in conformity with generally accepted accounting
principles.
The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 3 to the
financial statements, the Company is a development stage company with no
significant operating results to date, which raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 3. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
Jones, Jensen & Company
Salt Lake City, Utah
September 15, 1999
F-38
<PAGE>
AIR NEXUS, INC.
(Formerly Voice Design, Incorporated)
(A Development Stage Company)
Balance Sheet
ASSETS
------
<TABLE>
<CAPTION>
<S> <C>
June 30,
1999
----------
CURRENT ASSETS
Cash $ 515
Accounts receivable 8,437
Security deposit 801
----------
Total Current Assets 9,753
----------
TOTAL ASSETS $ 9,753
==========
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
-------------------------------------------------------
CURRENT LIABILITIES
Accounts payable $ 11,234
Line of credit 1,800
Accrued expenses 14,097
----------
Total Current Liabilities 27,131
----------
STOCKHOLDERS' EQUITY (DEFICIT)
Common stock 50,000,000 shares authorized, $1.00 value
3,000 shares issued and outstanding 3,000
Deficit accumulated during the development stage (20,378)
----------
Total Stockholders' Equity (Deficit) (17,378)
----------
TOTAL LIABILITIES AND STOCKHOLDERS EQUITY (DEFICIT) $ 9,753
==========
</TABLE>
F-39
<PAGE>
AIR NEXUS, INC.
(Formerly Voice Design, Incorporated)
(A Development Stage Company)
Statement of Operations
<TABLE>
<CAPTION>
<S> <C>
From
Inception on
June 2, 1999
Through
June 30,
1999
--------------
REVENUES $ 8,022
--------------
EXPENSES
General and administrative 28,383
--------------
Total Expenses 28,383
--------------
Loss from Operations (20,361)
--------------
OTHER (EXPENSE)
Interest expense (17)
--------------
Total Other (Expense) (17)
--------------
NET LOSS $ (20,378)
==============
BASIC LOSS PER SHARE $ (6.79)
==============
</TABLE>
F-40
<PAGE>
AIR NEXUS, INC.
(Formerly Voice Design, Incorporated)
(A Development Stage Company)
Statement of Stockholders' Equity
<TABLE>
<CAPTION>
<S> <C> <C> <C>
Deficit
Accumulated
During the
Common Stock Development
Shares Amount Stage
------------ ------------ ---------
Balance at inception on June - $ - $ -
2, 1999
Issuance of common stock to founders
at approximately $1.00 per share 3,000 3,000 -
Net loss from inception on June 2,
1999 through June 30, 1999 - - (20,378)
------------ ------------ ---------
Balance, June 30, 1999 3,000 $ 3,000 $(20,378)
============ ============ =========
</TABLE>
F-41
<PAGE>
AIR NEXUS, INC.
(Formerly Voice Design, Incorporated)
(A Development Stage Company)
Statement of Cash Flows
<TABLE>
<CAPTION>
<S> <C>
From
Inception on
June 2, 1999
Through
June 30,
1999
--------------
CASH FLOWS FROM OPERATING ACTIVITIES
Net (loss) $ (20,378)
Changes in operating assets and liabilities:
Increase (decrease) in accounts payable 11,234
Increase (decrease) in accrued expenses 14,097
(Increase) decrease in other assets (801)
(Increase) decrease in accounts receivable (8,437)
--------------
Net Cash (Used) by Operating Activities (4,285)
--------------
CASH FLOWS FROM INVESTING ACTIVITIES -
--------------
CASH FLOWS FROM FINANCING ACTIVITIES
Common stock issued for cash 3,000
Proceeds from line of credit 1,800
--------------
Net Cash Provided by Financing Activities 4,800
--------------
NET INCREASE (DECREASE) IN CASH 515
CASH AT BEGINNING OF PERIOD -
--------------
CASH AT END OF PERIOD $ 515
==============
CASH PAID DURING THE PERIOD FOR:
Interest $ -
Income taxes $ -
</TABLE>
F-42
<PAGE>
AIR NEXUS, INC.
(Formerly Voice Design, Incorporated)
(A Development Stage Company)
Notes to the Financial Statements
June 30, 1999
NOTE 1 - HISTORY AND ORGANIZATION
Air Nexus, Inc. (the Company) was incorporated in the State of Texas on June 2,
1999 as Voice Design, Incorporated. On June 17, 1999, Voice Design,
Incorporated changed its name to Air Nexus, Inc.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
a. Accounting Method
The Company's financial statements are prepared using the accrual method of
accounting. The Company has elected a December 31 year end.
b. Provision for Taxes
At June 30, 1999, the Company had net operating loss carryforwards of
approximately $20,000 that may be offset against future taxable income through
2014. No tax benefit has been reported in the financial statements because the
Company believes that there is a 50% chance the net operating loss carryforwards
will expire unused, therefore the potential tax benefits of the loss
carryforwards are offset by a valuation allowance of the same amount.
c. Cash Equivalents
The Company considers all highly liquid investments with a maturity of three
months or less when purchased to be cash equivalents.
d. Basic Loss Per Share
The computation of income basic loss per share of common stock is based on the
weighted average number of shares outstanding at the date of the financial
statements. Fully diluted net loss per common share is not materially different
from basic loss per share.
e. 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
the reported amounts of revenues and expenses during the reported period.
Actual results could differ from those estimates.
F-43
<PAGE>
AIR NEXUS, INC.
(Formerly Voice Design, Incorporated)
(A Development Stage Company)
Notes to the Financial Statements
June 30, 1999
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Continued)
f. Advertising
The Company follows the policy of charging the costs of advertising to expense
as incurred.
NOTE 3 - GOING CONCERN
The Company's financial statements are prepared using generally accepted
accounting principles applicable to a going concern which contemplates the
realization of assets and liquidation of liabilities in the normal course of
business. The Company has not established revenues sufficient to cover its
operating costs and allow it to continue as a going concern. Management
believes that the Company will soon be able to generate revenues sufficient to
cover its operating costs. Currently shareholders are committed to pay all
operating and other costs until sufficient revenues are generated.
NOTE 4 - COMMITMENTS AND CONTINGENCIES
Operating Leases
The Company leases its offices under a lease agreements accounted for as
operating leases. Real estate taxes, insurance and maintenance expenses are
obligations of the Company.
NOTE 5 - ACQUISITION
During June 1999, the Company entered into an agreement whereby it was acquired
by Lakota Technology, Inc. for 3,000,000 shares of restricted common stock.
F-44
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
CONSOLIDATED PROFORMA FINANCIAL STATEMENTS
DECEMBER 31, 1998
F-45
<PAGE>
C O N T E N T S
Consolidated Proforma Balance Sheet . . . . . . . . . . 3
Consolidated Proforma Statement of Operations . . . . . 5
Statement of Assumptions and Disclosures . . . . . . . 6
F-46
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Proforma Balance Sheet
December 31, 1998
(Unaudited)
ASSETS
------
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Lakota Proforma
Technologies Adjustments
Inc. and 2-Infinity.com, Increase Proforma
Subsidiaries Air Nexus, Inc. Inc. (Decrease) Consolidated
----------------- --------------- -------------- -------------- ------------
CURRENT ASSETS
Cash $ 92,090 $ - $ - $ - $ 92,090
Security deposit 2,077 - - - 2,077
----------------- -------------- ----------- -------------- ------------
Total Current Assets 94,167 - - - 94,167
----------------- -------------- ----------- -------------- ------------
FIXED ASSETS
Furniture and equipment 7,800 - - - 7,800
Accumulated depreciation (2,400) - - - (2,400)
----------------- -------------- ----------- -------------- ------------
Total Fixed Assets 5,400 - - - 5,400
----------------- -------------- ----------- -------------- ------------
OTHER ASSETS
Goodwill - - - 2,100,000 2,100,000
Accumulated amortization - - - (2,100,000) (2,100,000)
Oil and gas properties 32,064 - - - 32,064
----------------- -------------- ------------- -------------- ------------
Total Other Assets 32,064 - - - 32,064
----------------- -------------- ------------- -------------- ------------
TOTAL ASSETS $ 131,631 $ - $ - $ - 131,631
================= ============== ============= ============== ============
</TABLE>
F-47
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Proforma Balance Sheet (Continued)
December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Lakota Proforma
Technologies Adjustments
Inc. and Air Nexus, 2-Infinity. Increase Proforma
Subsidiaries Inc. com, Inc. (Decrease) Consolidated
----------------- ------------ ----------- -------------- ------------
CURRENT LIABILITIES
Accounts payable $ 2,104 $ - $ - $ - $ 2,104
Accrued expenses 19,815 - - - 19,815
Note payable - related
party 54,914 - - - 54,914
----------------- ------------ ----------- -------------- ------------
Total Current Liabilities 76,833 - - - 76,833
----------------- ------------ ----------- -------------- ------------
COMMITMENTS AND
CONTINGENCIES
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock: 25,000,000
shares authorized, no par
value; no shares
outstanding - - - - -
Common stock: 100,000,000
shares authorized of no par
value, 26,678,733 shares
issued and outstanding 1,650,389 - - 2,100,000 3,750,389
Loan receivable - related
party (38,270) - - - (38,270)
Retained earnings (deficit) (1,557,321) - - (2,100,000) (3,657,321)
----------------- ------------ ----------- -------------- ------------
Total Stockholders'
Equity (Deficit) 54,798 - - - 54,798
----------------- ------------ ----------- -------------- ------------
TOTAL LIABILITIES AND
STOCKHOLDERS'
EQUITY (DEFICIT) $ 131,631 $ - $ - $ - 131,631
================= ============ =========== ============== ============
</TABLE>
F-48
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
Consolidated Proforma Statement of Operations
For the Year Ended December 31, 1998
(Unaudited)
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C> <C>
Lakota Proforma
Technologies Adjustments
Inc. and Air Nexus, 2-Infinity. Increase Proforma
Subsidiaries Inc. com, Inc. (Decrease) Consolidated
----------------- ------------ ----------- -----------------------
REVENUES $ - $ - $ - $ - $ -
COST OF SALES - - - - -
----------------- ------------ ----------- ----------------------- ------------
GROSS PROFIT - - - - -
----------------- ------------ ----------- ----------------------- ------------
OPERATING EXPENSES
Depreciation and
amortization 1,200 - - 2,100,000 2,101,200
General and administrative 351,139 - - - 351,139
----------------- ------------ ----------- ----------------------- ------------
Total Operating
Expenses 352,339 - - 2,100,000 2,452,339
----------------- ------------ ----------- ----------------------- ------------
OPERATING INCOME
(LOSS) (352,339) - - (2,100,000) (2,452,339)
----------------- ------------ ----------- ----------------------- ------------
OTHER INCOME
Interest income 1,362 - - - 1,362
Other income (expense) (5,491) - - - (5,491)
----------------- ------------ ----------- ----------------------- ------------
Total Other Income (4,129) - - - (4,129)
----------------- ------------ ----------- ----------------------- ------------
INCOME (LOSS) BEFORE
INCOME TAXES (356,468) - - (2,100,000) (2,456,468)
----------------- ------------ ----------- ----------------------- ------------
NET INCOME (LOSS) $ (356,468) $ - $ - $ (2,100,000) (2,456,468)
================= ============ =========== ======================= ============
</TABLE>
F-49
<PAGE>
LAKOTA TECHNOLOGIES, INC. AND SUBSIDIARIES
Summary of Assumptions and Disclosures
NOTE 1 - ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The consolidated financial statements presented are those of Lakota
Technologies, Inc. (formerly Chancellor Trading Group, Inc.) (the Company) (a
development stage company) and its wholly owned subsidiaries Lakota Energy, Inc.
(Lakota), Air Nexus, Inc., Lakota Oil and Gas, Inc. and 2-Infinity.com, Inc.
The Company was incorporated in the State of Colorado on July 14, 1995.
2-Infinity.com, Inc. (the Company) was incorporated in the State of Texas on May
7, 1999. The Company was incorporated for any lawful purpose under Texas law,
but primarily to operate in the internet industry.
Air Nexus, Inc. (the Company) was incorporated in the State of Texas on June 2,
1999 as Voice Design, Incorporated on June 17, 1999, Voice Design, Incorporated
changed its name to Air Nexus, Inc.
NOTE 2 - BUSINESS COMBINATIONS
On June 9, 1999, the Company acquired all of the outstanding shares of Air
Nexus, Inc., a retail provider of commercial voice and data services.
The Company issued 3,000,000 shares of common stock for all of the outstanding
shares of Air Nexus, Inc.
The acquisition has been accounted for as a purchase and the results of
operations of Air Nexus, Inc. since the date of acquisition are included in the
Company's consolidated financial statements.
In addition, the Company acquired all of the outstanding shares of
2-Infinity.com, Inc. through issuance of 3,000,000 shares of common stock.
Both Air Nexus, Inc. and 2-Infinity.com, Inc. were incorporated in 1999.
Accordingly, these proforma financial statements for the year ended December 31,
1998 do not reflect their activity from inception to June 9, 1999.
1) Goodwill (Lakota) $ 1,050,000
Common stock (Lakota) (1,050,000)
----------------
$ -
===============
To record purchase of Air Nexus, Inc. through the issuance of 3,000,000 shares
of common stock valued at $0.35 per share.
2) Goodwill (Lakota) $ 1,050,000
Common stock (Lakota) (1,050,000)
----------------
$ -
===============
To record purchase of 2-Infinity.com, Inc. through the issuance of 3,000,000
shares of common stock valued at $0.35 per share.
3) Amortization expense $ 2,100,000
Accumulated amortization-goodwill (2,100,000)
----------------
$ -
================
F-50
<PAGE>
Part II
INFORMATION NOT REQUIRED IN PROSPECTUS
INDEMNIFICATION OF DIRECTORS AND OFFICERS
The laws of the State of Colorado and our corporate bylaws provide for
indemnification of our directors and officers for liabilities and expenses that
they may incur while acting in such capacities. In general, our directors and
officers are indemnified for actions they take in good faith and in a manner
reasonably believed to be in, or not opposed to, our best interests. With
respect to criminal actions or proceeds, they are indemnified if they had no
reasonable cause to believe their actions were unlawful. In addition, their
liability is limited by our Articles of Incorporation.
We do not currently have a policy of directors and officers insurance.
OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION
The following table sets forth our estimated expenses in connection with
the distribution of the securities being registered. None of the expenses will
be paid by selling securityholders. Except for SEC filing fees, all expenses
have been estimated and are subject to future contingencies.
SEC registration fee . . . . . . . . . . . . . . $ 1,423.21
Legal fees and expenses . . . . . . . . . . . . 60,000.00
Printing and engraving expenses . . . . . . . . 10,000.00
Accounting fees and expenses . . . . . . . . . 25,000.00
Blue sky fees and expenses . . . . . . . . . . 8,000.00
Transfer agent registration fees
and expenses . . . . . . . . . . . . . . . . . . 1,000.00
Miscellaneous Expenses . . . . . . . . . . . . . 2,576.79
Total . . . . . . . . . . . . . . . . . . . . . . $ 108,000.00
RECENT SALES OF UNREGISTERED SECURITIES
Effective November 6, 1996, Lakota Energy, Inc., a Colorado corporation ("Lakota
Energy") merged with and into Chancellor Trading Group, Inc., a Colorado
corporation ("Chancellor") in a business combination described as a "reverse
acquisition", with Chancellor being the surviving corporation. For accounting
purposes, the transaction has been treated as the acquisition of Chancellor (the
Registrant) by Lakota Energy. As part of the transaction, Chancellor changed
its name to Lakota Energy. Immediately prior to the transaction, Chancellor had
1,801,000 shares of Common Stock outstanding. As part of Chancellor's
reorganization with Lakota Energy, Chancellor issued 9,187,500 shares of its
Common Stock to the shareholders of Lakota Energy in exchange for 4,593,750
shares of Lakota Energy Common Stock, and an additional 118,000 shares to third
parties, so that subsequent to the transaction, there were 11,106,500 shares of
common stock issued and outstanding. All of the issuances were exempt under
Section 4(2) of the Securities Act of 1933.
II-1
<PAGE>
In January 1997, the Company issued an aggregate of 812,500 shares of Series A
Preferred Stock to Pilares Oil & Gas, Inc. in exchange for certain oil and gas
leasehold interests. At the time of the transaction, no dollar value was
assigned to the issuance. The issuance was exempt under Section 4(2) of the
Securities Act of 1933. Subsequently, in March 1997, Pilares Oil & Gas
converted all of the shares of Series A Preferred Stock into 812,500 restricted
shares of common stock.
From March 1997 through June 1998, the Company issued an aggregate of 216,100
shares of restricted common stock under Rule 506 of Regulation D and Section
4(2) of the Securities Act of 1933 to approximately twenty three (23) accredited
investors at a price of $1.00 per share, resulting in gross proceeds to the
Company of $216,100.
From May 1997 through January 1999, and once in April 1999, the Company sold an
aggregate of 5,075,200 Units in a private placement under Rule 506 of Regulation
D and Section 4(2) of the Securities Act of 1933 to a total of thirty seven (37)
accredited investors. Each Unit consisted of one share of restricted common
stock, one warrant to acquire one share of common stock within twelve (12)
months from the date of purchase, and one warrant to acquire one share of common
stock within twenty four (24) months from the date of purchase. The prices paid
for the Units, as well as the exercise price of the warrants, varied depending
on the market price of the Company's common stock at the time of each
transaction. In the aggregate, the proceeds from this offering were $371,725.
In November 1998, the Company issued an aggregate of 4,528,433 shares of
restricted common stock to five accredited entities in connection with the
purchase of two leasehold interests through Optima Investments. The issuance
was exempt under Section 4(2) of the Securities Act of 1933. At the time of the
transaction, no dollar value was assigned to the issuance. In June 1999,
pursuant to a settlement agreement with Optima, all of the shares were retired.
In February 1999, the Company issued an aggregate of 1,000,000 shares of
restricted common stock under Rule 506 of Regulation D and Section 4(2) of the
Securities Act of 1933 to Cactus Petroleum, Inc., an entity controlled by John
B. Hayes, a Director of the Company, as consideration for certain services
rendered as a consultant and finder under a verbal agreement with the Company in
connection with the Optima Investments transaction. At the time of the
transaction, no dollar value was assigned to the issuance. Mr. Hayes was also
issued 300,000 shares of restricted common stock in July 1999 pursuant to the
same exemption(s) as consideration under a verbal employment agreement with the
Company.
In March 1999, the Company issued an aggregate of 18,520 shares of common stock
under Rule 504 of Regulation D to MRC Legal Services Corporation, an accredited
entity acting as securities counsel to the Company, for services rendered. In
July 1999, an aggregate of 75,000 shares of restricted common stock was issued
to MRC Legal Services Corporation under Section 4(2) of the Securities Act of
1933 for services rendered. In September 1999, an aggregate of 400,000 shares
of restricted common stock was issued to MRC Legal Services Corporation and its
employee under Section 4(2) of the Securities Act of 1933 for services rendered,
including services in connection with the preparation and filing of the SB-2
registration statement of which this prospectus is a part. At the time of the
transaction, no dollar value was assigned to the issuance.
In March and April 1999, the Company issued an aggregate of 260,000 shares of
common stock under Rule 504 of Regulation D to PMR & Associates, an accredited
entity providing public
II-2
<PAGE>
relations services to the Company (including drafting
and disseminating news and press releases, increasing the Company's awareness in
the investment and broker-dealer communities, and consultation regarding certain
acquisitions), in exchange for services rendered. At the time of the
transaction, no dollar value was assigned to the issuance.
In March 1999, the Company sold an aggregate of $550,000 face value convertible
debentures to three (3) individuals located outside the United States under Rule
504 of Regulation D. The debentures were convertible into shares of common
stock of the Company at the discretion of the holder thereof. All of the
debentures have been converted into an aggregate of 7,685,581 shares of common
stock.
In April 1999, the Company issued 1,676,429 and 1,229,643 shares of common stock
to Robert Kent Honeyman and Howard Wilson, respectively, in exchange for
deferred compensation due to them under verbal employment agreements with the
Company. The issuance was exempt under Section 4(2) of the Securities Act of
1933. At the time of the transaction, no dollar value was assigned to the
issuance.
In June 1999, the Company issued an aggregate of 3,000,000 shares of restricted
common stock to Majed Jalali, the sole shareholder of 2-Infinity.com, Inc., in
exchange for 2,000 shares of 2-Infinity pursuant to the acquisition agreement
between the Company and Jalali. The issuance was exempt under Section 4(2) of
the Securities Act of 1933.
In June, August, October, and November 1999, the Company issued an aggregate of
445,000 restricted shares to eight existing shareholders who exercised warrants
acquired in the previous unit offering. As a result of the exercise, the
Company received $79,700. The issuance was exempt under Rule 506 and Section
4(2) of the Securities Act of 1933.
In June 1999, the Company issued an aggregate of 3,000,000 shares of restricted
common stock to Patrick Morgan, Candice Morgan, and Charles H. Downey, Jr. in
exchange for an aggregate of 10,000 shares of Voice Design, Inc. pursuant to the
acquisition agreement between Lakota and Voice Design, Inc. The issuance was
exempt under Section 4(2) of the Securities Act of 1933.
In July 1999, the Company sold an aggregate of $74,000 face value convertible
debenture to HLKT Holdings, LLC, an accredited Colorado limited liability
company under Rule 504 of Regulation D. The debenture was convertible into
shares of common stock of the Company at the discretion of the holder thereof.
The entire debenture was converted into an aggregate of 793,966 shares of common
stock.
In July 1999, the Company issued an aggregate of 495,385 shares of restricted
common stock to Brent Cavazos, an accredited investor and litigation counsel to
the Company, in exchange for services rendered. The issuance was exempt under
Rule 506 and Section 4(2) of the Securities Act of 1933.
II-3
<PAGE>
In August 1999, the Company sold an aggregate of $23,500 face value convertible
debenture to HLKT Holdings, LLC, an accredited Colorado limited liability
company under Rule 504 of Regulation D. The debenture was convertible into
shares of common stock of the Company at the
II-4
<PAGE>
discretion of the holder thereof. The entire debenture was converted into an
aggregate of 391,250 shares of common stock.
In August 1999, the Company issued an aggregate of 1,715,000 restricted shares
in the name of Jacob International, Inc., an accredited entity, pursuant to a
public relations agreement. At the time of the transaction, no dollar value was
assigned to the issuance. Of the shares issued, 428,000 were delivered to
Jacob, and the balance were held in escrow to be delivered when the closing bid
price of the Company's common stock reaches certain milestones. In November
1999, pursuant to a cancellation of the contract with Jacob, all of the shares
were returned to counsel for Lakota for retirement.
In August 1999, the Company executed a promissory note to each of Y.L. Hirsch,
Sholem Liebenthal, Avram Rothman, Joshua Heimlich, and Zvi Y. Zelikovitz, each
an accredited investor, representing an aggregate face amount of $750,000. The
issuance was pursuant to an exemption under Rule 506 of Regulation D. Each of
the notes is convertible into shares of common stock at the discretion of the
holder thereof. In addition, as part of the transaction, the Company issued an
aggregate of 5,000,000 warrants to acquire common stock to the holders of the
notes. See "Description of Securities."
In September 1999, the Company issued 1,500,000 shares of restricted common
stock to one accredited investor for $210,000. The investor also received
warrants to acquire 500,000 shares of common stock at $0.28 per share,
exercisable until September 28, 2001. Both the common stock issued to the
investor and the common stock underlying the exercise of the warrants are being
registered in the SB-2 registration statement of which this is prospectus is a
part. The issuance was pursuant to an exemption under Rule 506 of Regulation D.
EXHIBITS
Exhibit No. Description
- ----------- -----------
*2.1 Agreement and Plan of Reorganization dated November 6, 1996
between Lakota Energy, Inc. and Chancellor Trading Group,
Inc.
*2.2 Reorganization and Stock Purchase Agreement dated May 28,
1999 between Lakota Energy, Inc., 2-Infinity.com, Inc.,
and Majed Jalali.
*2.3 Reorganization and Stock Purchase Agreement dated June 8,
1999 between Lakota Energy, Inc. and Voice Design, Inc. and
its shareholders.
*2.4 Stock Transfer Agreement dated June 14, 1999 between Lakota
Energy, Inc. and Lakota Oil and Gas, Inc.
*3.1 Articles of Incorporation of Chancellor Trading Group, Inc.
filed July 14, 1995.
*3.2 Articles of Merger between Lakota Energy, Inc. and Chancellor
Trading Group, Inc. filed December 27, 1996.
*3.3 Articles of Amendment to the Articles of Incorporation of
Lakota Energy, Inc. filed August 4, 1999.
*3.4 Bylaws of Lakota Energy, Inc., as amended.
II-5
<PAGE>
*5 Opinion of Cutler Law Group with respect to legality of the
securities of the Registrant begin registered
*10.1 Oil and Gas Lease dated October 23, 1995 for the Bernard
project
*10.2 Assignment of Oil, Gas and Mineral Lease dated March 15,
1996 for the Bernard project.
*10.3 Oil, Gas and Mineral Lease dated April 26, 1996 for the
Glass Mountain project.
*10.4 Lease Agreement dated December 17, 1996 for the premises
located at 2849 Paces Ferry Road, Suite 710, Atlanta,
Georgia.
*10.5 Employment Agreement between 2-Infinity.com, Inc. and Majed
Jalali effective June 1, 1999.
*10.6 Employment Agreement between Voice Design, Inc. and Charles
Downey, Jr., effective June 14, 1999.
*10.7 Employment Agreement between Voice Design, Inc. and Patrick
"Cody" Morgan effective June 14, 1999.
*10.8 Lakota Energy, Inc. Omnibus Stock Option Plan effective
August 1, 1999.
*10.9 Agreement for investor relations services with PMR and
Associates dated January 27, 1999, as amended.
*10.10 Agreement for investor relations services with Market
Strategies dated June 4, 1999.
*10.11 Consulting Agreement with Rapid Release Research, LLC
effective August 9, 1999.
*10.12 Escrow Agreement dated August 11, 1999 between Lakota
Technologies, Inc., Rapid Release Research, LLC, and
MRC Legal Services Corporation, as escrow agent.
*10.13 Promissory Note payable to Paras Chokshi dated February 12,
1999.
*10.14 Promissory Note payable to Dipak Bhatt dated February 12,
1999.
*10.15 Promissory Note payable to Lakota Energy, Inc. from Robert
Kent Honeyman dated April 29, 1999.
*10.16 Securities Subscription Agreement dated as of March 16,
1999 between Lakota Energy, Inc. and Y.L. Hirsch.
*10.17 Securities Subscription Agreement dated as of March 16,
1999 between Lakota Energy, Inc. and Amram Rothman.
*10.18 Securities Subscription Agreement dated as of March 16,
1999 between Lakota Energy, Inc. and Joshua Heimlich.
*10.19 8% Series A Senior Subordinated Convertible Redeemable
Debenture due March 15, 2000, executed in favor of
Y.L. Hirsch.
*10.20 8% Series A Senior Subordinated Convertible Redeemable
Debenture due March 15, 2000, executed in favor of
Amram Rothman.
*10.21 8% Series A Senior Subordinated Convertible Redeemable
Debenture due March 15, 2000, executed in favor of
Joshua Heimlich.
*10.22 Escrow Agreement dated as of March 16, 1999 between Lakota
Energy, Inc., Y.L. Hirsch, Amram Rothman, Joshua
Heimlich, and Edward H. Burnbaum, Esq., as escrow agent.
II-6
<PAGE>
*10.23 Securities Subscription Agreement dated as of July 23, 1999
between Lakota Energy, Inc. and HLKT Holdings, LLC.
*10.24 1% Series B Senior Subordinated Convertible Redeemable
Debenture Due July 23, 2001, executed in favor of
HLKT Holdings, LLC.
*10.25 Escrow Agreement dated as of July 23, 1999 between Lakota
Energy,Inc., HLKT Holdings, LLC, and Edward H. Burnbaum, Esq.
as escrow agent.
*10.26 Subscription Agreement dated August 27, 1999 between Lakota
Technologies, Inc. and HLKT Holdings, LLC.
*10.27 3% Convertible Debenture due August 27, 2000 dated as of
August 27, 1999 and executed in favor of HLKT
Holdings, LLC.
*10.28 Securities Purchase Agreement dated as of August 24, 1999
by and among Lakota Technologies, Inc., Y.L. Hirsch, Sholem
Liebenthal, Avram Rothman, Joshua Heimlich, and
Zvi Y. Zelikovitz.
*10.29 8% Convertible Note due August 24, 2001, dated August 24,
1999, and executed in favor of Y.L. Hirsch.
*10.30 8% Convertible Note due August 24, 2001, dated August 24,
1999, and executed in favor of Sholem Liebenthal.
*10.31 8% Convertible Note due August 24, 2001, dated August 24,
1999, and executed in favor of Amram Rothman.
*10.32 8% Convertible Note due August 24, 2001, dated August 24,
1999, and executed in favor of Joshua Heimlich.
*10.33 8% Convertible Note due August 24, 2001, dated August 24,
1999, and executed in favor of Zvi Y. Zelikovitz.
*10.34 Common Stock Purchase Warrant dated August 24, 1999, and
executed in favor of Y.L. Hirsch.
*10.35 Common Stock Purchase Warrant dated August 24, 1999, and
executed in favor of Sholem Liebenthal.
*10.36 Common Stock Purchase Warrant dated August 24, 1999, and
executed in favor of Amram Rothman.
*10.37 Common Stock Purchase Warrant dated August 24, 1999, and
executed in favor of Joshua Heimlich.
*10.38 Common Stock Purchase Warrant dated August 24, 1999, and
executed in favor of Zvi Y. Zelikovitz.
*10.39 Escrow Agreement dated as of August 24, 1999 between Lakota
Technologies, Inc., Y.L. Hirsch, Sholem Liebenthal,
Avram Rothman, Joshua Heimlich,, Zvi Y. Zelikovitz,
and Edward H. Burnbaum, Esq., as escrow agent.
*10.40 Registration Rights Agreement dated as of August 24, 1999
between Lakota Technologies, Inc., Y.L. Hirsch, Sholem
Liebenthal, Avram Rothman, Joshua Heimlich,, and
Zvi Y. Zelikovitz.
*10.41 Guaranty dated as of August 24, 1999 by Robert Ken Honeyman
and for the benefit Y.L. Hirsch, Sholem Liebenthal,
Avram Rothman, Joshua Heimlich,, and Zvi Y. Zelikovitz.
II-7
<PAGE>
*10.42 Stock Pledge and Security Agreement dated as of August 24,
1999 by Robert Ken Honeyman and for the benefit Y.L. Hirsch,
Sholem Liebenthal, Avram Rothman, Joshua Heimlich,, and
Zvi Y. Zelikovitz.
*10.43 Tut Systems, Inc. Value Added Reseller Agreement dated May
20, 1999.
*10.44 Warrant executed in favor of Dipak Bhatt to purchase
1,250,000 shares, expiring November 30, 1999.
*10.45 Warrant executed in favor of Dipak Bhatt to purchase
1,250,000 shares, expiring November 30, 2000.
*10.46 Warrant executed in favor of Dipak Bhatt to purchase
750,000 shares, expiring December 22, 1999.
*10.47 Warrant executed in favor of Dipak Bhatt to purchase
750,000 shares, expiring December 22, 2000.
*10.48 Warrant executed in favor of Michael A. Hancock and Steven
D. Morrison to purchase 500,000 shares, expiring
December 10, 1999.
*10.49 Warrant executed in favor of Michael A. Hancock and Steven
D. Morrison to purchase 500,000 shares, expiring
December 10, 2000.
*10.50 Warrant executed in favor of Michael A. Hancock and Steven
D. Morrison to purchase 250,000 shares, expiring
December 17, 1999.
*10.51 Warrant executed in favor of Michael A. Hancock and Steven
D. Morrison to purchase 250,000 shares, expiring
December 17, 2000.
*10.52 Stock Purchase Agreement dated September 28, 1999 by and
between the Company and Matt Hensley.
*10.53 Warrant dated September 28, 1999 by and between the Company
and Matt Hensley.
10.54 Letter and Lease Agreements for South Halter Island
Prospect.
10.55 Letter and Lease Agreements for Union Central Life Insurance
Co. Well No. 1.
10.56 Voice Solutions Reseller Agreement between 3Com Corporation
and AirNexus, Inc.
10.57 Warrant executed in favor of Jeffrey A. Runner and Sally D.
Runner to purchase 200,000 shares, expiring October 23, 1999.
10.58 Warrant executed in favor of Jeffrey A. Runner and Sally D.
Runner to purchase 200,000 shares, expiring October 29, 1999.
10.59 Warrant executed in favor of Michael Baker to purchase
100,000 shares, expiring October 30, 1999.
23.1 Consent of Jones, Jensen & Company, Certified Public
Accountants
*23.3 Consent of the Law Offices of M. Richard Cutler (contained
in opinion to be filed as Exhibit 5)
*24 Power of Attorney
27 Financial Data Schedule
____________________
* Previously Filed
II-8
<PAGE>
UNDERTAKINGS
The undersigned Registrant hereby undertakes:
(1) To file, during any period in which it offers or sells securities,
a post-effective amendment to this registration statement to:
(i) Include any prospectus required by section 10(a)(3) of the
Securities Act;
(ii) Reflect in the prospectus any facts or events which, individually
or together, represent a fundamental change in the information in the
registration statement. Notwithstanding the foregoing, any increase or decrease
in volume of securities offered (if the total dollar value of securities offered
would not exceed that which was registered) and any deviation from the low or
high end of the estimated maximum offering range may be reflected in the form of
prospectus filed with the Commission pursuant to Rule 424(b) if, in the
aggregate, the changes in volume and price represent no more than a 20% change
in the maximum aggregate offering price set forth in the "Calculation of
Registration Fee" table in the effective registration statement; and
(iii) Include any additional or changed material information on the
plan of distribution.
(2) For determining liability under the Securities Act, treat each
post-effective amendment as a new registration statement of the securities
offered, and the offering of the securities at that time to be the initial bona
fide offering.
(3) File a post-effective amendment to remove from registration any of
the securities that remain unsold at the end of the offering.
(4) Insofar as indemnification for liabilities arising under the
Securities Act of 1933 (the "Act") may be permitted to directors, officers and
controlling persons of the small business issuer pursuant to the foregoing
provisions, or otherwise, the small business issuer has been advised that in the
opinion of the Securities and Exchange Commission such indemnification is
against public policy as express in the Act and is, therefore, unenforceable.
In the event that a claim for indemnification against such liabilities (other
than the payment by the small business issuer of expenses incurred or paid by a
director, officer or controlling person of the small business issuer in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the small business issuer will, unless in the opinion of its counsel
the matter has been settled by controlling precedent, submit to a court of
appropriate jurisdiction the question whether such indemnification by it is
against public policy as expressed in the Securities Act and will be governed by
the final adjudication such issue.
II-9
<PAGE>
SIGNATURES
In accordance with the requirements of the Securities Act of 1933, the
Registrant certifies that it has reasonable grounds to believe that it meets all
of the requirements for filing on Form SB-2 and authorized this registration
statement to be signed on its behalf by the undersigned, thereunto duly
authorized, in the City of Atlanta, State of Georgia, on December 10, 1999.
Lakota Technologies, Inc.
By: /s/ Robert (Ken) Honeyman
-------------------------------------
Robert (Ken) Honeyman
President and Director
By: /s/ Howard Wilson
--------------------------------
Howard Wilson
Vice President, Secretary, Chief Financial
Officer, and Director
II-10
<PAGE>
[PANACO , INC. LOGO]
July 28, 1999 By Overnight Mail
To all Working Interest Partners
Re: SAL 16146 #1 Well (2040010)
South Halter Island Prospect
S. Mary & Terrebonne Parishes, Louisiana
Gentlemen:
This letter shall serve to confirm in writing your telephone conversations last
night July 27, in which you decided unanimously to plug and abandon the
aforementioned well after reviewing the core analysis. Each of you had
previously agreed to shoot these cores during our partners meeting on July 26.
Please sign below to indicate your concurrence with the recommendation that
State Lease 16146 #1 well by plugged and abandoned.
Your cooperation is appreciated.
Very truly yours, PANACO, Inc.
/s/ Lois W. Kidd
Lois W. Kidd
Landman
This 29 day of July, 1999
I concur with the recommendation to P&A the aforementioned well. (x) yes no
Company: Lakota Energy Inc.
By: /s/ Ken Honeyman
Title: President
<PAGE>
TRIBOW 2, LLC
1010 Lamar, Suite 1580
Houston, Texas 77002 (713) 650-3614
5339 Alpha, Ste. 12D
Dallas, Texas 75240
(972) 233-2313
May 6, 1999
YORK RESOURCES, INC.
3845 F74 1960 West, Suite 250
Houston, Texas 77068
PANACO, INC.
1100 Louisiana, Suite 5100
Houston, Texas 77002
CARSON ENERGY, INC.
1114 Lost Creek Blvd, Suite 215
Austin, Texas 78746
JANIVO REALTY, INC.
3500 Oaklawn, Suite 215
Dallas, Texas 75219
LAKOTA ENERGY, INC.
2849 Paces Ferry Road, Suite 210
Atlanta, Georgia 30339
Re: South Halter Island Prospect
St. Mary.& Terrebonne Parishes,
L 0 U I S I A N A
Gentlemen:
This is the Agreement between Tribow 2, LLC, hereinafter referred to as "Tribow
2, " and "Non-Operator," Janivo Realty, Inc., hereinafter referred to as
"Janivo," PANACO, INC., hereinafter referred to as "Operator," and York
Resources, Inc., Carson Energy, Inc. and Lakota Energy, Inc., hereinafter
referred to as "NonOperators," relative to operations in the subject area.
operator and Non-Operators are sometimes hereinafter referred to collectively as
"Participants."
1.
SL 16146 and Lease Burdens
1.1 Tribow 2 represents that Tribow 2 is the owner of the
following described lease, to-wit:
Lease for Oil, Gas and Other Liquid or Gaseous Minerals dated June 15, 1998
between The State of Louisiana, as Lessor, and Tribow 2, LLC, as Lessee,
recorded in Book No. 1617 under Entry No. 1,027,605 of the Conveyance Records of
Terrebonne Parish, and in Book 41-Q, Entry No. 262,703 of the Conveyance Records
of St. Mary Parish, covering 620.0 acres, more or less, being a portion of State
Tract 30962,
hereinafter referred to as "SL 16146."
<PAGE>
1.2 Tribow 2 further represents that SL 16146 is subject only
to the following:
(a) royalty of twenty-two percent (22.0%) in favor of the Lessor;
(b) overriding royalties in the amount of three percent (3.0%) in favor of
Burton C. Bowen, et al;
(c) carried working interest effective at "Completion Point," as hereinafter
defined, in the "Initial Well" provided for in Article 5 below, in the
amount of twenty percent (20.0%), in favor of Tribow 2, Janivo
and PANACO, Inc.,
hereinafter referred to as "Lease Burdens."
1.3 The carried working interests of Tribow 2, Janivo and PANACO, Inc. are
subject to and the result of that certain unrecorded Leasebank Exploration
Agreement dated April 24, 1998, under the terms of which Janivo and PANACO, Inc.
underwrite certain prospect development costs for Tribow 2. For the limited
purposes of referring to their respective shares of such carried working
interest, Tribow 2 (75.0%), Janivo (16.667%) and PANACO, Inc. (8.333%) are
hereinafter referred to collectively as "Tribow 2, et al."
2.
Prospect Acquisition Fee
2.1 As consideration for Participants' interests in SL 16146 and the
geological information and data heretofore furnished by Tribow 2, Participants
agree to pay Tribow 2, in cash, and Tribow 2 will carry, as a "Prospect
Acquisition Fee, 11 the sum of Three Hundred Twenty Thousand ($320,000) Dollars,
in the following
proportions:
York Resources, Inc. $ 96,000
PANACO, Inc. $ 80,000
Tribow 2 $ 65,600
Carson Energy, Inc. $ 54,400
Lakota Energy, Inc. $ 24,000
---------
$320,000
2.2 Tribow 2 will notify Participants when all Participants have executed or
ratified this Agreement. Participants agree to deliver, to Tribow 2, their
respective checks for the Prospect Acquisition Fee within ten (10) days
following receipt of notice that all Participants have executed or ratified this
Agreement.
<PAGE>
2.3 In the event the Initial Well is not commenced on or before June 15,
1999 as provided in Section 5.3 below, each Participant shall have the right.,
until July 1, 1999 at 5:00 p.m, to withdraw from this Agreement. In the event
a Participant withdraws from this Agreement, Tribow 2 will refund such
Participant's share of the Prospect Acquisition Fee within ten (10) days
following Participant's election to withdraw.
3.
Assignment
In consideration of the Prospect Acquisition Fee and the drilling of the Initial
Well to Completion Point, Tribow 2 will, within fifteen (15) days following
receipt of the Prospect Acquisition Fee from Participants, deliver an after
Completion Point Assignment on the form attached hereto, marked Exhibit "All and
made a part hereof for all purposes ("Assignment"), to the end that SL 16146
shall be owned as follows:
York Resources, Inc. 24.00000%
PANACO, Inc. 21.66666%
Carson Energy, Inc. 13.60000%
Lakota Energy, Inc. 6.00000%
Janivo Realty, Inc. 3.33334%
Tribow 2, LLC 31.40000%
---------
100.00000%
4.
Operating Agreement
Concurrently with the execution of this Agreement, Participants and Tribow 2, et
al are executing the operating Agreement attached hereto, marked Exhibit "B" and
made a part hereof for all purposes ("Operating Agreement"). The operating
Agreement designates PANACO, Inc. as "Operator" and will control all operations
on the "Contract Area" depicted therein, including SL 16146 and the Initial
Well; provided, however, in the event of a conflict between this Agreement and
the Operating Agreement, then this Agreement shall take precedence.
5.
Initial Well
5.1 Before commencing operations on the Initial well, Operator will furnish
Non-Operators with an Authority For Expenditure to drill, evaluate and complete
the said well ("AFE"). No more than thirty (30) days before commencing
operations on the
<PAGE>
well, operator will call for each Non-Operator's share of the amount of the AFE
to drill and evaluate the well to Completion Point and plug and abandon the well
as a dry hole. Non-Operators will pay the amount specified within ten (10) days
following receipt of the AFE. At Completion Point in the Initial Well, subject
to the rights of Non-Operators, under Article 6 below, to participate or not
participate in subsequent operations, Operator will call for each Non-Operator's
share of the amount of the AFE to complete the well as an oil or gas well, or
the estimated cost to sidetrack or deepen the well together with an appropriate
AFE, and Non-Operators will pay the amount specified within three (3) business
days following receipt of Operator's Call for Funds.
5.2 In the event a Non-Operator fails to timely pay its share of the AFE to
drill and evaluate the well to completion point and plug and abandon the well
as a dry hole, or the AFE to sidetrack or deepen the well, such Non-Operator's
rights hereunder will terminate without notice. The Prospect Acquisition Fee
will not
be refunded and the interest of the defaulting Non-operator shall be subject to
Article 10 below.
5.3 Subject to the receipt of the amount of the AFE to drill and evaluate
the well to Completion Point and plug and abandon the Initial Well as a dry
hole, from all Non-Operators, Operator will, on or before June 15, 1999,
commence actual drilling on the Initial Well at a surface location 1,350.0 feet
due east of the surface location of the Scana Petroleum No. 1 State Lease No.
15119 Well, or 3,450.0 feet from the north line, 2,200.0 feet from the west line
of Section 27, Township 19 South, Range 12 East, Terrebonne Parish. Operator
will thereafter drill said well with due diligence and in a workmanlike
manner to:
(a) a total vertical depth of 12,300.0 feet below the surface at a bottomhole
location approximately 1,650.0 feet south and 2,500.0 feet west of the surface
location, or
(b) a depth, en route to the depth specified in (a) above, sufficient to drill
through and fully evaluate that certain series of sands or formations
encountered between the depths of 11,225.0 feet and 12,115.0 feet in the
Goldking No. 1 State Lease No. 7637 Well located in Section 27, Township 19
South, Range 12 East, Terrebonne Parish, plus two hundred feet (200.01), in an
effort to test the next sand or formation in the series (which sand is not
penetrated by the Goldking Well) encountered between the depths of 12,250.0 feet
a , and 12,360.0 feet in the Union Oil of California No. 1 State Lease No. 2784
Well located in Four League Bay of the same Township ("Big 'B' 12,200.0 foot
Sand"),
<PAGE>
hereinafter referred to as "Objective Depth," or
(c) a depth at which mechanical difficulty, loss of circulation, water flow,
abnormal pressure, heaving shale, salt or other conditions are encountered which
make drilling abnormally difficult or hazardous, causes sticking of drillpipe or
casing or any other similar difficulties which preclude drilling ahead under
normal procedures, hereinafter referred to as "Gulf Coast Conditions,"
whichever is the lesser depth.
5.4 At such time as the Initial Well has been drilled to one of the depths
specified in Section 5.3 above, operator will run a Dual Induction or other
equivalent open hole electrical log from the total depth drilled to the bottom
of the surface casing, and such other methods and tools of evaluation that will
insure a proper evaluation of all formations in the well indicating
hydrocarbons, if under the then existing conditions, such methods of evaluation
are prudent.
5.5 "Completion Point" in the Initial Well shall be defined and occur at
such time as the well has been drilled to one of the depths specified in Section
5.3 above and the electric log and other tools of evaluation have been run, plus
24 hours. The entire cost, risk and liability of drilling, evaluating and
completing the Initial Well, prior to Completion Point, will be shared as
follows:
York Resources, Inc. 30.0%
PANACO, Inc. 25.0%
Tribow 2 20.5%
Carson Energy, Inc. 17.0%
Lakota Energy, Inc. 7.5%
Tribow 2, et al -0-
------
100.0%
5.6 Participants willfully indemnify and hold Tribow 2, et al harmless from
any and all claims or causes of action arising directly or indirectly to an
undivided 20.0% of the costs and expenses of all operations on the Initial Well
until Completion Point.
6.
Completion Point
6.1 At Completion Point in the Initial Well, notwithstanding anything to the
contrary in Article VI.B. of the Operating
<PAGE>
Agreement, Participants and Tribow 2, et al will make the following elections:
(a) to complete the well as an oil or gas well, and if all Participants and
Tribow 2, et al agree, the risk, cost and expense of liability of such operation
will be shared as follows:
York Resources, Inc. 24.00000%
PANACO, Inc. 21.66666%
Carson Energy, Inc. 13.60000%
Lakota Energy, Inc. 6.00000%
Janivo 3.33334%
Tribow 2 31.40000%
---------
100.00000%
(b) to sidetrack or deepen the well, and if all Participants agree, the cost and
risk of such operation will be shared as follows:
York Resources, Inc. 30.0%
PANACO, Inc. 25.0%
Tribow 2 20.5%
Carson Energy, Inc. 17.0%
Lakota Energy, Inc. 7.5%
Tribow 2, et al -0-
-------
100.0%
including a Triple Combination Dual Induction Log or other equivalent open hole
electrical log over the unlogged portion of the hole and such other methods and
tools of evaluation to insure a proper test of the well.
(c) to plug and abandon the well, and if all Participants and Tribow 2, et al
agree, the cost and risk of such operation will be shared as set forth in
Section 6.1 (b) above.
6.2 Following operations to sidetrack or deepen the Initial Well, all of
Section 6.1 will apply to subsequent operations on the well, and the well shall
again have reached Completion Point.
6.3 At Completion Point, an election by the party or parties owning or
representing the largest percentage interest in the Initial Well to complete
the well as an oil or gas well shall take precedence over an election to deepen
the well, which shall take precedence over an election to sidetrack the well,
which shall take precedence over an election to plug and abandon the well. If
the parties cannot agree on the sand or formation in which to complete the well,
an election, by the party or parties owning or
<PAGE>
representing the largest percentage interest in the well, to complete in a
deeper sand or formation shall take precedence over an election to complete in a
shallower sand or formation.
6.4 At Completion Point, if less than all parties elect to deepen,
sidetrack, or complete the well as an oil or gas well, Article VI B. 2. of the
Operating Agreement shall not apply to such operations and the interest of the
non-participating parties shall be subject to Article 10 below.
6.5 If less than all parties elect to complete the well and the well results
in a dry hole, the cost and risk to plug and abandon said well will be shared by
the parties participating in the completion attempt.
7.
Supplemental Well
7.1 In the event the Initial Well is not drilled to the Objective Depth due
to Gulf Coast Conditions and is completed as an oil or gas well or plugged and
abandoned as a dry hole, Operator shall, within sixty (60) days after
completing or abandoning said well, propose a new well by furnishing
Non-operators with an APE therefor ("Supplemental Well") in an effort to reach
the Objective Depth. Non-Operators will, within thirty (30) days after receipt
of the Supplemental Well AFE, notify Operator that Non- Operators will
participate or not participate in the Supplemental Well.
7.2 The interest of the Non-Operators electing not to participate in the
Supplemental Well shall be subject to the provisions of Article 10 below;
provided, however:
(a) If the Initial Well was completed as an oil or gas well, the interest of
those Non-Operators that joined in and paid their share of the cost to complete
the well as an oil or gas well shall retain all rights to the well and SL 16146
insofar as said lease covers all rights between the surface-and the total depth
drilled in the Initial Well, plus 100.0 feet, and the interest of such
Non-Operator in and to the well and SL 16146 between the surface and the total
depth drilled in the Initial Well, plus 100.0 feet, shall not be subject to
Article 10 below.
(b) If the cost of the Initial Well exceeds the original AFE by fifteen
percent (15.0%) then Participants shall have "earned," under the terms of this
Agreement, all rights to all depths, and there shall be no requirement to
participate in the Supplemental Well. If the
<PAGE>
Supplemental Well is proposed, the drilling of such well and the penalty for
failure to participate in such well shall be governed by Article VI. B. of the
Operating Agreement.
7.3Failure by a Non-Operator to timely notify operator that a Non-Operator will
participate in the Supplemental Well shall constitute an election to not
participate in the well.
7.4The Supplemental Well will be drilled in a like manner and under the same
terms and conditions as the Initial Well, and the term "Initial Well" will
include the Supplemental Well. The entire cost, risk and expense of drilling the
Supplemental Well to Completion Point shall be shared as follows:
York Resources, Inc. 30.0%
PANACO, Inc. 25.0%
Tribow 2 20.5%
Carson Energy, Inc. 17.0%
Lakota Energy, Inc. 7.5%
Tribow 2, et al -0-
------
100.0%
7.5 In the event the Supplemental Well results in an oil or gas well or as a
dry hole after having reached the Objective Depth, or without having reached the
Objective Depth due to Gulf Coast Conditions, no further drilling is required of
Participants under the terms of this Agreement.
7.6 If a Non-Operator advances its share of the AFE for the Supplemental
Well but less than 100.0% interest in the well is subscribed under Article 10
below, Operator will promptly refund such Non-Operator's share of the AFE for
the Supplemental Well. In the event 100.0% interest in the Supplemental Well is
subscribed under this Article 7 or under Article 10 below and the well is not
timely commenced, all Participants will immediately re-assign to Tribow 2, all
rights in and to SL 16146, less and except rights in and to the Initial well and
SL 16146 to be retained under Section 7.2 above.
8.
Drilling Information
8.1 During all operations on the Initial Well, operator will insure that
Non-operators and Tribow 2, et al have access to said well at all times,
including freedom of the derrick floor, at their sole risk and expense, and
fully advise Non-operators and Tribow 2, et al of the depth and condition of the
well at all times. In the event of evaluation, operator will notify
Non-Operators and
<PAGE>
Tribow 2, et al in sufficient time so that representatives can be present.
8.2 Operator will promptly furnish Non-operators and Tribow 2, et al with a
copy of the location plat, permit to drill, all results of the tools of
evaluation and copies of all forms required by regulatory bodies for the Initial
Well, and from the time operations for drilling are commenced until the well is
completed, with daily drilling progress reports by facsimile. The total number
of copies required, along with contact names and addresses,
shall be supplied to the Operator by Non-Operators for the disbursement of well
data and information.
9.
Release of SL 16146
If a party to this Agreement elects to release, surrender or otherwise let SL
16146 expire, such party will first give notice to the other parties sixty (60)
days in advance of the date on which SL 16146 is to be surrendered, and the
interest of the party electing to surrender SL 16146 shall be subject to Article
10 below.
10.
Available Interest
10.1 In the event a Participant:
(a) fails to timely pay its share of the Prospect Acquisition Fee; ,
(b) fails to timely pay in advance its share of the AFE for the Initial
well;
(c) elects not to participate in the completion, sidetracking or deepening
of the Initial Well at Completion Point;
(d) fails to participate in the Supplemental Well;
(e) elects to surrender SL 16146;
Operator will advise the other Participants of the amount of interest of the
defaulting or non-participating Participant ("Available Interest"). The
Participants receiving notice shall, within forty-eight (48) hours after receipt
of such notice (twenty-four [24] hours corresponds to one (1) business day), if
a drilling or completion rig is on location, or within five (5) days if a
<PAGE>
drilling or completion rig is not on location, advise operator of such
Participants' election to:
(f) limit participation to such Participant's interest in the well,
operation or SL 16146 to which the Available Interest applies, to such
Participant's original interest; or
(g) in addition to such Participant's original interest, acquire such
Participant's proportionate share, or more, of the Available Interest.
Failure to timely advise operator of (f) or (g) above shall constitute an
election, under (f) above, to limit participation to such Participant's original
interest.
10.2 If the non-defaulting or participating Participants do not acquire all
of the Available Interest, Tribow 2 will use its best efforts to obtain new
participants for the remaining Available Interest under terms and conditions of
Tribow 2's choice. In the event Tribow 2 obtains an offer from a Participant
for the Available Interest on terms more favorable than the terms under which
the non-defaulting or participating Participants acquired their interest, Tribow
2 shall not be required to offer such more favorable terms to the non-defaulting
or participating Participants.
10.3 Any assignment of Available Interest will be made without warranty
except as against the acts of the assignor and free and clear of any overriding
royalty or other similar burden, except the Lease Burdens; however, reassignment
of Available Interest shall not relieve the assignor of obligations and
liabilities
incurred prior to the effective date of the assignment.
10.4 In the event a drilling or completion rig is on location while
Participants have the right to make the elections afforded under Section 10.1
above, Participants shall bear the entire risk and expense of the rig as their
interest appears in the well prior to Completion Point.
11.
Miscellaneous
11.1 This Agreement will extend to and be binding upon the parties hereto,
their representatives, successors and assigns.
11.2 This Assignment may be executed in counterparts, and each executed
counterpart shall be deemed an original and the signature pages of each
counterpart may be compiled to form one original and
<PAGE>
shall have the same effect as if one original had been executed by all parties.
This Agreement shall be binding on those- parties that sign a counterpart,
whether all parties sign a counterpart or not.
11.3 If the foregoing correctly reflects Participants' and Janivo Is
understanding of the Agreement, kindly sign this Agreement (including the
Operating Agreement), and return one executed copy to Tribow 2 on or before May
20, 1999. If this Agreement is not timely executed and returned, this Agreement
may not thereafter be
accepted without Tribow 2's written consent.
Very truly yours,
TRIBOW 2, LLC
By: /s/ Burton C. Bowen
Vice President
ACCEPTED AND AGREED TO this the
day of 1999.
YORK RESOURCES, INC.
By: /s/ unknown
Name:
Title:
ACCEPTED AND AGREED TO this the
day of 1999.
PANACO, INC.
By: /s/ unknown
Name:
Title:
<PAGE>
ACCEPTED AND AGREED TO this the
day of 1999.
CARSON ENERGY, INC.
By: /s/ E. Carter Bills, II
E. Carter Bills, II
ACCEPTED AND AGREED TO this the
day of 1999.
JANIVO REALTY, INC.
By: /s/ Anthony E. Baggett
Anthony E. Baggett
President
ACCEPTED AND AGREED TO this the
10 day of May , 1999.
LAKOTA ENERGY, INC.
By: /s/ R. K. Honeyman
R. K. Honeyman
President
<PAGE>
EXHIBIT A
ATTACHED TO and made a part of SHI. 2, that certain Participation Agreement
dated May 6, 1999 by Tribow 2, LLC, et al, relative to operations in the South
Halter Island Prospect, St. Mary and Terrebonne Parishes, Louisiana.
STATE OF LOUISIANA SHI.4
PARISHES OF TERREBONNE AND ST. MARY
ASSIGNMENT OF UNDIVIDED INTEREST IN'
STATE LEASE NO. 16146
SOUTH HALTER ISLAND PROSPECT
KNOW ALL 14EN BY THESE PRESENTS: THAT,
For and in consideration of the sum of One Hundred and No/100 Dollars and other
Valuable Consideration ($100.00 & OVC), the receipt and sufficiency of which are
hereby acknowledged,
TRIBOW 2, LLC
a Texas limited liability company
1010 Lamar, Suite 1580
Houston, Texas 77002
("Assignor") does hereby bargain, grant, sell, assign and convey unto
YORK RESOURCES, INC.
a Texas corporation
3845 FM 1960 West, Suite 250
Houston, Texas 77068
PANACO, INC.
a Delaware corporation
1100 Louisiana, Suite 5100
Houston, Texas 77002
CARSON ENERGY, INC.
a Texas corporation
1114 Lost Creek Boulevard, Suite 120
Austin, Texas 78746
LAKOTA ENERGY, INC.
2849 Paces Ferry Road. Suite 210
Atlanta, Georgia 30339
JANIVO REALTY, INC.
a ________________ corporation
3500 Oaklawn, Suite 215
Dallas, Texas 75219
(Assignees"), an undivided Sixty-eight and Six-tenths Percent (68.6%) interest
in and to the following described lease, to-wit:
<PAGE>
Lease for Oil, Gas and other Liquid or Gaseous Minerals dated June 15, 1998
between The State of Louisiana, as Lessor, and Tribow 2, LLC, as Lessee,
recorded in Book No. 1617 under Entry No. 1,027,605 of the Conveyance Records of
Terrebonne Parish, and in Book 41-Q, Entry No. 262,703 of the Conveyance Records
of St. Mary Parish, covering 620.0 acres, more or less, being a portion of State
Tract 30962 ("SL 16146"),
in the following proportions:
York Resources, Inc. 24.00000%
PANACO, Inc. 21.66666%
Carson Energy, Inc. 13.60000%
Lakota Energy, Inc. 6.00000%
Janivo Realty, Inc. 3.33334%
---------
68.60000%
subject to the following terms and conditions, to wit:
1.
The interests herein conveyed are subject to, and Assignees agree to assume and
bear their respective share of (a) the lessor's royalty, and (b) those certain
overriding royalties in the total Amount of Three Percent (3.0%) created by
(SHI.3) Assignment of ' overriding Royalties - South Halter Island Prospect
dated 1999 between Tribow 2, LLC, as Assignor, and Burton C. Bowen, et al,
as Assignees, recorded under Original Entry No._____ in Book___________
at Page _____________ of the Conveyance Records of Terrebonne Parish, and under
original Entry No. in Book at Page of the
Conveyance Records of St. Mary Parish.
2.
In the event SL 16146 covers less than the entire mineral interest in and to the
leased premises, or in the event Assignor owns less than 100.0% interest in and
to SL 16146, the overriding royalty described in Subparagraph ________
(b) above will be reduced to the proportion that the mineral interest actually
covered by said lease, or the interest actually owned by Assignor, bears to
100.0%.
3.
Assignees expressly agree to fully protect, defend and indemnify and hold
Assignor, its officers, employees, agents, successors and assigns free and
harmless from and against each and every claim, demand, liability or cause
of action, on account of lease maintenance matters (including payment of
royalty), personal injury or death, property damage, damage to the
environment, including any claim, demand or cause of action asserted by any
governmental agency or any person, corporation or other entity for personal
injury (including sickness, disease or death), property
damage or damage to the environment resulting from the discharge or release of
any chemical, material or emission into one or more of the environmental media
at or in the vicinity of the Leases or obligations imposed upon Assignor by
contract or by rules and regulations of the Louisiana Department of Conservation
and other applicable laws, rules and regulations requiring plugging and
abandoning of each Well (including but not limited to salt water disposal
<PAGE>
therewith, including but not limited to any and all costs, expenses, damages and
penalties, attorneys fees or losses in connection therewith, made or asserted by
third persons, including governmental agencies and political subdivisions, or by
Assignees, their employees, agents or servants until "Completion Point" in the
"Initial Well" as defined in SHI.2, that certain unrecorded Participation
Agreement dated May 6, 1999 between Assignor and Assignees. Notwithstanding
anything herein to the contrary, no Assignee shall individually be responsible,
under the provisions of this indemnity and hold harmless provision, for more
than each Assignee's interest in this indemnity obligation, which indemnity
obligation for each Assignee shall be equal to that Assignee's percentage
interest in the Leases. Following Completion Point, Assignor shall assume and
bear its thirty-one and four-tenths percent (31.4%) of all risk, cost and
expense arising out of operations on the Leases.
4.
No change in ownership of the overriding royalty described in Subparagraph (b)
above, or any interest therein, or change in the capacity of status of Assignor
will impose any additional burden on Assignees or impair the effectiveness of
payments made by Assignees, unless Assignees will have been furnished,
forty-five (45) days before payment is due, a Certified Copy of the recorded
instrument or judgement evidencing such change of ownership or capacity.
5.
Assignees accept the interests herein conveyed and will fulfill all obligations,
conditions and stipulations of the Leases, as well as the rules and regulations
of the State Mineral Board of the State of Louisiana so far as applicable
thereto.
6.
The Leases are not dedicated to a Gas Purchase or Sales Contract.
7.
PANACO, Inc. accepts responsibility as Operator of SL 16146 and as such is
responsible for the disbursement of royalties to The State of Louisiana.
8.
This Assignment will be binding upon and inure to the benefit of Assignor and
Assignees, their respective successors and assigns forever.
9.
Except as against the acts or omissions by, through or under Assignor, this
Assignment is made without warranty, express or implied, even to the return of
the purchase price, but is with complete transfer and subrogation of all rights
and actions in warranty against the lessors.
10.
This Assignment may be executed in multiple counterparts and each executed
counterpart shall be deemed an original, and the signature pages may be compiled
to form
<PAGE>
original,, and the signature pages may be compiled to form one original and
shall have the same effect as if one original had been executed by all parties.
IN WITNESS WHEREOF this Assignment is executed on this the
day of 1999.
ASSIGNOR
Thus done and signed by TRIBOW 2, LLC, at Houston,. Harris County,, Texas,, on
this day of 1999, in the
presence of the undersigned competent witnesses, who have signed 'these presents
with the said Appearer and me,, Notary, after reading of the whole.
WITNESSES:
- ----------------------
- ------------------------
TRIBOW 2, LLC
BY: /s/ Burton C. Bowen
- ---------------------------
Burton C. Bowen
Vice-President
NOTARY PUBLIC
ASSIGNEES
Thus done and signed by YORK RESOURCES, INC., at Houston, Harris County, Texas,
on this day of 1999, in the presence of the undersigned
competent witnesses, who have signed these presents with the said Appearer and
me, Notary, after reading of the whole.
WITNESSES:
- ----------------------
- ---------------------
YORK RESOURCES, INC.
BY: /s/ unknown
- ----------------------
Name:
Title:
NOTARY PUBLIC
<PAGE>
Thus done and signed by PANACO, INC., at Houston, Harris County, Texas, on this
day of 1999, in the
presence of the undersigned competent witnesses, who have signed these presents
with the said Appearer and me, Notary, after reading of the whole.
WITNESSES:
- ----------------
- ----------------
PANACO, INC.
By: /s/ Unknown
- ------------------
Name:
Title:
NOTARY PUBLIC
Thus done and signed by CARSON ENERGY, INC., at Austin, Travis County, Texas, on
this day of , 1999, in the presence of the undersigned competent
witnesses, who have signed these presents with the said Appearer and me, Notary,
after reading of the whole.
WITNESSES:
- -----------------------
- -----------------------
CARSON ENERGY, INC.
By: /s/ E. Carter Bills, II
- ---------------------------------
E. Carter Bills, II
President
<PAGE>
NOTARY PUBLIC
<PAGE>
Thus done and signed by LAKOTA ENERGY, INC., at Atlanta, County, Georgia, on
this day of
1999, in the presence of the undersigned competent witnesses, who have signed
these presents with said Appearer and me,, Notary, after reading of the whole.
WITNESSES:
- ----------------------
- ----------------------
LAKOTA ENERGY INC.
BY: /s/ Unknown
- -----------------
Name:
Title:
NOTARY PUBLIC
Thus done and signed by JANIVO REALTY, INC., at Dallas, Dallas County, Texas, on
this day-of 1999, in the presence of the undersigned competent
witnesses, who have signed these presents with the said Appearer and me, Notary,
after reading of the whole.
WITNESSES:
- -----------------------
- ------------------------
.JANIVO REALTY, INC.
By: /s/ Anthony E. Baggett
- ------------------------------
Anthony E. Baggett
President
NOTARY PUBLIC
<PAGE>
A.A.P.L. FORM 610-1982
MODEL FORM OPERATING AGREEMENT
EXHIBIT B
OPERATING AGREEMENT
DATED
May 6, 1999 ,
OPERATOR PANACO, Inc.
CONTRACT AREA SOUTH HALTER ISLAND
COUNTY OR PARISH OF St. Mary & Terrebonne STATE OF Louisiana
[COPYRIGHT 1982 - ALL RIGHTS RESERVED AMERICAN ASSOCIATION OF PETROLEUM LANDMEN,
2408 CONTINENTAL LIFE BUILDING, FORT WORTH, TEXAS, 76102, APPROVED FORM.
A.A.P.L. NO. 610 - 1982 REVISED
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
OPERATING- AGREEMENT
THIS AGREEMENT, entered into by and between PANACO, Inc. hereinafter
designated and referred to as "Operator", and the signatory party or parties
other than Operator, sometimes hereinafter referred to individually herein as
"Non-Operator", and collectively as "Non-Operators".
WITNESSETH:
WHEREAS, the parties to this agreement are owners of oil and gas leases and/or
oil and gas interests in the land identified in Exhibit "A", and the parties
hereto have reached an agreement to explore and develop these leases and/or oil
and gas interests for the production of oil and gas to the extent and as
hereinafter provided,
NOW, THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the meanings
here ascribed to them:
A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas condensate,
and all other liquid or gaseous hydrocarbons and other marketable substances
produced therewith, unless in intent to limit the inclusiveness of this term is
specifically stated.
B. The terms "oil and gas lease". "lease" and "leasehold" shall mean the oil
and gas leases covering tracts of land lying within the Contract Area which are
owned by the parties to this agreement.
C. The term "oil and gas interests" shall mean unleased fee and mineral
interests in tracts of land lying within the Contract Area which are owned by
parties to this agreement.
D. The term "Contract Area" shall mean all of the lands, oil and gas leasehold
interests and oil and gas interests intended to be developed and operated for
oil and gas purposes under this agreement. Such lands, oil and gas leasehold
interests and oil and gas interests are described in Exhibit "A".
E. The term "drilling Unit" shall mean the area fixed for the drilling of one
well by order or rule of any state or federal body having authority. If a
drilling unit is not fixed by any such rule or order, a drilling unit shall be
the drilling unit as established by the pattern of drilling in the Contract Area
or as fixed by express agreement of the Drilling Parties.
F. The term "drillsite" shall mean the oil and gas lease or interest on which a
proposed well is to be located.
G. The terms "Drilling Party" and "Consenting Party" shall mean a party who
agrees to join in and pay its share of the cost of any operation conducted under
the provisions of this agreement.
H. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a party
who elects not to, participate in a proposed operation.
Unless the context otherwise clearly indicates, words used in the singular
include the plural, the plural includes the singular, and the neuter gender
includes the masculine and the feminine.
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are incorporated
in and made a part hereof:
A. Exhibit "A", shall include the following information:
(1) Identification of lands subject to this agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Percentages or fractional interests of parties to this agreement,
(4) Oil and gas leases and/or oil and gas interests subject to this agreement,
(5) Addresses of parties for notice purposes.
B. [OMITTED]
C. Exhibit "C", Accounting Procedure.
D. Exhibit "D", Insurance.
E. Exhibit "E", Gas Balancing Agreement.
F. Exhibit "F", Non-Discrimination and Certification of Non-Segregated
Facilities.
G. [OMITTED]
If any provision of any exhibit, except Exhibits "E" and "G", is inconsistent
with any provision contained in the body of this agreement, the provisions in
the body of this agreement shall prevail.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE III.
INTERESTS OF PARTIES
A. [OMITTED]
B. Interest of Parties in Costs and Production:
Unless changed by other provisions, all costs and liabilities incurred in
operations under this agreement shall be borne and paid, and all equipment and
materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit "A". In the same manner,
the parties shall also own all production of oil and gas from the Contract Area
subject to the payment of royalties to the extent of Leasehold Burdens which
shall be borne as hereinafter set forth.
Regardless of which party has contributed the lease(s) and/or oil and gas
interest(s) hereto on which royalty is due and payable, each party entitled to
receive a share of production of oil and gas from the Contract Area shall bear
and shall pay or deliver, or cause to be paid or delivered, to the extent of its
interest in such production, the royalty amount stipulated hereinabove and shall
hold the other parties free from any liability therefor. No party shall ever be
responsible, however, on a price basis higher than the price received by such
party, to any other party's lessor or royalty owner, and if any such other
party's lessor or royalty owner should demand and receive settlement on higher
price basis, the party contributing the affected lease shall bear the additional
royalty owner should demand and receive settlement on a higher price basis, the
party contributing the affected lease shall bear the additional royalty burden
attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby.
C. Excess Royalties, Overriding Royalties and Other Payments:
Unless changed by other provisions, if the interest of any party in any
lease covered hereby is subject to any royalty, overriding royalty, production
payment or other burden on production in excess of the amount stipulated in
Article III.B., such party so burdened shall assume and alone bear all such
excess obligations and shall indemnify and hold the other parties hereto
harmless from any and all claims and demands for payment asserted by owners of
such excess burden.
D. Subsequently Created Interests:
If any party should hereafter create an overriding royalty, production
payment or other burden payable out of production attributable to its working
interest hereunder, or if such a burden existed prior to this agreement and is
not set forth in Exhibit "A", or was not disclosed in writing to all other
parties prior to the execution of this agreement by all parties, or is not a
jointly acknowledged and accepted obligation of all parties (any such interest
being hereinafter referred to as "subsequently created interest" irrespective of
the timing of its creation and the party out of whose working interest the
subsequently created interest is derived being hereinafter referred to as
"burdened party"), and:
1. If the burdened party is required under this agreement to assign or
relinquish to any other party, or parties, shall receive said assignment and/or
production free and clear of said subsequently created interest and the burdened
party shall indemnify and save said other party, or parties, harmless from any
and all claims and demands for payment asserted by owners of the subsequently
created interest; and,
2. If the burdened party fails to pay, when due, its share of expenses
chargeable hereunder, all provisions of Article VII.B. shall be enforceable
against the subsequently created interest in the same manner as they are
enforceable against the working interest of the burdened party.
ARTICLE IV.
TITLES
A. [SECTION OMITTED]
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT 1982
ARTICLE IV
continued
Option No. 2: Costs incurred by Operator in procuring abstracts and fees paid
outside attorneys for title examination (including preliminary, supplemental,
shut-in gas royalty opinions and division order tide opinions) shall be borne by
the Drilling Parties in the proportion that the interest of each Drilling Party
bears to the total interest of all Drilling Parties as such interests appear in
Exhibit "A". Operator shall make no charge for services rendered by its staff
attorneys or other personnel in the performance of the above functions.
Operator shall be responsible for the preparation and recording of pooling
designations or declarations as well as the conduct of hearings before
governmental agencies for the securing of spacing or pooling orders. This shall
not prevent any party from appearing on its own behalf at any such hearing.
No well shall be drilled on the Contract Area until after (1) the title to the
drillsite or drilling unit has been examined as above provided, and (2) the tide
has been approved by the examining attorney or tide has been accepted by all of
the parties who are to par-ticipate in the drilling of the well.
B. [SECTION OMITTED]
2. Loss by Non-Payment or Erroneous Payment of Amount Due: [OMITTED]
<PAGE>
3. Other Losses: All losses of title incurred, shall be joint losses and shall
be borne by all parties in proportion to their interests. There shall be no
readjustment of interest in the remaining portion of the Contract Area.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE V.
OPERATOR
A. Designation and Responsibilities of Operator:
PANACO, Inc. shall be the Operator of the Contract Area, and shall conduct and
direct and have full control of all operations on the Contract Area as permitted
and required by, and within the Omits of this agreement. It shall conduct all
such operations in a good and workmanlike manner, but it shall have no liability
as Operator to the other parties for losses sustained or liabilities incurred,
except such as may result from gross negligence or willful misconduct.
B. Resignation or Removal of Operator and Selection of Successor:
1. Resignation or Removal of Operator: Operator may resign at any time by giving
written notice thereof to Non-Operators. If Operator terminates its legal
existence, no longer owns an interest hereunder in the Contract Area, or is no
longer capable of serving as Operator, Operator shall be deemed to have resigned
without any action by Non-Operators, except the selection of a successor.
Operator may be removed if it fails or refuses to carry out its duties
hereunder, or becomes insolvent, bankrupt or is placed in receivership, by the
affirmative vote of two (2) or more Non-Operators owning a majority interest
based on ownership as shown on Exhibit "A" remaining after excluding the voting
interest of Operator. Such resignation or removal shall not become effective
until 7:00 o'clock A.M. on the first day of the calendar month following the
expiration of ninety (90) days after the giving of notice of resignation by
Operator or action by the Non-Operators to remove Operator, unless a successor
Operator has been selected and assumes the duties of Operator at an earlier
date. Operator, after effective date of resignation or removal, shall be bound
by the terms hereof as a Non-Operator. A change of a corporate name or structure
of Operator or transfer of Operator's interest to any single subsidiary, parent
or successor corporation shall not be the basis for removal of Operator.
2. Selection of Successor Operator: Upon the resignation or removal of Operator,
a successor Operator shall be selected by the parties. The successor Operator
shall be selected from the parties owning an interest in the Contract Area at
the time such successor Operator is selected. The successor Operator shall be
selected by the affirmative vote of two (2) or more parties owning a majority
interest based on ownership as shown on Exhibit "A"; provided, however, if in
Operator which has been removed fails to vote or votes only to succeed itself,
the successor Operator shall be selected by the affirmative vote of two (2) or
more parties owning a majority interest based on ownership as shown on Exhibit
"A" remaining after excluding the voting interest of the Operator that was
removed.
C. Employees:
The number of employees used by Operator in conducting operations
hereunder, their selection, and the hours of labor and the compensation for
services performed shall be determined by Operator, and all such employees shall
be the employees of Operator.
D. Drilling Contracts:
All wells drilled on the Contract Area shall be drilled on a competitive
contract basis at the usual rates prevailing in the area. If it so desires,
Operator may employ its own tools and equipment in the drilling of wells, but
its charges therefor shall not exceed the prevailing rates in the area and the
rate of such charges shall be agreed upon by the parties in writing before
drilling operations are commenced, and such work shall be performed by Operator
under the same terms and conditions as are customary and usual in the area in
contracts of independent contractors who are doing work of a similar nature.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. [SECTION OMITTED]
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VI
continued
B. Subsequent Operations:
1. Proposed Operations: Should any party hereto desire to drill any well on
the Contract Area other than the well provided for in Article VI.A., or to
rework, deepen or plug back a dry hole drilled at the joint expense of all
parties or & well jointly owned by all the parties and not then producing in
paying quantities, the party desiring to drill, rework, deepen or plug back such
a well shall give the other parties written notice of the proposed operation,
specifying the work to be performed, the location, proposed depth, objective
forma-tion and the estimated cost of the operation. The parties receiving such a
notice shall have thirty (30) days after receipt of the notice within which to
notify the pony wishing to do the work whether they elect to participate in the
cost of the proposed operation. If a drill-ing rig is on location, notice of a
proposal to rework, plug back or drill deeper may be given by telephone and the
response period shall be limited to twenty-four (24) hours, exclusive of
Saturday, Sunday and legal holidays. Failure of a party receiving such notice to
reply within the period above fixed shall constitute an election by that party
not to participate in the cost of the proposed operation. Any notice or response
given by telephone shall be promptly confirmed in writing.
If all parties elect to participate in such a proposed operation, Operator
shall within ninety (90) days after expiration of the notice period of thirty
(30) days (or as promptly as possible after the expiration of twenty-four (24)
hour period when a drilling rig is on location, as the case may be), actually
commence the proposed operation and complete it with due diligence at the risk
and expense of all par-ties hereto; provided, however, said commencement date
may be extended upon written notice of same by Operator to the other parties,
for a period of up to thirty (30) additional days if, in the sole opinion of
Operator, such additional time is reasonably necessary to obtain permits from
governmental authorities, surface rights (including rights-of-way) or
appropriate drilling equipment, or to complete title examination curative matter
required for tide approval or acceptance. Notwithstanding the force majeure
provisions of Article XI, if the actual operation has not been commenced within
the time provided (including any extension thereof as specifically permitted
herein) and if any party hereto still desires to conduct said operation, written
notice proposing same must be resubmitted to the other parties in
accordance with the provisions hereof as if no prior proposal had been made.
2. Operations by Less than Ali Parties: If any party receiving such notice as
provided in Article VI.B.1. or VII.D.1. (Option No. 2) elects not to participate
in the proposed operation, then, in order to be entitled to the benefits of this
Article, the party or parties giving the notice and such other parties as shall
elect to participate in the operation shall. within ninety (90) days after the
expiration of hour the notice period of thirty (30) days (or as promptly as
possible after the expiration of twenty-four (24) hour period when a drilling
rig is on location. as the case may be) actually commence the proposed operation
and complete it with due diligence. Operator shall perform all work for the
account of the Consenting Parties; provided, however, if no drilling rig or
other equipment is on location, and if Operator is a Non-Consenting Party, the
Consenting Parties shall either: (a) request Operator to perform the work
required by such proposed opera-tion for the account of the Consenting Parties,
or (b) designate one (1) of the Consenting Parties as Operator to perform such
work. Consenting Parties, when conducting operations on the Contract Area
pursuant to this Article VI.B.2., shall comply with all terms and conditions of
this agreement.
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period, shall
advise the Consenting Parties of the total interest of the parties approving
such operation and its recommendation as to whether the Consenting Parties
should proceed with the operation as proposed. Each Consenting Party, within
twenty-four (24) hours (exclusive of Saturday, Sunday and legal holidays) after
receipt of such notice, shall advise the proposing party of its desire to (a)
limit participation to such party's interest as shown on Exhibit "A" or (b)
carry its proportionate pan of Non-Consenting Parties' interests, and failure to
advise the proposing party shall an election under (a). In the event a
drilling rig is on location, the time permitted for such a response shall not
exceed a total twenty-four (24) hours (inclusive of Saturday. Sunday and legal
holidays). The proposing party, at its election, may withdraw such proposal if
there is insufficient participation and shall promptly notify all parties of
such decision.
The entire cost and risk of conducting such operations shall be borne by
the Consenting Parties in the proportions they have elected to bear same under
the terms of the preceding paragraph. Consenting Parties shall keep the
leasehold estates involved in such operations free and clear of all liens and
encubmbrances of every kind created by or arising from the operations of the
Consenting Parties. If such an operation results in a dry hole, the Consenting
Parties shall plug and abandon the well and restore the surface location at
their sole cost, risk and expense. If any well drilled, reworked, deepened or
plugged back under the provisions of this Article results in a producer of oil
and/or gas in paying quantities, the Consenting Parties shall complete and equip
the well to produce at their sole cost and risk,
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING- AGREEMENT - 1982
ARTICLE VI
continued
and the well shall then be turned over to Operator and shall be operated by it
at the expense and for the account of the Consenting Parties. Upon commencement
of operations for the drilling, reworking, deepening or plugging back of any
such well by Consenting Parties in accordance with the provisions of this
Article, each Non-Consenting Party shall be deemed to have relinquished to
Consenting Parties, and the Consenting Parties shall own and be entitled to
receive, in proportion to their respective interests, all of such
Non--Consenting Party's interest in the well and share of production therefrom
until the proceeds of the sale of such share, calculated at the well, or market
value thereof if such share is not sold, (after deducting production taxes,
excise taxes, royalty, overriding royalty and other interests not excepted by
Article III.D. payable out of or measured by the production from such well
accruing with respect to such interest until it reverts) shall equal the total
of the following:
(a) 200% of each such Non-Consenting Party's share of the cost of any newly
acquired surface equipment beyond the wellhead connections (including, but not
limited to, stock tanks, separators, treaters, pumping equipment and piping),
plus 100% of each such Non-Consenting Party's share of the cost of operation of
the well commencing with first production and continuing until each such
Non-Consenting Party's relinquished interest shall revert to it under other
provisions of this Article, it being agreed that each Non-Consenting Party's
share of such costs and equipment will be that interest which would have been
chargeable to such Non--Consenting Party had it participated in the well from
the beginning of the operations; and
(b) 400% of that portion of the costs and expenses of drilling, reworking.
deepening, plugging back, testing and completing, after deducting any cash
contributions received under Article VIII.C., and 400% of that portion of the
cost of newly acquired equipment in the well (to and including the wellhead
connections), which would have been chargeable to such Non-Consenting Party if
it had participated therein.
An election not to participate in the drilling or the deepening of a well
shall be deemed an election not to participate in any reworking or plugging back
operation proposed in such a well. or portion thereof, to which the initial
Non-Consent election applied that is conducted at any time prior to full
recovery by the Consenting Parties of the Non-Consenting Party's recoupment
account. Any such reworking or plugging back operation conducted during the
recoupment period shall be deemed part of the cost of operation of said wen and
there shall be added to the sums to be recouped by the Consenting Parties one
hundred percent (100%) of that portion of the costs of the reworking or plugging
back operation which would have been chargeable to such Non-Consenting Party had
it participated therein. If such a reworking or plugging back operation is
proposed during such recoupment period, the provisions of this Article VI.B.
shall be applicable as between said Consenting Parties in said well.
During the period of time Consenting Parties are entitled to receive
Non-Consenting Party's share of production, or the proceeds therefrom,
Consenting Parties shall be responsible for the payment of all production,
severance, excise, gathering and other taxes, and all royalty, overriding
royalty and other burdens applicable to Non-Consenting Party's share of
production not excepted by Article III.D.
In the case of any -reworking, plugging back or deeper drilling operation,
the Consenting Parties shall be permitted to use, free of cost, all casing,
tubing and other equipment in the well, but the ownership of all such equipment
shall remain unchanged; and upon abandonment of a well after such reworking,
plugging back or deeper drilling, the Consenting Parties shall account for all
such equipment to the owners thereof, with each party receiving its
proportionate part in kind or in value, less cost of salvage.
Within sixty (60) days after the completion of any operation under this
Article, the party conducting the operations for the Consenting Parties shall
furnish each Non-Consenting Party with an inventory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
deepening, plugging back, testing, completing, and equipping the well for
production; or, at its option, the operating party, in lieu of an itemized
statement of such costs of operation, may submit a detailed statement of monthly
billings. Each month thereafter, during the time the Consenting Parties are
being reimbursed as provided above, the party conducting the operations for the
Consenting Parties shall furnish the Non-Consenting Parties with an itemized
statement of all costs and liabilities in- cuffed in the operation of the well,
together with a statement of the quantity of oil and gas produced from it and
the amount of proceeds realized from the sale of the well's working interest
production during the preceding month. In determining the quantity of oil and
gas produced during any month, Consenting Parties shall use industry accepted
methods such as, but not limited to, metering or periodic well tests. Any
amount realized from the sale or other disposition of equipment newly acquired
in connection with any such operation which would have been owned by a
Non-Consenting Party had it participated therein shall be credited against the
total unreturned costs of the work done and of the equipment purchased in
determining when the interest of such Non-Consenting Party shall revert to it as
above provided; and if there is a credit balance, it shall be paid to such
Non-Consenting Party.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VI
continued
If and when the Consenting Parties recover from a Non-Consenting Party's
relinquished interest the amounts provided for above, the relinquished interests
of such Non-Consenting Party shall automatically revert to it, and, from and
after such reversion, such Non--Consenting Party shall own the same interest in
such well, the material and equipment in or pertaining thereto, and the
production therefrom as such Non-Consenting Party would have been entitled to
had it participated in the drilling, reworking, deepening or plugging back of
said well. Thereafter, such Non-Consenting Party shall be charged with and shall
pay its proportionate part of the further costs of the operation of said well in
accordance with the terms of this agreement and the Accounting Procedure
attached hereto.
Notwithstanding the provisions of this Article VI.B.2., it is agreed that
without the mutual consent of all parties, no wells shall be completed in or
produced from a source of supply from which a well located elsewhere on the
Contract Area is producing, unless such well conforms to the then-existing well
spacing pattern for such source of supply,
The provisions of this Article shall have no application whatsoever to the
drilling of the initial well described in Article VI.A. except (a) as to Article
VII.D.1. I. (Option No. 2), if selected, or (b) as to the reworking, deepening
and plugging back of such initial well after it has been drilled to the depth
specified in Article VI.A. if it shall thereafter prove to be a dry hole or, if
initially completed for production, ceases to produce in paying quantities.
3. Stand-By Time: When a well which has been drilled or deepened has
reached its authorized depth and all tests have been completed , and the results
thereof furnished to the parties, stand-by costs incurred pending response to a
party's notice proposing a reworking, deepening, plugging back or completing
operation in such a well shall be charged and borne as part of the drilling or
deepening operation just completed. Stand-by costs subsequent to all parties
responding, or expiration of the response time permitted, whichever first
occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph of
Article VI.B.2, shall be charged to and borne as part of the proposed operation,
but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated between the Consenting
Parties in the proportion each Consenting Party's interest as shown on Exhibit
"A" bears to the total interest as shown on Exhibit "A" of all Consenting
Parties.
4. Sidetracking: Except as hereinafter provided, those provisions of this
agreement applicable to a "deepening" operation shall also be applicable to any
proposal to directionally control and intentionally deviate a well from vertical
so as to change the bottom hole location (herein called "sidetracking"), unless
done to straighten the hole or to drill around junk in the hole or because of
other mechanical difficulties. Any party having the right to participate in a
proposed sidetracking operation that does not own an interest in the affected
well bore at the time of the notice shall, upon electing to participate, tender
to the well bore owners its proportionate share (equal to its interest in the
sidetracking operation) of the value of that portion of the existing well bore
to be utilized as follows:
(a) If the proposal is for sidetracking an existing dry hole, reimbursement
shall be on the basis of the actual costs incurred in the initial drilling of
the well down to the depth at which the sidetracking operation is initiated.
(b) If the proposal is for sidetracking a well which has previously
produced, reimbursement shall be on the basis of the well's salvable materials
and equipment down to the depth at which the sidetracking operation is
initiated, determined in accordance with the provisions of Exhibit "C", less the
estimated cost of salvaging and the estimated cost of plugging and abandoning.
In the event that notice for a sidetracking operation is given while the
drilling rig to be utilized is on location, the response period shall be limited
to twenty-four (24) hours, exclusive of Saturday, Sunday and legal holidays;
provided, however, any party may request and receive up to eight (8) additional
days after expiration of the twenty -four (24) hours within which to respond by
paying for all stand-by time incurred during such extended response period. If
more than one party elects to take such additional time to respond to the
notice,
stand-by costs shall be allocated between the parties taking additional time to
respond on a day-to-day basis in the proportion each electing par-ty's interest
as shown on Exhibit "A" bears to the total interest as shown on Exhibit "A" of
all the electing parties. In all other instances the response period to a
proposal for sidetracking shall be limited to thirty (30) days.
G. [SECTION OMITTED]
[PAGE]
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VI
continued
D. Access to Contract Area and Information:
Each party shall have access to the Contract Area at all reasonable times,
at its sole cost and risk to inspect or observe operations. and shall have
access at reasonable times to information pertaining to the development or
operation thereof, including Operator's books and records relating thereto.
Operator, upon request, shall furnish each of the other parties with copies of
all forms or reports filed with governmental agencies, daily drilling reports.
well logs, tank tables, daily gauge and run tickets and reports of stock on hand
at the first of each month, and shall make available samples of any cores or
cuttings taken from any well drilled on the Contract Area. The cost of gathering
and furnishing information to Non-Operator; other than that specified above.
shall be charged to the Non-Operator that requests the information.
E. Abandonment of Wells:
1. Abandonment of Dry Holes: Except for any well drilled or deepened
pursuant to Article VI.B.2., any well which has been drilled or deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be plugged and abandoned without the consent of all parties. Should
Operator, after diligent effort, be unable to contact any party, or should any
party fail to reply within forty-eight (48) hours (exclusive of Saturday, Sunday
and legal holidays) after receipt of notice of the proposal to plug and abandon
such well, such party shall be deemed to have consented to the proposed
abandonment. All such wells shall be plugged and abandoned in accordance with
applicable regulations and at the cost, risk and expense of the parties who
participated in the cost of drilling or deepening such well. Any party who
objects to plugging and abandoning such well shall have the right to take over
the well and conduct further operations in search of oil and/or gas subject to
the provisions of Article VI.B.
2. Abandonment of Wells that have Produced: Except for any well in which a
Non-Consent operation has been conducted hereunder for which the Consenting
Parties have not been fully reimbursed as herein provided, any well which has
been completed as a producer shall not be plugged and abandoned without the
consent of all parties. If all parties consent to such abandonment, the well
shall be plugged and abandoned in accordance with applicable regulations and at
the cost, risk and expense of all the parties hereto. If, within thirty (30)
days after receipt of notice of the proposed abandonment of any well, all
parties do not agree to the abandonment of such well, those wishing to continue
its operation from the interval(s) of the formations(s) then open to production
shall tender to each of the other parties its proportionate share of the value
of the well's salvable material and equipment, determined in accordance with the
provisions of Exhibit "C", less the estimated cost of salvaging and the
estimated cost of plugging and abandoning. Each abandoning party shall assign
the non-abandoning parties, without warranty, express or implied, as to title or
as to quantity, or fitness for use of the equipment and material, all of Its
interest in the well and related equipment, together with its interest in the
leasehold estate as to, but only as to, the in-terval or intervals of the
formation or formations then open to production.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VI
continued
Thereafter, abandoning parties shall have no further responsibility,
liability, Or interest in the Operation of or production from the well in the
interval or intervals then open other than the royalties retained in any lease
made under the terms of this Article. Upon request, Operator shall continue to
operate the assigned well for the account of the non-abandoning parties at the
rates and charges contemplated by this agreement, plus any additional cost and
charges which may arise as the result of the separate ownership of the assigned
well. Upon proposed abandonment of the producing interval(s) assigned or
- -leased, the assignor or lessor shall then have the option to repurchase its
prior interest in the well (using the same valuation formula) and participate in
further operations therein subject to the provisions hereof.
3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.1.
or VI.E.2. above shall be applicable as between Consenting Parties in the event
of the proposed abandonment of any well excepted from said Articles; provided,
however, no well shall be permanently plugged and abandoned unless and until all
parties having the right to conduct further operations therein have been
notified of the proposed abandonment and afforded the opportunity to elect to
take over the well in accordance with the provisions of this Article VI.E.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. Liability of Parties:
The liability of the parties shall be several, not joint or collective.
Each party shall be responsible only for its obligations, and shall be liable
only for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating, a mining or other partnership or association, or to render the parties
liable as partners.
B. Liens and Payment Defaults:
Each Non-Operator grants to Operator a lien upon its oil and gas rights in
the Contract Area, and a security interest in its share of oil and/or gas when
extracted and its interest in all equipment, to secure payment of its share of
expense, together with interest thereon at the rate provided in Exhibit "C". To
the extent that Operator has a security interest under the Uniform Commercial
Code of the state, Operator shall be entitled to exercise the rights and
remedies of a secured party under the Code. Ile bringing of a suit and the
obtaining of judgment by Operator for the secured indebtedness shall not be
deemed an election of remedies or otherwise affect the lien rights or security
interest as security for the payment thereof. In addition, upon default by any
Non-Operator in the payment of its share of expense, Operator shall have the
right, without prejudice to other rights or remedies, to collect from the
purchaser the proceeds from the sale of such Non-Operator's share of oil and/or
gas until the amount owed by such Non-Operator, plus interest, has been paid.
Each purchaser shall be entitled to rely upon Operator's written statement
concerning the amount of any default. Operator grants a like lien and security
interest to the Non-Operators to secure payment of Operator's proportionate
share of expense.
If any party fails or is unable to pay its. share of expense within sixty
(60) days after rendition of a statement therefor by Operator, the
non-defaulting parties, including Operator, shall, upon request by Operator, pay
the unpaid amount in the proportion that the interest of each such party bears
to the interest of all such parties. Each party so paying its share of the
unpaid amount shall, to obtain reimbursement thereof, be subrogated to the
security rights described in the foregoing paragraph.'
C. Payments and Accounting:
Except as herein otherwise specifically provided, Operator shall promptly
pay and discharge expenses incurred in the development and operation of the
Contract Area pursuant to this agreement and shall charge each of the parties
hereto with their respective proportionate shares upon the expense basis
provided in Exhibit "C". Operator shall keep an accurate record of the joint
account hereunder, showing expenses incurred and charges and credits made and
received.
Operator, at its election, shall have the right from time to time to demand
and receive from the other par-ties payment in advance of their respective
shares of the estimated amount of the expense to be incurred in operations
hereunder during the next succeeding month, which right may be exercised only by
submission to each such party of in itemized statement of such estimated
expense, together with an invoice for its share thereof. Each such statement and
invoice for the payment in advance of estimated expense shall be submitted on or
before the 20th day of the next preceding month. Each party shall pay to
Operator its proportionate share of such estimate within fifteen (15) days after
such estimate and invoice is received. If any party fails to pay its share of
said estimate within said time, the amount due shall bear interest as provided
in Exhibit "C" until paid. Proper adjustment shall be made monthly between
advances and actual expense to the end that each party shall bear and pay its
proportionate share of actual expenses incurred, and no more.
D. Limitation of Expenditures:
1. Drill or Deepen: Without the consent of all parties, no well shall be
drilled or deepened, except any well drilled to deepened pursuant tot the
provisions of Article VI.B.2., of this agreement. Consent to the drilling or
deepening shall include:
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VII
continued
Option No. 1: All necessary expenditures for the drilling or deepening,
testing, completing and equipping of the well, including necessary tankage
and/or surface facilities.
Option No. 2: All necessary expenditures for the drilling or deepening and
testing of the well. When such well has reached its authorized depth, and all
tests have been completed, and the results thereof furnished to the parties,
Operator shall give immediate notice to the Non-Operators who have the right to
participate in the completion costs. The parties receiving such notice shall
have forty--eight (48) hours (exclusive of Saturday, Sunday and legal holidays)
in which to elect to participate in the setting of casing and the completion
attempt. Such election, when made, shall include consent to all necessary
expenditures for the completing and equipping of such well, including necessary
tankage and/or surface facilities. Failure of any party receiving such notice to
reply within the period above fixed shall constitute an election by that party
not to participate in the cost of the completion attempt. If one or more, but
less than all of the parties, elect to set pipe and to attempt a completion, the
provisions of Article VI.B.2. hereof (the phrase "reworking, deepening or
plugging back" as contained in Article VI.B.2. shall be deemed to include
"completing") shall apply to the operations thereafter conducted by less than
all parties.
2. Rework or Plug Back: Without the consent of all parties, no well shall
be reworked or plugged back except a well reworked or plugged back pursuant to
the provisions of Article VI.B.2. of this agreement. Consent to the reworking or
plugging back of a well shall include all necessary expenditures in conducting
such operations and completing and equipping of said well, including necessary
tankage and/or surface facilities.
3. Other Operations: Without the consent of all parties, Operator shall not
undertake any single project reasonably estimated to require an expenditure in
excess of Twenty-five Thousand Dollars($ 25,000.00)I
except in connection with a well, the drilling, reworking, deepening,
completing, recompleting, or plugging back of which has been previously
authorized by or pursuant to this agreement; provided, however, that, in case of
explosion, fire, flood or other sudden emergency, whether of the same or
different nature, Operator may take such steps and incur such expenses as in its
opinion are required to deal with the emergency to safeguard life and property
but Operator, as promptly as possible, shall report the emergency to the other
parties. If Operator prepares an authority for expenditure (AFE) for its own
use, Operator shall furnish any Non-Operator so requesting an information copy
thereof for any single project costing in excess of Twenty-five Thousand
Dollars ($ 25,000.00) but less than the amount first set forth above in this
paragraph.
E. Rentals, Shut-in Well Payments and Minimum Royalties:
Rentals, shut-in well payments and minimum royalties which may be required
under the terms of any lease shall be paid by the Operator, at joint expense of
the parties hereto. Any party may request, and shall be entitled to receive,
proper evidence of all such payments. In the event of failure to make proper
payment of any rental, shut-in well payment or minimum royalty through mistake
or oversight where such payment is required to continue the lease in force, any
loss which results from such non-payment shall be a joint loss. All claims or
suits involving title to any interest subject to this Agreement shall be treated
as a claim or suit against all parties.
Operator shall notify Non-Operator of the anticipated completion of a shut-in
gas well, or the shutting in or return to production of a producing gas well, at
least five (5) days (excluding Saturday, Sunday and legal holidays), or at the
earliest opportunity permitted by circumstances, prior to taking such action,
but assumes no liability for failure to do so.
F. Taxes;
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator information as to
burdens (to include, but not be limited to, royalties, overriding royalties and
production payments) on leases and oil and gas interests contributed by such
NonOperator. If the assessed valuation of any leasehold estate is reduced by
reason of its being subject to outstanding excess royalties, overriding
royalties or production payments, the reduction in ad valorem taxes resulting
therefrom shall inure to the benefit of the owner or owners of such leasehold
estate, and Operator shall adjust the charge to such owner or owners so as to
reflect the benefit of such reduction. If the ad valorem taxes are based in
whole or in part upon separate valuations of each party's working interest, then
notwithstanding anything to the contrary herein, charges to the joint account
shall be made and paid by the parties hereto in accordance with the tax value
generated by each party's working interest. Operator shall bill the other
parties for their proportionate shares of all tax payments in the manner
provided in Exhibit "C".
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest all such taxes
and any interest and penalty. When any such protested assessment shall have
been finally determined, Operator shall pay the tax for the joint account,
together with any interest and penalty accrued, and the total cost shall then be
assessed against the parties, and be paid by them, as provided in Exhibit "C".
Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party's share of oil and/or gas produced under the terms of
this agreement.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VII
continued
G. Insurance:
At all times while operations are conducted hereunder, Operator shall
comply with the workmen's compensation law of the state where the operations are
being conducted; provided, however, that Operator may be a self-insurer for
liability under said compensation laws in which event the only charge that shall
be made to the joint account shall be as provided in Exhibit "C". Operator shall
also carry or provide insurance for the benefit of the joint account of the
parties as outlined in Exhibit "D", attached to and made a part hereof. Operator
shall require all contractors engaged in work on or for the Contract Area to
comply with the workmen's compensation law of the state where the operations are
being conducted and to maintain such other insurance as Operator may require.
In the event automobile public liability insurance is specified in said
Exhibit -1)", or subsequently receives the approval of the parties, no direct
charge shall be made by Operator for premiums paid for such insurance for
Operator's automotive equipment.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST
A. Surrender of Leases:
The leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any lease or
in any portion thereof, and the other parties do not agree or consent thereto,
the party desiring to surrender shall assign, without express or implied
warranty of tide, all of its interest in such lease, or portion thereof, and any
well. material and equipment which may be located thereon and any rights in
production thereafter secured, to the parties not consenting to such surrender.
If the interest of the assigning party is or includes oil and gas interest, the
assigning party shall execute and deliver to the party or parties not consenting
to such surrender an oil and gas lease covering such oil and gas interest for a
term of one (1) year and so long thereafter as oil and/or gas is produced from
the land covered thereby, such lease to be on the form attached hereto as
Exhibit "B". Upon such assignment or lease, the assigning party shall be
relieved from all obligations thereafter accruing, but not theretofore accrued,
with respect to the interest assigned or leased and the operation of any well
attributable thereto, and the assigning party shall have no further interest in
the assigned or leased premises and its equipment and production other than the
royalties retained in any lease made under the terms of this Article. The party
assignee or lessee shall pay to the party assignor or lessor the reasonable
salvage value of the latter's interest. in any wells equipment attributable to
the assigned or leased acreage. The value of all material shall be determined in
accordance with the provisions of Exhibit "C", less the estimated cost of
salvaging and the estimated cost of plugging and abandoning. If the assignment
or lease is in favor of more than one party, the interest shall be shared by
such parties in the proportions that the interest of each bears to the total
interest of all such parties.
Any assignment, lease or surrender made under this provision shall not
reduce or change -the assignor's, lessor's or surrendering party's interest as
it was immediately before the assignment, lease or surrender in the balance of
the Contract Area; and the acreage assigned, leased or surrendered, and
subsequent operations thereon, shall not thereafter be subject to the terms and
provisions of this agreement.
B. Renewal or Extension of Leases:
If any party secures a renewal of any oil and gas lease subject to this
agreement, all other parties shall be notified promptly, and shall have the
right for a period of thirty (30) days following receipt of such notice in which
to elect to participate in the ownership of the renewal lease, insofar as such
lease affects lands within the Contract Area, by paying to the party who
acquired it their several proper proportionate shares of the acquisition cost
allocated to that part of such lease within the Contract Area, which shall be in
proportion to the interests held at that time by the parties in the Contract
Area.
If some, but less than all, of the parties elect to participate in the
purchase of a renewal lease, it shall be owned by the parties who elect to
participate therein, in a ratio based upon the relationship of their respective
percentage of participation in the Contract Area to the aggregate of the
percentages of participation in the Contract Area of all parties participating
in the purchase of such renewal lease, Any renewal lease in which less than all
parties elect to participate shall not be subject to this agreement.
Each party who participates in the purchase of a renewal lease shall be
given in assignment of its proportionate interest therein by the acquiring
party.
The provisions of this Article shall apply to renewal leases whether they
are for the entire interest covered by the expiring lease or cover only a
portion of its area or an interest therein. Any renewal lease taken before the
expiration of its predecessor lease, or taken or contracted for within six (6)
months after the expiration, of the existing lease shall be subject to this
provision; but any lease taken-or contracted for more than six (6) months after
the expiration of an existing lease shall not be deemed a renewal lease and
shall not be subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of
oil and gas leases.
C. Acreage or Cash Contributions:
While this agreement is in force, if any party contracts for a contribution
of cash towards the drilling of a well or any other operation on the Contract
Area, such contribution shall be paid to the party who conducted the drilling or
other operation and shall be applied by it against the cost of such drilling or
other operation. If the contribution be in the form of acreage, the party whom
the contribution is made shall promptly tender an assignment of the acreage,
without warranty of title, to the Drilling Parties in the proportions
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE VIII
continued
said Drilling Parties shared the cost of drilling the well. Such acreage shall
become a separate Contract Area and, to the extent possible, be governed by
provisions identical to this agreement. Each party shall promptly notify all
other parties of any acreage or cash contributions it may obtain in support of
any well or any other operation on the Contract Area. The above provisions shall
also be applicable to optional rights to earn acreage outside the Contract Area
which are in support of a well drilled inside the Contract Area.
If any party contracts for any consideration relating to disposition of
such party's share of substances produced hereunder, such consideration shall
not be deemed a contribution as contemplated in this Article VIII.C.
D. Maintenance of Uniform Interest:
For the purpose of maintaining uniformity of ownership in the oil and gas
leasehold interests covered by this agreement, no party shall sell, encumber,
transfer or make other disposition of its interest in the leases embraced within
the Contract Area and in wells, equipment and production unless such disposition
covers either:
1. the entire interest of the party in all leases and equipment and
production; or
2. an equal undivided interest in all leases and equipment and production
in the Contract Area.
Every such sale, encumbrance, transfer or other disposition made by any
party shall be made expressly subject to this agreement and shall be made
without prejudice to the right of the other parties.
If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such co-owners
to appoint a single trustee or agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement-, however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the oil and gas produced from the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.
E. Waiver of Rights to Partition:
If permitted by the laws of the state or states in which the property
covered hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and sill rights it may have to partition and have set
aside to it in severalty its undivided interest therein.
F. [SECTION OMITTED]
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
This agreement is not intended to create, and shall not be construed to
create, a relationship of partnership or an association for profit between or
among the parties hereto. Notwithstanding any provision herein that the rights
and liabilities hereunder are several and not joint or collective, or that this
agreement and operations hereunder shall not constitute a partnership, if, for
federal income tax purposes, this agreement and the operations hereunder are
regarded as a partnership, each party hereby affected elects to be excluded from
the application of all of the provisions of Subchapter "K",, Chapter 1, Subtitle
"A", of the Internal Revenue Code of 1954, as permitted and authorized by
Section 761 of the Code and the regulations promulgated thereunder. Operator is
authorized and directed to execute on behalf of each party hereby affected such
evidence of this election as may be required by the Secretary of the Treasury of
the United States or the Federal Internal Revenue Service, including
specifically, but not by way of limitation, all of the returns, statements, and
the data required by Federal Regulations 1.761. Should there be any requirement
that each party hereby affected give further evidence of this election, each
such party shall execute such documents and furnish such other evidence as may
be required by the Federal Internal Revenue Service or as may be necessary to
evidence this election. No such party shall give any notices or take any other
action inconsistent with the election made hereby. If any present or future
income tax laws of the state or states in which the Contract Area is located or
any future income tax laws of the United States contain provisions similar to
those in Subchapter "K", Chapter 1, Subtitle "A", of the Internal Revenue Code
of 1954, under which an election similar to that provided by Section 761 of the
Code is permitted, each party hereby affected shall make such election as may be
permitted or required by such laws. In making the foregoing election, each such
party states that the income derived by such party from operations hereunder can
be adequately determined without the computation of partnership taxable income.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE X.
CLAW AND LAWSUITS
Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed Twenty-
five Thousand Dollars ($25,000.00) and if the payment is in complete settlement
Of such claim or suit. If the amount required for settlement ex-ceeds the above
amount, the parties hereto shall assume and take over the further handling of
the claim or suit, unless such authority is delegated to Operator. All costs and
expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation from
which the claim or suit arises. If a claim is made against any party or if any
party is sued on account of any matter arising from operations hereunder over
which such individual has no control because of the rights given Operator by
this agreement, such party shall immediately notify all other parties, and the
claim or suit shall be treated as any other claim
or suit involving operations hereunder.
I
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
make money payments, that party shall give to all other parties prompt written
notice of the force majeure with reasonably full particulars concerning it;
thereupon, the obligations of the party giving the notice, so far as they are
affected by the force majeure, shall be suspended during, but no longer than,
the continuance of the force majeure. The affected party shall use all
reasonable diligence to remove the force majeure situation as quickly as
practicable.
The requirement that any force majeure shall be remedied with all
reasonable dispatch shall not require the settlement of strikes, lockouts, or
other labor difficulty by the party involved, contrary to its wishes; how all
such difficulties shall be handled shall be entirely within the discretion of
the party concerned.
The term "force majeure", as here employed, shall mean an act of God,
strike, lockout, or other industrial disturbance, act of the public enemy, war,
blockade, public riot, lightning, fire, storm, flood, explosion. governmental
action, governmental delay, restraint or inaction, unavailability of equipment,
and any other cause, whether of the kind specifically enumerated above or
otherwise, which is not reasonably within the control of the party claiming
suspension.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties and required by any of
the provisions of this agreement. unless otherwise specifically provided, shall
be given in writing by mail or telegram; postage or charges prepaid, or by telex
or telecopier and addressed to the parties to whom the notice is given at the
addresses fisted on Exhibit "A". The originating notice given under any
provision hereof shall be deemed given only when received by the party to whom
such notice is directed, and the time for such party to give any notice in
response thereto shall run from the date the originating notice is received. Ile
second or any responsive notice shall be deemed given when deposited in the mail
or with the telegraph company, with postage or charges prepaid, or sent by telex
or telecopier. Each party shall have the right to change its address at any
time, and from time to time, by giving written notice thereof to all other
parties.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the oil and gas
leases and/or oil and gas interests subject hereto for the period of time
selected below; provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any lease or oil and gas interest
contributed by any other party beyond the term of this agreement.
Option No. 1: So long as any of the oil and gas leases subject to this
agreement remain or are continued in force as to any part of the Contract Area,
whether by production, extension, renewal or otherwise,
Option No.2 [SECTION OMITTED]
It is agreed, however, that the termination of this agreement shall not
relieve any party hereto from any liability which has accrued or attached prior
to the date of such termination.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982
ARTICLE XIV.
COMPLIANCE WITH LAWS AND REGULATIONS
A. Laws, Regulations and Orders:
This agreement shall be subject to the conservation laws of the state in
which the Contract Area is located, to the valid rules, regulations, and orders
of any duly constituted regulatory body of said state; and to all other
applicable federal, state, and local laws, ordinances, rules, regulations, and
orders.
B. Governing Law:
This agreement and all matters pertaining hereto, including, but not
limited to, matters of performance, non-performance, breach, remedies,
procedures, rights, duties and interpretation or construction, shall be governed
and determined by the law of the state in which the Contract Area is located. If
the Contract Area is in two or more states, the law of the state of LOUISIANA
shall govern.
C. Regulatory Agencies:
Nothing herein contained shall grant, or be construed to grant, Operator
the right or authority to waive or release any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or orders promulgated under such laws in reference to oil,
gas and mineral operations, including the location, operation, or production of
wells, on tracts offsetting or adjacent to the Contract Area.
With respect to operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of action
arising out of, incident to or resulting directly or indirectly from Operator's
interpretation or application of rules. rulings, regulations or orders of the
Department of Energy or predecessor or successor agencies to the extent such
interpretation or application was made in good faith. Each Non-Operator further
agrees to reimburse Operator for any amounts applicable to such NonOperator's
share of production that Operator may be required to refund, rebate or pay as a
result of such an incorrect interpretation or application, together with
interest and penalties thereon owing by Operator as a result of such incorrect
interpretation or application.
Non-Operators authorize Operator to prepare and submit such documents as
may be required to be submitted to the purchaser of any crude oil sold hereunder
or to any other person or entity pursuant to the requirements of the "Crude Oil
Windfall Profit Tax Act of 1980", as same may be amended from time to time
("Act"), and any valid regulations or rules which may be issued by the Treasury
Department from time to time pursuant to said Act. Each party hereto agrees to
furnish any and all certifications or other information which is required to be
furnished by said Act in a timely manner and in sufficient detail to permit
compliance with said Act.
ARTICLE XV.
OTHER PROVISIONS
A. GOVERNING AGREEMENT:
This Agreement is subject to the terms and conditions of that certain
Participation Agreement dated May 6, 1999 ("Participation Agreement") between
the parties. Any conflict between the terms and conditions Imposed by these two
agreements shall be controlled by the terms of the Participation Agreement.
B. SEQUENCE AND TIMING OF OPERATIONS:
It is agreed that where a welt, which has been authorized under the terms
of this Agreement by all parties, or by one or more, but Less than all parties
under Paragraph VI.B. (1) or (2); shall have bow drilled to the objective depth
or the objective formation, whichever is less and the parties participating in
the well cannot mutually agree upon the sequence and timing of further
operations regarding sold wait, the following elections shall, control in the
order enumerated hereafter:
1. An election to do additional togging, coring, or testing;
2. An election to attempt to complete the watt at either the objective
depth or objective formation;
3. An election to plug back and attempt to complete said watt;
4. An election to deepen said well;
<PAGE>
5. An election to sidetrack the well; and
6. An election to plug and abandon.
It is provided, however, that if at the time said participating parties are
considering any of the above elections, the hole is in such a condition that a
reasonable prudent operator would not conduct the operations contemplated by the
particular election involved for fear of placing the hole in jeopardy or losing
the same prior to completing the well in the objective depth or objective
formation, such election shall not be given the priority hereinabove set forth.
<PAGE>
C. OBLIGATORY OPERATIONS:
Notwithstanding anything to the contrary contained in this Agreement,
if any proposed operation on (other than the required operations set out in the
Participation Agreement including the drilling or completion of the initial Test
Well, described in Article VI.A. above) is required to (i) continue a lease or
sublease, or portions thereof, in force and effect beyond the end of its primary
term; or (ii) earn or preserve the right to earn a leasehold interest owned by a
third party pursuant to a written agreement therewith which would otherwise
expire in the absence of such operations, then in lieu of the penalties provided
for in Article VI.B. each Non-Consenting Party shalt be deemed to have
relinquished to Consenting Parties, and Consenting Parties shalt own and be
entitled to receive, in proportion to their respective interests, all of such
Non-Consenting Party's right, title title and interest in and to the lease or
sublease or agreements, or portion thereof, which would terminate or not be
earned in the absence of such operations. for the purpose of this paragraph,
operations wilt be deemed necessary to continue a lease or sublease agreement or
portion thereof, in force and effect beyond the end of its primary term if
proposed within six (6) months of the date such tease, or portion thereof, would
expire, if such operations were not conducted. Notwithstanding the above, if the
affected lease can otherwise be maintained by the payment of delay rentals, such
wait shalt not be considered an obligatory well as contemplated by this
paragraph.
D. DEFAULT PENALTY/AUTOMATIC NON-CONSENT:
If the lien conferred in Article VII.B. has been enforced, for so long as
the affected party remains in default, it shalt have no further access to the
Contract Area or information obtained in connection with operations hereunder
and shalt not be entitled to vote on any manner hereunder. As to any proposed
operation in which it otherwise would have the right to participate, such party
shalt have the right to be a Consenting Party therein only if it pays the amount
it is in default before the operation. This provision shalt not apply to those
amounts in default that are being contested in good faith between the parties.
E. RELEASE OF INFORMATION TO PUBLIC:
No party shall distribute any information or photographs concerning
operations hereunder to the press or other media without the approval of all
parties. In the event of an emergency involving extensive property damage,
operations failure, toss of human life, or other clear emergency, Operator is
deemed authorized to furnish such minimum, strictly factual information as is
necessary to satisfy the legitimate public interest on the part of the press and
duty constituted authorities. It time does not permit the obtaining of prior
approval by the other parties, Operator shalt promptly advise the other parties
of the information so furnished. Nothing herein contained shall preclude any
party from making such disclosures as may be, in that party's sole judgment,
required by any federal or state law or regulation or by any stock exchange an
which the shares of the party and/or its parent company are listed.
F. AREA OF MUTUAL INTEREST:
If, at any time within a period of three (3) years from the effective date
of this Operating Agreement, any party hereto acquires (herein called the
"Acquiring Party") directly or indirectly, from a third party, any right, title
or interest of any nature or kind, beneficial or otherwise, in options, royalty
interest, mineral interests or leases or extensions or renewals thereof
pertaining to hydrocarbons (heroin called the "Acquired Interest") covering any
of the lands within the Contract Area (heroin called "Area of Mutual Interest"),
such Acquiring Party shall immediately give notice in writing to all of the
other parties hereto (herein called the "Non-Acquiring Parties") of such
Acquired interest. The notification shall contain a description of the lands and
a copy of the pertinent lease or document, the extent of the interest and the
total consideration involved, together with such other details, terms and
conditions required with respect to such Acquired Interest. The portion of the
Acquired Interest subject to this Agreement shall be limited to the lands within
the Contract Area.
A party's Area of Mutual Interest shall be that party's Percentage Interest
in the Contract Area at the time of acquisition of the Acquired Interest. As to
each Acquired Interest, each Non-Acquiring Party shall have the option, but not
the obligation, to elect to participate in such acquisition in an amount squat
to such party's Area of Mutual Interest Interest divided by the Area of Mutual
Interest interests of all parties so electing to participate or may elect to
limit participation in such acquisition to its applicable percentage set forth
in Article 4 of Exhibit "A" hereto by paying a like percentage of the
acquisition costs for such Acquired interest.
All parties electing to participate in an Acquired Interest shall notify
the Acquiring Party of such election within fifteen (15) days (forty-eight
hours, excluding Saturdays, Sundays and holiday& if a drilling rig, completion
rig or workover rig is then operating within the Area of Mutual Interest) after
receipt of notice from the Acquiring Party. Failure of a party having the right
to participate to timely elect shalt be deemed an election by such party not to
participate in such Acquired Interest. All parties electing to participate in an
Acquired Interest shall promptly remit such party's share of the costs of
acquisition to the Acquiring Party within ton (10) days after receipt of any
invoice from the Acquiring Party, and such participating party shall assume its
proportionate share of all obligations relating to the Acquired Interest. Each
of the participating parties agrees to execute and deliver all such assignments,
conveyances and other ,such documents as may be necessary to vest title to the
Acquired Interest in the parties entitled to participate therein.
This Article XVI provision F. shall expire at the end of the three (3) year
period from the effective date of this operating Agreement.
The Acquiring party shall immediate assign an overriding royalty on any
lease or other contract creating an interest in minerals within the Area of
Mutual Interest, in the total amount of three percent (3.0%), to the following
parties:
<PAGE>
5. John Edwin Danser 1.500%
6. Burton C. Bowen 1.125%
7. William A. Borlaug .375%
3.000%
<PAGE>
G. ADDITIONAL RIGHTS OF TRIBOW 2, LLC:
Notwithstanding the fact that the interests of Tribow 2, LLC in the
Contract Area are effective at Prospect Payout, Tribow 2, LLC shall have the
right at all times before Prospect Payout to receive notice&, evidence of rental
and other payments and the right to audit the books, papers and records of
Operator. Tribow 2, LLC shall have access to all wells at all reasonable times,
including freedom of the derrick floor, at its sole risk and expense, including,
but not limited to, the right to witness the running of toots of evaluation.
In the event Tribow 2, LLC fails fails to make the arrangements necessary
to separately dispose of or market its proportionate share of oil and/or gas
produced from the Contract Area, operator shall, subject to Tribow 2, LLC's
right to revoke on thirty (30) days written notice, purchase such oil and/or gas
or sell it to others for the account of Tribow 2, LLC at the same time, price
and terms received by the other parties for the other parties' share of oil and
gas. The parties shall not charge a marketing fee for purchasing or selling
Tribow 2, LLC's share of oil and/or gas.
H. COUNTERPART EXECUTION.
If counterparts of this Agreement are executed, the signatures and
acknowledgments of the parties, as affixed thereto, may be combined by operator
in, and treated and given effect for all purposes as, a single instrument. This
Agreement also may be ratified by separate instrument referring hereto, each of
which shall have the effect of the original agreement and of adopting by
reference all of the provisions herein contained.
OPERATOR
Thus done and signed by PANACO, INC., at Houston, Harris County, Texas, on
this day of
, 1999, in the presence of the undersigned competent witnesses, who have signed
these presents with the said Appearer and me, Notary, after reading of the
whole.
WITNESSES:
PANACO, INC.
By: /s/ Unknown
Name:
Title:
NOTARY PUBLIC
NON-OPERATORS
Thus done and signed by YORK RESOURCES, INC., at Houston, Harris County,
Texas, on this______________________________________day of _________________,
1999, in the presence of the undersigned competent witnesses, who have
signed these presents with the said Appearer and
me, Notary, after reading of the whole.
WITNESSES:
YORK RESOURCES, INC.
By: /s/ Unknown
Name:
Title:
NOTARY PUBLIC
<PAGE>
Thus. done and signed by CARSON ENERGY, INC., at Austin, Travis County,
Texas, an this _ day
of 1999, in the presence of the undersigned competent witnesses, who have
signed these presents with the said Appearer and me, Notary, after reading of
the whole.
WITNESSES:
CARSON ENERGY, INC.
By: /s/ E. Carter Bills
E. Carter Bills
NOTARY PUBLIC
Thus done and signed by JANIVO REALTY, INC., at Dallas, Dallas County,
Texas, on this _ day
of 1999, in the presence of the undersigned competent witnesses, who have
signed these presents with the said Appearer and me, Notary, after reading of
the whole.
WITNESSES:
JANIVO REALTY, INC.
By: /s/ Anthony E. Baggett
Anthony E. Baggett
President
NOTARY PUBLIC
Thus done and signed by LAKOTA ENERGY, INC., at Atlanta, Cobb County,
Georgia, an this 10 day of May, 1999, in the presence of the undersigned
competent witnesses, who have signed these presents with the said Appearer and
me, Notary, after reading of the whole.
WITNESSES:
/s/ Lori Lovett
/s/ Unknown
LAKOTA ENERGY, INC.
By: /s/ Ken Honeyman
Name: Ken Honeyman
Title: President
[NOTARY SEAL]
<PAGE>
Thus done and signed by TRIBOW 2, LLC, at Houston, Harris County, Texas, on this
6th day of May, 1999, in
the presence of the undersigned competent witnesses, who have signed these
presents with the said Appearer and me, Notary, after reading of the whole.
WITNESSES:
/s/ Brigette Perkins
/s/ Unknown
TRIBOW 2, LLC
By: /s/ Burton C. Bowen
Burton C. Bowen
Vice President
/s/ Linda W. Haas
Linda W. Haas
NOTARY PUBLIC
[NOTARY SEAL]
<PAGE>
<PAGE>
6. Leasehold Burdens Subject to Contract:
(a) lessors' royalties of twenty-two percent (22.0%);
(b) overriding royalties in the amount of three percent (3.0%) in
favor of John Edwin Denser, Burton C. Bowen and William
A. Borlaug;
<PAGE>
(f) working interest in the Initial, Well, carried to Completion Point
the amount of 20.0% in favor of Tribow 2, LLC, PANACO Inc. and
Janivo Realty, Inc.
<PAGE>
EXHIBIT B
ATTACHED TO and made a part of that certain operating Agreement by PANACO, Inc.,
as Operator, South Halter Island Area, St. Mary and Terrebonne Parishes.
N 0 N E
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants
EXHIBIT " C "
Attached to and made apart of that certain Operating Agreement by PANACO, Inc.,
as Operator , South Halter Island Area, St. Mary and Terrebonne Parishes.
ACCOUNTING PROCEDURE
JOINT OPERATIONS
I. GENERAL PROVISIONS
<PAGE>
1. Definitions
"Joint Property" shall mean the real and personal property subject to the
agreement to which this Accounting Procedure is attached. "Joint Operations"
shall mean all operations necessary or proper for the development, operation,
protection and maintenance of the Joint Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are to be shared by
the Parties.
"Operator" shall mean the party designated to conduct the Joint Operations,
"Non-Operators!" shall mean the Parties to this agreement other than the
Operator. "Parties" shall mean Operator and Non-Operators.
"First Level Supervisors" shall mean those employees whose primary function
in Joint Operations is the direct supervision of other employees and/or contract
labor directly employed on the Joint Property in a field operating capacity.
"Technical Employees" shall mean those employees having special and
specific engineering, geological or other professional skills, and whose primary
function in Joint Operations is the handling of specific operating conditions
and problems for the benefit of the Joint Property.
"Personal Expenses" shall mean travel and other reasonable reimbursable
expenses of Operator's employees.
"Material" shall mean personal property, equipment or supplies acquired or
held for use on the Joint Property.
"Controllable Material" shall mean Material which at the time is so
classified in the Material Classification Manual as most recently recommended by
the Council of Petroleum Accountants Societies.
2. Statement and Billings
Operator shall bill Non-Operators on or before the last day of each month
for their proportionate share of the Joint Account for the preceding month. Such
bills will be accompanied by statements which identify the authority for
expenditure, lease or facility, and all charges and credits summarized by
appropriate classifications of investment and expense except that items of
Controllable Material and unusual charges and credits shall be separately
identified and fully described in detail.
3. Advances and Payments by Non-Operators
A. Unless otherwise provided for in the agreement, the Operator may
require the Non-Operators to advance their share of estimated cash outlay for
the succeeding month's operation within fifteen (15) days after receipt of the
billing or by the first day of the month for which the advance is required,
whichever is later. Operator shall adjust each monthly billing to reflect
advances received from the Non-Operators.
B. Each Non-Operator shall pay its proportion of all bills within
fifteen (15) days after receipt If payment is not made within such time, the
unpaid balance shall bear interest monthly. at the prime rate in effect at Chase
Manhattan Bank. New York on the first day of the month in which delinquency
occurs plus 1% or the maximum contract rate permitted by the applicable usury
laws in the state in which the Joint Property is located, whichever is the
lesser, plus attorney's fees, court costs, and other costs in connection with
the collection of unpaid amounts.
4. Adjustments
Payment of any such bill shall not prejudice the right of any Non-Operator
to protest or question the correctness thereof; provided, however, all bills and
statements rendered to Non-Operator by Operator during any calendar year shall
conclusively be presumed to the true and correct after twenty-four (24) months
following the end of any such calendar year, unless within the said twenty-four
(24) month period a Non-Operator takes written exception thereto and makes claim
on Operator for adjustment. No adjustment favorable to Operator shall be made
unless it is made within the same prescribed period. The provisions of this
paragraph shall not prevent adjustments resulting from a physical inventory of
Controllable Material as provided for in Section V.
COPYRIGHT 1985 by the Council of Petroleum Accountants Societies.
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants
5. Audits
A. A Non-Operator, upon notice in writing to Operator and all other
Non-Operators, shall have the right to audit Operator's accounts and records
relating to the Joint Account for any calendar year within the twenty-four (24)
month period following the end of such calendar year; provided, however, the
making of an audit shall not extend the time for the taking of written exception
to and the adjustments of accounts as provided for in Paragraph 4 of this
Section I. Where there are two or more Non-Operators, the Non-Operators shall
make every reasonable effort to conduct a joint audit in a manner which will
result in a minimum of inconvenience to the Operator. Operator shall bear no
portion of the Non-Operators' audit cost incurred under this paragraph unless
agreed to by the Operator. The audits shall not be conducted more than once each
year without prior approval of Operator, except upon the resignation or removal
of the Operator, and shall be made at the expense of those Non-Operators
approving such audit.
B. The Operator shall reply in writing to an audit report within 180
days after receipt of such report.
6. Approval By Non-Operators
Where an approval or other agreement of the Parties or Non-Operators is
expressly required under other sections of this Accounting Procedure and if the
agreement to which this Accounting Procedure is attached contains no contrary
provisions in regard thereto, Operator shall notify all Non-Operators of the
Operator's proposal, and the agreement or approval of a majority in interest of
the Non-Operators shall be controlling on all Non-Operators.
II. DIRECT CHARGES
Operator shall charge the Joint Account with the following items:
1. Ecological and Environmental
Costs incurred for the benefit of the Joint Property as a result of
governmental or regulatory requirements to satisfy environmental considerations
applicable to the Joint Operations. Such costs may include surveys of an
ecological or archaeological nature and pollution control procedures as required
by applicable laws and regulations.
2. Rentals and Royalties
Lease rentals and royalties paid by Operator for the Joint Operations.
3. Labor
A. (1) Salaries and wages of Operator's field employees directly
employed on the Joint Property in the conduct of
Joint Operations.
(2) Salaries of First Level Supervisors in the field.
(3) Salaries and wages of Technical Employees directly employed on
the Joint Property if such charges are excluded from
the overhead rates.
(4) Salaries and wages of Technical Employees either temporarily
or permanently assigned to and directly employed in the
operation of the Joint Property if such charges are excluded
from the overhead rates.
<PAGE>
B. Operator's cost of holiday, vacation, sickness and disability benefits
and other customary allowances paid to employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section 11. Such
costs under this Paragraph 3B may be charged on a "when and as paid basis" or by
"percentage assessment" on the amount of salaries and wages chargeable to the
Joint Account under Paragraph 3A of this Section II. If percentage assessment is
used, the rate shall be based on the Operator's cost experience.
C. Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs chargeable to
the Joint Account under Paragraphs 3A and 3B of this Section II.
D. Personal Expenses of those employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section II.
<PAGE>
4. Employee Benefits
Operator's current costs of established plans for employees' group life
insurance, hospitalization, pension, retirement, stock purchase, thrift, bonus
and other benefit plans of a like nature, applicable to Operator's labor cost
chargeable to the Joint Account under Paragraphs 3A and 3B of this Section II
shall be Operator's actual cost not to exceed the percent most recently
recommended by the Council of Petroleum Accountants Societies.
<PAGE>
COPAS - 1984 - ONSHORE
a Recommended by Who Council of Petroleum Accountants Societies
5. Material
Material purchased or furnished by Operator for use on the Joint Property
as provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and is
reasonably practical and consistent with efficient and economical operations.
The accumulation of surplus stocks shall be avoided.
6. Transportation
Transportation of employees and Material necessary for the Joint Operations
but subject to the following limitations:
A. If Material is moved to the Joint Property from the Operator's
warehouse or other properties, no charge shall be made to the Joint Account for
a distance greater than the distance from the nearest reliable supply store
where like material is normally available or railway receiving point nearest the
Joint Property unless agreed to by the Parties.
B. If surplus Material is moved to Operator's warehouse or other
storage point, no charge shall be made to the Joint Account for a distance
greater than the distance to the nearest reliable supply store where like
material is normally available, or railway receiving point nearest the Joint
Property unless agreed to by the Parties. No charge shall be made to the Joint
Account for moving Material to other properties belonging to Operator, unless
agreed to by the Parties.
C. In the application of subparagraphs A and B above, the option to
equalize or charge actual trucking cost is available when the actual charge is
$400 or less excluding accessorial charges. The $400 will be adjusted to the
amount most recently recommended by the Council of Petroleum Accountants
Societies.
7. Services
The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 10 of Section II and Paragraph i,
ii, and iii, of Section 111. The cost of professional consultant services and
contract services of technical personnel directly engaged on the Joint Property
if such charges are excluded from the overhead rates. The cost of professional
consultant services or contract services of technical personnel not directly
engaged on the Joint Property shall not be charged to the Joint Account unless
previously agreed to by the Parties.
8. Equipment and Facilities Furnished By Operator
A. Operator shall charge the Joint Account for use of Operator owned
equipment and facilities at rates commensurate with costs of ownership and
operation. Such rates shall include costs of maintenance, repairs other
operating expense, insurance, taxes, depreciation, and interest on gross
investment less accumulated depreciation not to exceed ten - percent ( 10 %) per
annum. Such rates shall not exceed average commercial rates currently prevailing
in the immediate area of the Joint Property.
<PAGE>
(2) In lieu of charges in paragraph 8A above, Operator may elect to use
average commercial rates prevailing in the immediate area of the Joint Property
less 20%. For automotive equipment, Operator may elect to use rates published by
the Petroleum Motor Transport Association.
9. Damages and Losses to Joint Property
All costs or expenses necessary for the repair or replacement of Joint
Property made necessary because of damages or losses incurred by fire, flood,
storm, theft, accident, or other cause, except those resulting from Operator's
gross negligence or willful misconduct. Operator shall furnish Non-Operator
written notice of damages or losses incurred as soon as practicable after a
report thereof has been received by Operator.
10. Legal Expense
Expense of handling, investigating and settling litigation or claims, title
materials and examination of title discharging of liens, payment of judgements
and amounts paid for settlement of claims incurred in or resulting from
operations under the agreement or necessary to protect or recover the Joint
Property, except that no charge for services of Operator's legal staff or fees
or expense of outside attorneys shall be made unless previously agreed to by the
Parties. All other legal expense is considered to be covered by the overhead
provisions of Section III unless previously agreed to by the Parties. All other
legal expense is considered to be covered by the overhead provisions of Section
III unless otherwise agreed to by the Parties, except as provided in Section I,
Paragraph 3. All costs whether legal, professional or otherwise incurred in
compliance with State of Federal rules and regulations with respect to spacing,
permitting, proration, production and NGPA shall constitute a direct charge, if
applicable, to the Joint Property.
11. Taxes
All taxes of every kind and nature assessed or levied upon or in connection
with the Joint Property, the operation thereof, or the production therefrom, and
which taxes have been paid by the Operator for the benefit of the Parties. If
the ad valorem taxes are based in whole or in part upon separate valuations of
each party's working interest, then notwithstanding anything to the contrary
herein, charges to the Joint Account shall be made and paid by the Parties
hereto in accordance with the tax value generated by each party's working
interest.
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
12. Insurance
Net premiums paid for insurance required to be carried for the Joint
Operations for the protection of the Parties. In the event Joint Operations are
conducted in a state in which Operator may act as self-insurer for Worker's,
Compensation and/or Employers Liability under the respective state's laws,
Operator may, at its election, include the risk under its selfinsurance program
and in that event, Operator shall include a charge at Operator's cost not to
exceed manual rates.
13. Abandonment and Reclamation
Costs incurred for abandonment of the Joint Property, including costs
required by governmental or other regulatory authority.
14. Communications
Cost of acquiring, leasing, installing, operating, repairing and
maintaining communication systems, including radio and microwave facilities
directly serving the Joint Property. In the event communication
facilities/systems serving the Joint Property are Operator owned, charges to the
Joint Account shall be made as provided in Paragraph 8 of this Section 11.
15. Other Expenditures
Any other expenditure not covered or dealt with in the foregoing provisions
of this Section II, or in Section III and which is of direct benefit to the
Joint Property and is incurred by the Operator in the necessary and proper
conduct of the Joint Operations.
III. OVERHEAD
1. Overhead - Drilling and Producing Operations
i. As compensation for administrative, supervision, office services and
warehousing costs, Operator shall charge drilling and producing operations on
either:
(X ) Fixed Rate Basis, Paragraph 1A, or
( ) Percentage Basis, Paragraph 1B
Unless otherwise agreed to by the Parties, such charge shall be in lieu of
costs and expenses of all offices and salaries or wages plus applicable burdens
and expenses of all personnel, except those directly chargeable under Paragraph
3A, Section II. The cost and expense of services from outside sources in
connection with matters of taxation, traffic, accounting or matters before or
involving governmental agencies shall be considered as included in the overhead
rates provided for in the above selected Paragraph of this Section III unless
such cost and expense are agreed to by the Parties as a direct charge to the
Joint Account
ii. The salaries, wages and Personal Expenses of Technical Employees
and/or the cost of professional consultant services and contract services of
technical personnel directly employed on the Joint Property:
( ) shall be covered by the overhead rates, or
( X ) shall not be covered by the overhead rates.
iii. The salaries, wages and Personal Expenses of Technical Employees
and/or costs of professional consultant services and contract services of
technical personnel either temporarily or permanently assigned to and directly
employed in the operation of the Joint Property:
(X) shall be covered by the overhead rates, or
( ) shall not be covered by the overhead rates.
A. Overhead - Fixed Rate Basis
<PAGE>
(1) Operator shall charge the Joint Account at the following rates per well
per month:
Drilling Well Rate $10,000
(Prorated for less than a full month)
Producing Well Rate $1,000
(2) Application of Overhead-Fixed Rate Basis shall be as follows:
(a) Drilling Well Rate
(1) Charges for drilling wells shall begin on the date the
well is spudded and terminate on the date the drilling rig, completion rig, or
other units used in completion of the well is released, whichever
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
is later, except that no charge shall be made during
suspension of drilling or completion operations for fifteen (15) or more
consecutive calendar days,
(2) Charges for wells undergoing any type of workover or
recompletion for a period of five (5) consecutive work days or more shall be
made at the drilling well rate. Such charges shall be applied for the period
from date workover operations, with rig or other units used in workover,
commence through date of rig or other unit release, except that no charge shall
be made during suspension of operations for fifteen (15) or more consecutive
calendar days.
(b) Producing Well Rates
(1) An active well either produced or injected into for any
portion of the month shall be considered as a one-well charge for the entire
month.
(2) Each active completion in a multi-completed well in which
production is not commingled down hole shall be considered as a one-well charge
providing each completion is considered a separate well by the governing
regulatory authority.
(3) An inactive gas well shut in because of overproduction or
failure of purchaser to take the production -shall be considered as a one-well
charge providing the gas well is directly connected to a permanent sales outlet.
(4) A one-well charge shall be made for the month in which
plugging and abandonment operations are completed on any well. This one-well
charge shall be made whether or not the well has produced except when drilling
well rate applies.
(5) All other inactive wells (including but not limited to
inactive wells covered by unit allowable, lease allowable, transferred
allowable, etc.) shall not qualify for an overhead charge.
(3) The well rates shall be adjusted as of the first day of April each
year following the effective date of the agreement to which this Accounting
Procedure is attached. The adjustment shall be computed by multiplying the rate
currently in use by the percentage increase or decrease in the average weekly
earnings of Crude Petroleum and Gas Production Workers for the last calendar
year compared to the calendar year preceding as shown by the index of average
weekly earnings of Crude Petroleum and Gas Production Workers as published by
the United States Department of Labor, Bureau of Labor Statistics, or the
equivalent Canadian index published by Statistics Canada, as applicable. The
adjusted rates shall be the rates currently in use, plus or minus the computed
adjustment.
B. [SECTION OMITTED]
2. Overhead - Major Construction
To compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly discernible as a fixed asset required for the development and
operation of the Joint Property, Operator shall either negotiate a rate prior to
the beginning of construction, or shall charge the Joint
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
Account for overhead based on the following rates for any Major
Construction project in excess of $
:
<PAGE>
A. 5 % of first $100,000 or total cost if less, plus
B. 3 % of costs in excess of $100,000 but less than $1,000,000, plus
C. 2 % of costs in excess of $1,000,000.
Total cost shall mean the gross cost of any one project. For the purpose of
this paragraph, the component parts of a single project shall not be treated
separately and the cost of drilling and workover wells and artificial lift
equipment shall be excluded.
3. Catastrophe Overhead
To compensate Operator for overhead costs incurred in the event of
expenditures resulting from a single occurrence due to oil spill, blowout,
explosion, fire, storm, hurricane, or other catastrophes as agreed to by the
Parties, which are necessary to restore the Joint Property to the equivalent
condition that existed prior to the event causing the expenditures, Operator
shall either negotiate a rate prior to charging the Joint Account or shall
charge the Joint Account for overhead based on the following rates:
A. 5 % of total costs through $100,000; plus
B. 3 % of total costs in excess of $100,000 but less than $1,000,000; plus
C. 2 % of total costs in excess of $1,000,000.
Expenditures subject to the overheads above will not be reduced by
insurance recoveries, and no other overhead provisions of this Section III shall
apply.
4. Amendment of Rates
The overhead rates provided for in this Section III may be amended from
time to time only by mutual agreement between the Parties hereto if, in
practice, the rates are found to be insufficient or excessive.
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS
Operator is responsible for Joint Account Material and shall make proper
and timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property;
however, at Operator's option, such Material may be supplied by the
Non-Operator. Operator shall make timely disposition of idle and/or surplus
Material, such disposal being made either through sale to Operator or
Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but
shall be under no obligation to purchase, interest of Non-Operators in surplus
condition A or B Material. The disposal of surplus Controllable Material not
purchased by the Operator shall be agreed to by the Parties.
1. Purchases
Material purchased shall be charged at the price paid by Operator after
deduction of all discounts received. In ' case of Material found to be defective
or returned to vendor for any other reasons, credit shall be passed to the Joint
Account when adjustment has been received by the Operator.
2. Transfers and Dispositions
Material furnished to the Joint Property and Material transferred from the
Joint Property or disposed of by the Operator, unless otherwise agreed to by the
Parties, shall be priced on the following basis exclusive of cash discounts:
A. New Material (Condition A)
(1) Tubular Goods all tubular goods, including line pipe, shall be
priced at Operator's actual cost plus operator's actual cost of transportation.
(a) [OMITTED]
(b) [OMITTED]
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
(c) [OMITTED]
(d) [OMITTED]
(2) [OMITTED]
(2) Other Material shall be priced at the current new price, in effect
at date of movement, as listed by a reliable supply store nearest the Joint
Property, or point of manufacture, plus transportation costs, if applicable, to
the railway receiving point nearest the Joint Property.
(3) Unused new Material, except tubular goods, moved from the Joint
Property shall be priced at the current new price, in effect on date of
movement, as listed by a reliable supply store nearest the Joint Property, or
point of manufacture, plus transportation costs, if applicable, to the railway
receiving point nearest the Joint Property. Unused new tubulars will be priced
as provided above in Paragraph 2.A.(1) and (2).
B. Good Used Material (Condition B)
Material in sound and serviceable condition and suitable for reuse
without reconditioning.
(1) Material moved to the Joint Property
At seventy-five percent (76%) of current new price, as determined
by Paragraph A.
(2) Material used on and moved from the Joint Property
(a) At seventy-five percent (75%) of current new price, as
determined by Paragraph A, if Material was originally charged to the Joint
Account as new Material or
(b) At sixty-five percent (65%) of current new price, as
determined by Paragraph A, if Material was originally charged to the Joint
Account as used Material.
(3) Material not used on and moved from the Joint Property
At seventy-five percent (75%) of current new price as determined
by Paragraph A.
The Cost of reconditioning, if any, shall be absorbed by the
transferring property.
<PAGE>
C. Other Used Material
(1) Condition C
Material which is not in sound and serviceable condition and not
suitable for its original function until after reconditioning shall be priced at
fifty percent (50%) of current new price as determined by Paragraph A. The
cost of reconditioning shall be charged to the receiving property, provided
Condition C value plus cost of reconditioning does not exceed Condition B value.
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
(2) Condition D
Material, excluding junk, no longer suitable for its original
purpose, but usable for some other purpose shall be priced on a basis
commensurate with its use. Operator may dispose of Condition D Material under
procedures normally used by Operator without prior approval of Non-Operators.
(a) Casing, tubing, or drill pipe used as line pipe shall be
priced as Grade A and B seamless line pipe of comparable size and weight Used
casing, tubing or drill pipe utilized as line pipe shall be priced at used line
pipe prices.
(b) Casing, tubing or drill pipe used as higher pressure
service lines than standard line pipe, e.g. power oil lines, shall be priced
under normal pricing procedures for casing, tubing, or drill pipe. Upset tubular
goods shall be priced on a non upset basis.
(3) Condition E
Junk shall be priced at prevailing prim. Operator may dispose of
Condition E Material under procedures normally utilized by Operator without
prior approval of Non-Operators.
D. Obsolete Material
Material which is serviceable and usable for its original function but
condition and/or value of such Material is not equivalent to that which would
justify a price as provided above may be specially priced as agreed to by the
Parties. Such price should result in the Joint Account being charged with the
value of the service rendered by such Material.
E. Pricing Conditions
(1) Loading or unloading costs may be charged to the Joint Account
at the rate of twenty-five cents (.25) per hundred weight on all tubular goods
movements, in lieu of actual loading or unloading costs sustained at the
stocking point. The above rate shall be adjusted as of the first day of April
each year following January 1, 1985 by the same percentage increase or decrease
used to adjust overhead rates in Section III, Paragraph 1.A.(3). Each year, the
rate calculated shall be rounded to the nearest cent and shall be the rate in
effect until the first day of April next year. Such rate shall be published each
year by the Council of Petroleum Accountants Societies.
(2) Material involving erection costs shall be charged at
applicable percentage of the current knocked-down price of new Material.
3. Premium Prices
Whenever Material is not readily obtainable at published or listed prices
because of national emergencies, strikes or other unusual causes over which the
Operator has no control, the Operator may charge the Joint Account for the
required Material at the Operator's actual cost incurred in providing such
Material, in making it suitable for use, and in moving it to the Joint Property;
provided notice in writing is furnished to Non-Operators of the proposed. charge
prior to billing Non-Operators for such Material. Each Non-Operator shall have
the right, by so electing and notifying Operator within ten days after receiving
notice from Operator, to furnish in kind all or part of his share of such
Material suitable for use and acceptable to Operator.
4. Warranty of Material Furnished By Operator
Operator does not warrant the Material furnished. In case of defective
Material, credit shall not be passed to the Joint Account until adjustment has
been received by Operator from the manufacturers or their agents.
V. INVENTORIES
The Operator shall maintain detailed records of Controllable Material.
1. Periodic Inventories, Notice and Representation
At reasonable intervals, inventories shall be taken by Operator of the
Joint Account Controllable Material. Written notice of intention to take
inventory shall be given by Operator at least thirty (30) days before any
inventory is to begin so that Non-Operators may be represented when any
inventory is taken. Failure of Non-Operators to be represented at an inventory
shall bind Non-Operators to accept the inventory taken by Operator.
2. Reconciliation and Adjustment of Inventories
Adjustments to the Joint Account resulting from the reconciliation of a
physical inventory shall be made within six months following the taking of the
inventory. Inventory adjustments shall be made by Operator to the Joint Account
for
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
overages and shortages, but, Operator shall be held accountable only for
shortages due to lack of reasonable diligence.
3. Special Inventories
Special inventories may be taken whenever there is any sale, change of
interest, or change of Operator in the Joint Property. It shall be the duty of
the party selling to notify all other Parties as quickly as possible after the
transfer of interest takes place. In such cases, both the seller and the
purchaser shall be governed by such inventory. In cases involving a change of
Operator, all Parties shall be governed by such inventory.
4. Expense of Conducting Inventories
A. The expense of conducting periodic inventories shall not be charged
to the Joint Account unless agreed to by the Parties.
B. The expense of conducting special inventories shall be charged to
the Parties requesting such inventories, except inventories required due to
change of Operator shall be charged to the Joint Account.
<PAGE>
EXHIBIT "D"
ATTACHED TO AND MADE A PART OF THAT CERTAIN OPERATING AGREEMENT
BY PANACO, INC. I AS OPERATOR, SOUTH HALTER ISLAM AIM
ST. MARY AND TERREBONNE PARISHES
1. The Operator, during the terns of this Agreement, shall attempt to carry
Insurance for the benefit and at the expense of the parties hereto as follows:
A. Worker's Compensation Insurance as contemplated and required by the
laws of the state in which operations will be conducted.
B. Employees Liability Insurance with minimum limits as required by the
laws of the State in which operations will be conducted.
C. Automobile Liability Insurance. covering all automotive equipment
used under this Agreement with limits of not less than $1,000,000
Combined Single Limited.
D. General Liability (Bodily Injury & Property Damage) Insurance with
limits of not less than $1,000.000 Combined Single Limit.
E. Excess Liability Coverage with a limit of not less than $10,000,000
for Bodily Injury and Property Damage per occurrence.
F. Will Control "Blowout" Insurance with limits of not less than
$10,000,000 per occurrence for all drilling wells Including
Extra Expenses related to redrilling, see page and pollution.
II. The Operator shall charge the Joint Account for insurance premiums.
Losses "including deductibles) not covered by such insurance shall be charged to
the Joint Account. The Operator shall maintain and keep in force all the above
insurance coverage's, but is not responsible for solvency of any insurer(s).
III. In addition, if any Non-Operator elects not to participate in Coverage
"F" above, written notification must be presented to the Operator within ton
(10) days of the date of this Agreement's signing, and Operator shall be
furnished with a certificate of Non Operator's Well Control Insurance.
IV. In the event any portion of such insurance is not available to Operator
and coverage is either reduced or lost, then Operator shall notify Non-Operator
of such facts and Non-Operator may either participate in such reduced coverage
or provide Its own coverage.
V. Unavailability of Insurance at Reasonable Rates. If any of the
above-described insurance policies is not available (or becomes unavailable) at
reasonable premium rates, then Operator shall promptly give notice in writing
thereof to the other parties and Operator thereafter shall not be required to
obtain or continue such insurance in force.
VI. The Non-Operators acknowledge that the above-described policies are
limited in scope of coverage and amounts insured and do not cover all risks and
obligations which may be incurred under the Operating Agreement or applicable
law.
<PAGE>
EXHIBIT "E"
ATTACHED TO AND MADE A PART OF THAT CERTAIN OPERATING AGREEMENT
BY PANACO, INC., AS OPERATOR , SOUTH HALTER ISLAND AREA
ST. MARY AND TERREBONNE PARISHES
GAS BALANCING AGREEMENT
I. INTENT OF THIS GAS BALANCING AGREEMENT
A. The parties to this gas balancing agreement ("GBA") intend to provide a
method of balancing production from the acreage (the "Contract Ara) covered by
the Operating Agreement to which this GBA is attached the "Operating Agreement")
when a party does not take its proportionate share of production.
B. Pursuant to the Operating Agreement, each party has the right to take in
kind and/or separately dispose of its proportionate share of the gas produced
from the Contract Area. In the event any party hereto does not take in kind
and/or market its shire of the gas as produced, the terms of this GBA shall
automatically become effective, and shall supersede any relevant terms to the
contrary in the Operating Agreement (unless otherwise noted herein).
C. As long as any gas produced from the Contract Area is subject to the
regulations of the Federal Energy Regulatory Commission ("FERC") or any
successor governmental authority under any statutory authority which establishes
maximum lawful prices for the gas, each party shall receive its allocated 'share
of each pricing category of gas in accordance with its participating interest in
each reservoir from which such gas is produced. It is the intent of this GBA
that balancing of gas will be based upon (lie allocated volumes of each such
category of gas (if any) for the Contract Area (or if there is more than one
well or reservoir therein in which the working interests differ, for each such
well or reservoir in which such interests differ, and this GBA shall be
interpreted and the provisions hereof effected accordingly). Any deregulated
gas, including gas deregulated In the future, shall be treated as a separate
category for purposes of balancing, and such deregulated gas category may be
utilized to makeup gas from any regulated gas category.
D. The terms "party" and "parties" shall be considered to imply either the
singular or plural form of the word as applicable according to the context.
II. OVER/UNDER PRODUCTION
A. During any period or periods when any party does not take in kind and/or
market its full share of gas produced ("non-marketing" party), the other parties
("marketing" parties) shall be entitled, but not required, to produce, take,
sill and deliver for such marketing parties' accounts, in addition to the full
share of gas to which the marketing parties are otherwise entitled, all or any
portion of the gas attributable to a non-marketing party. Gas attributable to a
non-marketing' party that is taken by a . marketing party is referred to in this
GBA as "overproduction'. Each party failing to take or market its full share of
the gas produced (an "Underproduced Party") shall be considered underproduced by
a quantity of gas equal to its share of the gas produced but not taken, less
such party's share of the gas vented, lost or used in operations. The marketing
parties that take gas attributable to a non-marketing party, in the absence of
any other agreement between them, shall each take a share of the gas
attributable to the non-marketing party in the direct proportion that its
interest bears to the total interest of all marketing parties. All gas taken by
a party in accordance with the terms of this GBA, regardless of whether such
party is underproduced or overproduced, shall be regarded as gas taken for its
own
<PAGE>
account with title thereto being in such party, whether such gas is attributable
to such party's share of production, overproduction or makeup of
underproduction.
B. Notwithstanding anything contained in this GBA or the Operating Agreement
to the contrary, each party shall be obligated to take & have sold for its
account its full share of gas produced if there is no other party electing to
take such share of gas for its account and if the Operator determines in good
faith that (i) damage may be caused to any reservoir from which production is
then being obtained or (ii) reserves or the lease(s) covered by the Contract
Area may be lost as a consequence of the curtailment of production that would
otherwise result from such party becoming a non-marketing party under
circumstances where there is no marketing party for such gas.
III. ACCOUNTING FOR IMBALANCE
A. For the sole purpose of implementing the terms of this GBA and adjusting
gas imbalances which may occur, each party taking gas from the Contract Area in
any month shall furnish or cause to be furnished to the Operator by the last day
of each calendar month a statement (a -seuees Statement!) showing the total
volume of gas taken for its account during the preceding calendar month
expressed in Mcf's at 14.73 PSIA (the "Report Period"). If actual volume
information sufficient to prepare such statement is not made available to the
taking party in sufficient time to prepare it, such taking party shall
nevertheless furnish a statement of its good faith estimate of volumes taken.
Within sixty (60) days after the end of each Report Period or, if later, within
thirty (30) days after receipt of all Seller's Statements for such Report
Period, the Operator shall furnish each party a statement of the gas balance
among the parties (the "Gas Balance Statement'). The Gas Balance Statement for
each Report Period shall provide an accounting on a monthly and cumulative basis
of the quantities and categories of gas each party is entitled to receive and
the quantities and categories of gas produced and delivered for each party's
account and shall include the total quantity of gas produced in the Report
Period to which it relates, expressed In Mcf's at 14.73 PSIA. All gas volumes
under this paragraph will be identified by the appropriate category as required
by law or regulation in effect from time to time (including deregulated gas, as
appropriate). Each party agrees that it will not utilize any information
obtained hereunder for any purpose other than implementing tile terms of this
GBA. Any error or discrepancy in any Gas Balance Statement shall be promptly
reported to Operator, following which Operator shall make a proper adjustment
thereof within thirty (30) days after final determination of the correct
quantities involved; provided, however, if no errors or discrepancies are
reported to Operator within two (2) years from the date of any Gas Balance
Statement, such Statement shall be conclusively deemed to be correct. Operator
shall have the right to treat a party as a non-marketing party and not allow it
to produce gas for Its account during any month when such party Is delinquent in
furnishing any Seller's Statements then due from it.
B. If Operator in good faith determines that an Overproduced Party (defined
for purposes hereof as any party having cumulative overproduction at the time in
question) has recovered one hundred percent (100%) of such Overproduced Party's
share of Operator's good faith estimate of the proved recoverable reserves from
the Contract Area, such Overproduced Party shall cease taking gas upon receipt
of written notification of such determination from the Operator. Upon such
occurrence, the Underproduced Parties shall be entitled to take one hundred
percent (100%) of such Overproduced Party's share of production until the
account of the Overproduced Party is balanced. Thereafter, such Overproduced
Party shall again have the right to take its share of the remaining production,
if any, in accordance with the provisions herein contained. Notwithstanding
anything herein to the contrary, after an Overporduced Party has recovered on e
hundred percent (100%) of its full share of the estimated proved recoverable
reserves as so determined in good faith by the Operator, such Overproduced Party
may continue to produce if such continued production is (i) necessary for lease
maintenance purposes, including avoidance of shut-in or similar payments, or
(ii) permitted by a majority in interest of the Underproduced Parties after
written ballot conducted by Operator.
IV. GAS MAKE-UP
<PAGE>
To allow for the recovery and make-tip of underproduced gas and to balance
the gas account between the parties in accordance with their respective
interest, each Underproduced Party shall be entitled to take an additional share
of gas ("makeup gas")as herein provided. Once an Underproduced Party begins
taking makeup gas, it shall continue taking so long as practical to achieve
balance. Each Underproduced Party shall ' 11 be entitled to take up to fifty
percent (50%) of tile share of gas attributable to all Overproduced Parties in
addition to the full share of gas to which such party is otherwise entitled;
however, in no event shall tile makeup gas entitlement of any Underproduced
Party exceed one hundred percent (100%) of Its entitlement share of production.
Makeup gas may be taken by an Underproduced Party as provided above commencing
at tile beginning of any month following not less than 45 days' prior written
notice to tile Operator of such election from the Underproduced Party. If, more
than one Underproduced Party elects to take makeup gas during any month when
Insufficient gas is available as provided herein from the Overproduced Parties,
such Underproduced Parties shall be entitled to take makeup gas In proportion to
their respective underproduced accounts as reflected in the most recent
available Gas Balance Statement. No Underproduced Party will be allowed to take
makeup gas during the months of October, November, December or January, except
out of production that any other party elects not to take during such months.
The first gas made up shall be assumed to be tile first gas underproduced.
V. ASSIGNMENT OF INTEREST
In the event a party sells, assigns, exchanges or otherwise transfers all
or any undivided portion of its working interest in the Contract Area, the
transferee of tile interest so transferred shall take such interest subject to
any overbalance position attributable to such interest (and by accepting such
interest such transferee shall have assumed and shall be responsible for such
overbalance position as provided herein, provided that the transferor shall also
remain fully liable therefor until such overbalance position is fully satisfied
as provided herein); and, conversely, the transferee of such interest as to
which an underbalance position exists shall be the party to whom tile
Overproduced Parties shall be accountable under this GBA. The provisions of the
preceding sentence shall not apply to any mortgage, pledge or hypothecation of,
or any other grant of a security interest in, any such working interest;
provided, however, that such provisions shall apply to the forced sale of such
interest pursuant to the foreclosure of, or other realization upon, any such
encumbrance. The provisions of this paragraph shall be In addition to any other
provisions of the Operating Agreement applicable to tile transfer of any such
working interest.
VI. CESSATION OF PRODUCTION
A. Following the Operator's good faith determination that the well(s) within
tile Contract Area have reached the end of their economically productive lives
after gas production therefrom has ceased with no attempt having been made to
restore production within one hundred twenty (120) days thereafter, the Operator
shall distribute, within one hundred fifty (150) days of the date the last well
in the Contract Area last produced gas from the productive formations therein, a
statement of net unrecouped underproduction and overproduction and the months
and years In which such unrecouped production accrued. Within thirty (30) days
from the end of such one hundred flfty (150) day period, the overproduced
Non-operators shall furnish to Operator, for the sole purpose of establishing
records sufficient to verify cash balancing values, a statement supported by
copies of gas sales invoices, reflecting amounts actually received (or
constructively received as provided in Section VI.F) on a monthly basis for the
months for which accrued unrecouped overproduction exists. Within thirty (30)
days after receipt of all such statements, Operator shall provide a final
accounting showing the amounts owed by the overproduced Non-operators (the
"final accounting").
B. If an Overproduced Party desires to furnish an Underproduced Party with
make-up gas from another location, then it shall deliver to the Underproduced
Party written notice
<PAGE>
to that effect setting forth the quantity of gas (as adjusted to equal the same
BTU content and gas quality as the Underproduced Party would have received if it
were not a nonmarketing party) and the proposed delivery point(s) and makeup
rate(s). If the parties do not agree on the delivery point(s) and makeup rate(s)
prior to the issuance of the final accounting, then a cash settlement shall be
made as provided in Section VI.C.
C. Within thirty (30) days of receipt of the final accounting and subject to
the provisions of Section VI.B, each Overproduced. Party shall remit to Operator
for disbursement to the Underproduced Parties a sum of money (which sum shall
not include interest) equal to the amount actually received (or constructively
received as provided in Section VI.F) by such Overproduced Party for quantities
taken during the month(s) of overproduction, less applicable deductions for
transportation costs, royalties ( including overriding royalties to the extent
they burden the interest of both the Overproduced Party and the Underproduced
Party), severance and other production taxes and any other costs or charges to
which the production of the Overproduced Party and the Underproduced Party would
be subject (in each instance to the extent actually paid by the Overproduced
Party). Such remittance shall be based on the number of MM13TU' of
overproduction and shall be accompanied by a statement showing volumes and
prices for each month with accrued unrecouped overproduction.
D. Within thirty (30) days of receipt of any such remittance by Operator
from an Overproduced Party, Operator shall disburse such funds to the
Underproduced Party(ies) in accordance with the final accounting. Operator
assumes no liability with respect to any such payment (unless such payment Is
attributable to Operator's overproduction), it being the intent of the parties
that each Overproduced Party shall be solely responsible for reimbursing each
Underproduced Party for such Underproduced Party's respective share of
overproduction taken by such Overproduced Party in accordance with the
provisions herein contained. If any party fails to pay any sum due under the
terms hereof after demand therefor by the Operator, ilia Operator may turn
responsibility for the collection of such sum over to the party or parties to
whom it is owed, and Operator shall have no further responsibility for
collection.
E. In determining the amount of overproduction for which settlement is clue,
production taken during any month by an Underproduced Party in excess of such
Underproduced Party' share shall be treated as makeup gas and shall be applied
to reduce prior deficits in the order of accrual of such deficits.
F. An Overproduced Party that took gas in kind for Its own use or sold gas
to an affiliate shall pay for such gas at market value at the time it was
produced. even If ilia Overproduced Party sold such gas to an affiliate at a
price greater or lesser than market value.
G. If refunds are later required by any governmental authority, each party
shall be accountable for its respective share of such refunds as finally
balanced hereunder.
VII. ROYALTY SETTLEMENT
Except where provision is made to the contrary in the Operating Agreement
or as otherwise may be required by any applicable law or regulation, at all
times while gas is produced from the Contract Area, each party shall pay, or
cause to be paid, all royalty due and payable on its share of gas production
actually taken. Each party agrees to hold each other party harmless from any and
all claims for royalty payments asserted by its royalty owners. The term
"royalty owner" shall include owners of royalties, overriding royalties,
production payments and similar interests.
VIII. DELIVER ABILITY TESTS
<PAGE>
Nothing herein shall be construed to deny any party the right, from time to
time, upon reasonable advance notice in writing to the Operator, to produce and
take or deliver to its purchaser the full well stream for a reasonable period to
meet the deliverability test required by its purchaser.
IX. NOMINATIONS.
A. Each party, on a monthly basis, shall be responsible to nominate its
respective share of gas to the transporting pipeline(s). Further, each party
shall bear and pay all penalties, if any, related to its share of gas whether it
is selling or using the gas or whether the sales and use of each are in
proportion to its respective interest in such gas. Any party may begin taking
and/or delivering to its purchasers its full share of gas produced on the first
day of any month provided the Operator has received written notice thereof at
least eighteen (18) working days prior to the first day of such month. Upon
receiving a written request from a party taking its gas in kind, Operator shall
give such, party or its designated representative notice no later than nine (9)
working days prior to the first day of a month of the sustained MMBTU per day
(including anticipated 'downtime) which Operator estimates It will deliver to
sales for such ensuing month. Operator agrees to advise such party or Its
designated representative of any anticipated or reported significant change In
production volumes (+/-5%) of which Operator has knowledge as soon as reasonably
practical.
B. Operator shall not be liable to any party for any cost, expense, loss or
liability as to any matter set out in this Section IX, Including but 'not
limited to any fees and/or penalties associated with Imbalances charged by any
pipeline, except such as is caused by tile gross negligence or willful
misconduct of Operator.
X. TAXES
A. Each party shall pay, or cause to be paid, all production and severance
taxes due and payable on all gas production actually taken or sold by such
party.
B. For Federal income tax purposes, the parties agree to utilize the
cumulative gas balancing method in accordance with Treasury Regulation section
1.761-2(d). This will facilitate the election of the parties to be excluded from
the provisions of Subchapter K. Chapter 1, Subtitle A of the Internal Revenue
Code of 1986 as provided In Article 20.1 of the Operating Agreement.
XI. LIQUID HYDROCARBONS
All parties hereto shall share in and own the liquid hydrocarbons recovered
from all gas by primary separation equipment prior to processing In a gas plant
In accordance with their respective Interests, as specified In the Operating
Agreement, whether or not such parties are actually producing and marketing gas
at such time.
XII. LEASE OPERATING COSTS
Nothing herein shall change or affect tacit party's obligation to pay Its
proportionate share of all costs and liabilities Incurred In operations, as its
share thereof Is set forth in the Operating Agreement.
XIII. TERM
This agreement shall remain in force and effect as long as the Operating
Agreement is in effect and thereafter until the gas balance accounts between the
parties are settled in full and shall accrue to the benefit and be binding upon
the parties hereto, their successors, representatives and assigns.
<PAGE>
XIV. OPERATOR'S LIABILITY
Except as otherwise provided herein, Operator is authorized to administer
tile provisions of this Agreement, but shall have no liability to the other
parties for losses sustained or liability Incurred which arise out of or In
connection with the performance of Operator's duties hereunder, except such as
may result from Operator's gross negligence or willful misconduct.
XV. AUDITS
Any Underproduced Party shall have the right for a period of two (2) years
after receipt of payment pursuant to a final accounting and after giving written
notice to all parties, to audit an Overproduced Party's accounts and records
relating to such payment. The party conducting such audit shall bear its costs
of the audit. Additionally, Operator shall have the right for a period of two
(2) years after receipt of a Seller's Statement or a statement prepared in
connection with the final accounting and after giving written notice thereof to
the affected party to audit such party's accounts and records relating to such
volumes or payment. as applicable. Costs of such audit shall be borne by the
joint account.
XVI. CONFLICT
The terms of this GBA govern if there Is a conflict between the terms
hereof and the terms of any gas sales contract covering the Contract Area
entered into by any party.
XVII. ARBITRATION
Any controversy or claim arising out of or relating to this GBA or the
breach hereof shall be settled by binding arbitration In accordance with the
Commercial Arbitration Rules of the American Arbitration Association, and
Judgment upon the award may be entered In any court having jurisdiction thereof.
The arbitrator shall not award punitive nor multiple damages in settlement of
any controversy or claim.
<PAGE>
EXHIBIT "F"
ATTACHED TO AM MADE A PART OF THAT CERTAIN OPERATING AGREEMENT
BY PANACO, INC., AS OPERATOR, SOUTH HALTER, ISLAND AREA
ST. MARY AND TERREBONNE PARISHES
EQUAL EMPLOYMENT OPPORTUNITY PROVISION
During the performance of this contract, as "Operator" agrees as follows:
1) The Operator will not discriminate against any employee or applicant for
employment because of race, color, religion, national origin or sex. The
Operator will take affirmative action to ensure that applicants are employed,
and that employees are treated during employment, without regard to their race,
color, religion, national origin or sex. Such action shall Include, but not be
limited to the following: employment, upgrading, demotion, or transfer,
recruitment or recruitment advertising; layoff or termination; rates of pay or
other forms of compensation; and selection for training, including
apprenticeship. The Operator agrees to post in conspicuous places, available to
employees and applicants for employment notices to be provided for the
contracting officer setting forth the provisions of this non-discrimination
clause.
2) The Operator will, In all solicitations or advertisements for employees
placed by or on behalf of the Operator, state -that all qualified applicants
will receive consideration for employment without regard to race, color,
religion, national origin or sex.
3) The Operator will send to each labor union or representative of workers
with which It has a collective bargaining agreement or other contract or
understanding, a notice to be provided by the agency contracting officer,
advising the labor union or workers' representative of the Operators'
commitments under Section 202 of Executive Order No. 11246 dated September 24,
1965, and shall post copies of the notice In conspicuous places available to
employees. and applicants for employment.
4) The Operator will comply with all provisions of Executive Order No. 11246
of September 24, 1965, and of the rules, regulations, and relevant orders of the
Secretary of Labor.
<PAGE>
5) The Operator will furnish all Information and reports required by
Executive Order No. 11246 of September 24, 1966, and by the rules, regulations,
and orders of the Secretary of Labor, or pursuant thereto, and will permit
access to Its books, records, and accounts by the contracting agency and the
Secretary of Labor for purposes of Investigation to ascertain compliance with
such rules, regulations, and orders.
6) In the event of the Operator's non-compliance with the nondiscrimination
clauses of this contract or with any of such rules, regulations, or orders, this
contract may be cancelled, terminated or suspended In whole or In part and the
Operator may be declared Ineligible for further Government contracts In
accordance with procedures authorized In Executive Order No. 11248 of September
24, 1985, and such other sanctions may be Imposed and remedies Invoked as
provided In Executive Order No. 11246
7) The Operator will include the provisions of paragraphs (1) through (7) in
every subcontract or purchase order unless exempted by rules, regulations, or
orders of the Secretary of Labor issued pursuant to Section 204 of Executive
Order No. 11246 of September 24, 1965, so that such provisions will be binding
upon each subcontract or vendor. The Operator
<PAGE>
will take such action with respect to any subcontract or purchase order as
the contracting agency may direct as a means of enforcing such provisions
including sanctions for non-compliance. Provided, however, that in the event the
Operator becomes involved in, or is threatened with, litigation with a
subcontractor or vendor as a result of such direction by the contracting agency,
the Operator may request the United States to enter into such litigation to
protect the interests of the United States.
8) Operator acknowledges that it may be required to file Standard Form 100
(EEO-1) promulgated jointly by the Office of Federal Contract Compliance, the
Equal Employment Opportunity Commission and Plans for Progress with Joint
Reporting Committee, Federal Depot, Jeffersonville, Indiana, within thirty (30)
days of the date of contract award if such report has not been filed for the
current year and otherwise comply with or file such other compliance reports as
may be required under Executive Order No. 11246, as amended and rules and
regulations adopted thereunder.
9) Operator further acknowledges that he may be required to develop a
written affirmative action compliance program as- required by the rules and
regulations approved by the Secretary of Labor under authority of Executive
Order No. 11248 and supply Non-Operators with a copy of such program if they so
request.
CERTIFICATION OF NON-SEGREGATED FACILITIES
1) Operator assures Non-Operators that it does not and will not maintain or
provide for its employees any segregated facilities at any of its
establishments, and that it does not and will not permit Its employees to
perform their services at any location, under its control, where segregated
facilities are maintained. For this purpose, it is understood that the phrase
"segregated facilities" includes facilities, which are in fact segregated on a
basis of race, color, religion or national origin, because of habit; local
custom or otherwise. It is further understood and agreed that maintaining or
providing segregated facilities for its employees or permitting its employees to
perform their services at any location under its control where segregated
facilities are maintained is a violation of the equal opportunity clause
required by Executive Order No. 11246 of September 24, 1965.
2) Operator further understands and agrees that a breach of the assurance
herein contained subjects it to the provisions of the Order at 41 CFR Chapter 60
of the Secretary of Labor dated May 21, 1988, and the provisions of the equal
opportunity clause enumerated in contracts between the United States of America
and Non-Operators.
3) Whoever knowingly and willfully makes any false, factitious or fraudulent
representation may be liable to criminal prosecution under 18 U.S.C. 1001.
OCCUPATIONAL SAFETY AND HEALTH ACT
Operator will observe and comply with all safety and health standards
promulgated by the Secretary of Labor under Section 107 of the Contract Work
Hours and Standards Act, published In 29 CFR Part 1518 and adopted by the
Secretary of Labor as Occupational Safety and Health Act of 1970. Such safety
and health standards shall apply to all subcontractors and their employees as
well as to the prime contractor and its employees.
VETERAN'S PREFERENCE
Operator agrees to comply with the following insofar as contracts it lets for an
amount of $10,000 or more or which will generate 400 or more man-days of
employment (each man-day consisting of any day in which an employee
<PAGE>
performs more than one hour of work) and further agrees to Include the following
provision In contracts with Contractors and subcontractors:
"CONTRACTOR AND SUBCONTRACTOR LISTING REQUIREMENT
1) As provided by 41 CFR 50-250, the contractor agrees that all employment
openings of the contractor which exist at the time of the execution of this
contract and those which occur during. the performance of this contract,
including those not generated by the contract and including those occurring at
an establishment of the contractor other than the one wherein the contract is
being performed but excluding those of independently operated corporate
affiliates, shall, to the maximum extent feasible, be offered for listing at an
appropriate local office of the State employment service system wherein the
opening occurs and to provide such periodic reports to such local office
regarding employment openings and hires as may be required. Provided, that this
provision shall not apply to openings which the contractor fills from within the
contractors organization or are filled pursuant to a customary and traditional
employer-union hiring arrangement and that the listing of employment openings
shall involve only the normal obligations which attach to the placing of job
orders.
2) The contractor agrees to place the above provision in any subcontract
directly under this contract."
CERTIFICATION OF COMPLIANCE WITH ENVIRONMENTAL LAWS
Operator agrees to comply with the Clean Air Act (42 U.S.C. 1857) and the
Federal Water Pollution Control Act (33 U.S.C. 1251) when conducting
operations involving nonexempt contracts. In all nonexempt contracts with
subcontractors, Operator shall require:
1) No facility shall be utilized by Subcontractor in the performance of this
contract with Non-Operator who is listed on the Environmental Protection Agency
(EPA) List of Violating Facilities. See Executive Order No. 11738 of September
12, 1973, and 40 CFR 15.20.
2) Prompt written notification shall be given to Subcontractor to
Non--Operator of any communication indicating that any such facility is under
consideration to be included on the EPA List of Violating Facilities.
3) Subcontractor shall comply with all requirements of Section 1.14 of the
Clean Air Act (42 U.S.C. 1857) and Section 308 of the Federal Water Pollution
Control Act (33 U.S.C. 1261). relating to inspection, monitoring, entry,
reports, and Information, as well as all other requirements specified in these
Sections, and all regulations and guidelines issued thereunder.
4) The foregoing criteria and requirements shall be included in all of
Subcontractor's nonexempt subcontracts, and Subcontractor shall take such action
as the Government may direct as a means of enforcing such provisions. See 40 CFR
15.4 and 5.
END OF EXHIBIT
<PAGE>
EVEREST MINERALS CORPORATION
POST OFFICE BOX
CORPUS CRISTI TEXAS 78403
(512) 883-2831
Facsimile (512)
September 13, 1999
Cummins & Walker Oil Company Via Facsimile
--------------
Post Office Box 718 361/882-2672
Corpus Christi, Texas 78403
Attn: Mr. M. L. Walker
Re: Union Central Life Insurance Co. Well No. I
Colorado County, Texas
Everest Minerals Corporation ("Everest") as Operator will set 7000' of 4 1/2 "
casing in order to test the Yegus sands for the Union Central Life Insurance Co.
Well No. I in Colorado County, Texas.
It is our understanding that Cummins & Walker Oil Company Inc. ("Cummins") will
not be the Operator for the referenced well and has appointed Everest to take
its place. Cummins will participate for 5.0% in lieu of its original 10.0%, and
Everest and Lakota Energy, Ind. will each own 50% of the remaining 5.0%. This
interest is subject to a 25.0% back in working interest after payout by Carolina
Oil & Gas, Inc.
If you are in agreement, please sign in the designated space below and forward
Everest a check in the amount of $132,010.73 for the completion funds for the
referenced well. These costs are only an estimate and Cummins agrees to be
responsible for 82.5% of all completion costs as of 1:30 a.m. on September 13,
1999.
With the exception of the above, this is subject to the tam and conditions of
Letter Agreement dated May 17, 1999, by and between Cummins, Everest Oil & Gas
Corporation and Carolina Oil and Gas, Inc. Please execute and return via fax by
3:00 p.m. today.
Sincerely,
/s/
Tom M. Crain, Jr.
Vice President
ACCEPTED AND AGREED TO THIS 13TH DAY OF SEPTEMBER, 1999.
CUMMINS & WALKER OIL COMPANY, INC. (Hand written note "LaKota owes
$26,402.15")
/s/
M. L. Walker, II President
<PAGE>
CUMMINS & WALKER OIL COMPANY, INC.
P. 0. Box 718
Corpus Christi, Texas 78403
(5 12) 882-2607 FAX (512) 882-2672
April 9, 1999
Mr. John Hays
LaKota Energy, Inc.
6606 Carrington Court
Sugarland, Texas 77479
Re: Garwood Prospect
Colorado County, Texas
Dear John:
Enclosed herewith, please find a package on our Garwood Prospect located in
Colorado County, Texas. It is a multi-pay test with particular emphasis on the
Yegua "Y-2" sand. This prospect will test the Y-2, Y-4, and a shallow Miocene
sand at approximately 2500'. In addition, we will encounter the Frio which has
been quite prolific in this area, but generally falls below the 10' tuning
thickness the 3-D requires to resolve an amplitude event.
The lease block consists of 480 acres currently under lease. We are negotiating
for an additional 360 acres (to be offered at cost to the present partner
group)to the North-North West and have a partial interest leased under the 360.
If the first well is successful, we will drill a third Y-2 test on the NW block.
Terms of the trade are as follows:
Land, Legal and Title Opinion: 89,000
Geology & Generation: 30,000
Seismic Costs: 60,000
Dry Hole Cost: 120,000
Completion Cost: 120,000
Total Well Cost: 419,000
Cost per Quarter: 104,750
The prospect is subject to a 25% backin after payout on the first well only in
favor of Carolina Oil & Gas, Inc. (Robert Buchan), who is the prospect
generator. Cummins & Walker Oil Company, Inc. will be named operator of the
contract area. Cummins & Walker will own a 1/8th interest heads-up.
40% of the prospect is available at this time. We have a title opinion in hand
and rigs are available. We anticipate an initial rate of 1.2mmcf/d and a 8.4
month payout. Payout on the first well would require 298mmcf/gas.
(Handwritten - Thanks M. L. W. II)
<PAGE>
INVOICE No._____________________
CUMMINS & WALKER OIL COMPANY, INC.
P. 0. Box 718
Corpus Christi, Texas 78403
(512) 882-2607
DATE May 21, 1999
--------------
LaKota Energy, Inc.
6606 Carrington Court
Sugarland, Texas 77479 LEASE Garwood 3-D
------------
Prospect
-----
To invoice you for your .175 Working Interest in the leases,
geophysical and geological costs, and your dry hole costs.
TOTAL AMOUNT DUE: $57,225.00
Copy of LaKota Energy, Inc. Check Number 0984 in the amount of $57,225.00 made
payable to Cummins & Walker Oil Co. written on NationsBank account number 000984
061000052 070 719 7090
<PAGE>
EXHIBIT H
NOTICE OF OPERATING AGREEMENT
State (situs of land): TEXAS
County (situs of land): COLORADO
Operator: Cummins & Walker Oil Company, Inc.
Operator's Address: 317 People, Suite 1000
P.O. Box 718
Corpus Christi, TX 78403
Nonoperators: LaKota Energy, Inc.
Nonoperators' Address: 6606 Carrington Court
Sugarland, Texas 77479
Date of Execution: May 21 , 1999
Effective Date: May 17, 1999
Notice is hereby given that Operator and Nonoperators, named above, entered
into an Operating Agreement dated May 17, 1999 , (the "Agreement") which covers
lands located in the County and State named above, more fully described in
Exhibit "A" attached to this Notice. The Agreement is on the following form:
A.A.P.L.-1989
The Agreement contains the terms and conditions commonly found in that form of
Agreement with certain additions and deletions. In particular, it should be
noted that the Agreement contains provisions affecting the sharing of expenses
and revenues, controlling the relinquishment of interests by nonconsenting
parties, granting liens and rights of set off and recoupment, and generally
affecting the rights of the undersigned in the lands and interests subject to
the Agreement.
Operator and Nonoperators give notice that the Agreement between them may be
amended and supplemented from time to time in the future, and any inquiry as to
the contents of the Agreement should also include an inquiry as to the contents
of any and all such amendments and supplements.
<PAGE>
This Notice is being executed and recorded for the purpose of giving notice to
third parties dealing with the Operator and Nonoperators of the existence of the
Agreement and also of perfecting the liens and interests set forth in that
Agreement. Each of the undersigned reserve the right to refuse inspection of the
Agreement to parties attempting to obtain information for purposes prejudicial
to the business interests of the parties to the Agreement.
This Notice may be executed in multiple counterparts and shall be binding upon
all parties signing same, whether all sign or otherwise. To facilitate
recordation, a single counterpart containing additional signature and
acknowledgment pages from other counterparts may be executed and recorded.
EXECUTED on the date set out below beside each party's name.
OPERATOR:
CUMMINS & WALKER COMPANY, INC.
May 21, 1999 By: /s/
- -------------- --------
Date Executed M. L. Walker, II, President
NONOPERATORS:
- - 14 - 99 /s/
Date Executed (Print or Type Name)
Ken Honeyman
<PAGE>
STATE OF TEXAS
-----
COUNTY OFNVECES
------
Before me, the undersigned authority, on this day personally appeared M. L.
Walker, II, President of Cummins & Walker Oil Company, Inc., known to me to be
the person whose name is subscribed to the foregoing instrument, and
acknowledged to me that he executed the same as his free act and deed for the
purposes and consideration therein expressed.
Given under my hand and seal of office this 21day of May, 1999
-- ----------
_______________________________________________
Notary Public, State of ____________________________
My Commission Expires:
_________________________
STATE OF GEORGIA
-------
COUNTY OFCOBB
----
Before me, the undersigned authority, on this day personally appeared Ken
Honeyman, of LaKota Energy, Inc., known to me to be the person whose name is
subscribed to the foregoing instrument, and acknowledged to me that he executed
the same as his free act and deed for the purposes and consideration therein
expressed.
Given under my hand and seal of office this 14thday of June, 1999
---- -----------
_______/s/________________________________
Notary Public, State of ____________________________
My Commission Expires:
_________________________
(Stamped with a Notary Seal bearing the name Nan Richie, Harlson County, Georgia
Notary Public, commission expiration of Jan. 8, 2001)
<PAGE>
CUMMINS & WALKER OIL COMPANY, INC.
P. 0. Box 718
Corpus Christi, Texas 78403
(5 12) 882-2607 FAX (512) 882-2672
May 21, 1999
LaKota Energy, Inc.
Mr. John Hays
6606 Carrington Court
Sugarland, Texas 77479
Re: Garwood Prospect
Colorado County, Texas
Dear Mr. Hays:
When accepted by you, this letter will constitute the agreement ("Letter
Agreement") regarding the above referenced prospect between Cummins & Walker Oil
Company, Inc. ("C&W") and LaKota Energy, Inc., hereinafter referred to as
"Non-Operator", as follows:
1. Lease:C&W owns or controls certain oil and gas leases (''leases") covering
------
lands situated in Colorado County, Texas, as designated on the plat attached
hereto, said leases being more particularly described on the Exhibit "A"
attached hereto and made a part hereof
II. Royalty & Overriding Royalty Burdens: The leases are subject to royalty and
------------------------------------
overriding royalties equal to 25.0% of 8/8ths.
III. Assignment: For and consideration of the payments by Non-Operator to C&W
-----------
and in further consideration of the agreements of Non-Operator herein contained,
C&W hereby agrees to deliver an assignment to Non-Operator of an undivided
seventeen and one-half percent (17.5%) interest in and to the leases, subject to
(1) the royalty and overriding royalty burdens hereinabove mentioned and, (2) a
twenty-five percent (25.0%) working interest back-in after "payout" of the "test
well". "Payout" shall be deemed to have occurred at that point in time when the
revenues from the sale of oil and gas from the "test well" hereinafter
described, after deducting royalties, overriding royalties, taxes on
<PAGE>
production and operating expenses as set forth in the Operating Agreement
attached hereto and made a part hereof, are equal to the sum of the costs of
drilling, completing and equipping said test well for production, including all
land, legal, seismic, geological and origination costs. With regard to all
development wells drilled subsequent to the test well, Non-Operator's interest
shall be reduced by its proportionate part of the 25% back-in after payout, so
that Non-Operator's pro--rata share of the costs under any such development well
shall be 75% of 17.5 %, which is equal to 13.125%.
IV. Test. well and Operating Agreement:Upon acceptance of this Letter Agreement
-----------------------------------
by the parties hereto, Non-Operator agrees to pay to C&W the sum of $57,225.00
(Fifty-Seven Thousand Two Hundred Twenty Five Dollars) which represents
Non-Operator's 17.5% share of the costs of $207,000.00 for land, legal, geology
& origination, and seismic costs, plus 17.5% of &120,000.00 representing the
"dry hole" portion of the costs for the test well on the AFE attached hereto and
made a part hereof. C&W agrees to commence operations on or before July 1,
1999 for the drilling of said test well at a mutually agreeable location to a
total depth of 7000 feet in a good faith effort to discover oil and/or gas in
paying quantities. "Casing point" for the test well is hereby defined as the
point in time when the test well has been drilled to total depth and evaluated
with the industry standard triple-combo well log, plus sidewall cores and
formation tests as deemed necessary by C&W. At casing point, should
Non-Operator elect to participate in the completion of the test well as a
producer, then Non-Operator shall pay its proportionate 17.5% of the completion
costs as estimated on said AFE. It is hereby provided, however, that should
Non--Operator elect not to participate in the completion of the test well, then
Non-Operator shall have no further interest in the test well and the leases. All
operations after casing point shall be governed by the terms of the Operating
Agreement. Should Non-Operator elect to participate in the completion of the
test well, then C&W will promptly deliver the assignment to Non-Operator of his
undivided 17.5% interest in and to the leases subject to the terms hereof. If
the actual costs incurred amount to less than the estimates represented on the
AFE then an appropriate refund or credit shall be made for the account of
Non-Operator. If the actual costs amount to more than the estimated costs, then
Non-Operator agrees to pay for Non-Operator's proportionate 17.5% of such
amount.
In the event that subsurface conditions, such as heaving shale, or other such
condition or mechanical problems are encountered in the test well which, in the
opinion of C&W, makes further drilling impractical or impossible, then C&W may,
at its election, commence operations for the drilling of a substitute well, at a
mutually acceptable location, which shall then be deemed to be the "test well"
under the terms hereof.
V. Conduct of Operations and Notices:C&W shall operate under accepted practices
----------------------------------
prevailing in the filed. C&W agrees to accord Non-Operator, or his designee, at
his own risk, with the freedom and access to the derrick floor of each well
drilled hereunder, and
shall have the opportunity to review all pertinent geological, seismic and
engineering data during business hours. Non-Operator shall receive a copy of all
well logs, core analysis
<PAGE>
and formation test results, plus, upon request, copies of well test data and
pertinent Railroad Commission reports. All such data, reports and pertinent
information furnished to Non-Operator by C&W hereunder shall be held strictly
confidential by Non-Operator. With regard to notification matters and all other
purposes hereunder, the addresses, phone and fax numbers are hereby specified as
follows:
Non-Operator
LaKota Energy, Inc.
6606 Carrington Court
Sugarland, Texas 77479
Phone: 281-980-6203
FAX: 281-980-6357
Operator:
Cummins & Walker Oil Company, Inc.
P. 0. Box 718
Corpus Christi, Texas 78403
Phone: 361-882-2607
FAX: 361-882-2672
VI. Area of Mutual Interest:An area of Mutual Interest ("AMI ") is hereinafter
-------------------------
designated on the plat and following description attached hereto and made a part
hereof. It is agreed by the parties hereto that should any leasehold, royalty
or other interest covering lands and/or well(s), equipment, or appurtenances
attached thereto, lying wholly or partially within the AMI be hereinafter
acquired, then each such party shall have the right but not the obligation to
participate for his (or its) pro-rata share of such acquisition. within ten
days of any such acquisition, the acquiring party shall notify the non-acquiring
party in writing of his (or its) opportunity to participate in such acquisition,
and the non-acquiring party shall then have thirty (30) days in which to respond
in writing of his (or its) election to participate. Upon the election of the
non-acquiring party to participate in any such acquisition, then such party
shall have thirty days thereafter to deliver payment to the acquiring party for
his (or its) pro-rata share of the cost of such accusation. Should the
non-acquiring party fail to make such timely payment to the acquiring party,
then it is hereby agreed that the non-acquiring party shall have no interest in
such acquisition. It is understood and agreed that Non--Operator's pro-rata
share under the terms of this AMI shall be proportionately reduced by the 25%
back-in after payout hereinabove mentioned, so that Non-Operator's pro-rata
share under any such acquisition under this AMI shall be equal to 13.125%. This
AMI and the terms of this paragraph VI. shall terminate on the December 31,
2000.
<PAGE>
VII. Additional Provision: The provisions hereof shall be binding upon the
----------------------
parties hereto, their legal heirs successors and assigns. Nothing in this Letter
Agreement is intended and shall never be construed to create a partnership,
joint venture, mining partnership, corporation, association or other
relationship whereby any party hereto shall ever be held liable for the acts or
debts of another.
If the foregoing correctly states our agreement, please indicate your acceptance
and approval hereof by signing and returning one original to our office.
Yours very truly,
Cummins & Walker Oil Company, Inc.
/s/
M. L. Walker, II., President
AGREED TO AND ACCEPTED this 2 day of June, 1999.
LaKota Energy, Inc.
/s/
Printed Name: Ken Honeyman
Title: President
<PAGE>
EXHIBIT "B"
A.A.P.L. FORM 610 - 1989
MODEL FORM OPERATING AGREEMENT
OPERATING AGREEMENT
DATED MAY 17, 1999
OPERATOR EVEREST MINERALS CORPORATION, through first log on the bank, then
CUMMINS & WALKER OIL COMPANY, INC.
CONTRACT AREA WEST MUSTANG CREEK AND GARWOOD PROSPECTS
SEE EXHIBIT "A" TO LETTER AGREEMENT FOR LIST OF LEASES
COUNTY OF COLORADO, STATE OF TEXAS
COPYRIGHT 1989 - ALL RIGHS RESERVED
AMEICAN ASSOCIATION OF PETROLEUM
LANDMEN, 4100 FOSSIL CREEK BLVD.
FORT WORTH, TEXAS, 76137, APPROVED FORM.
A.A.P.L. NO. 610 - 1989
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
TABLE OF CONTENTS
-----------------
Article Title Page
I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . 1
II. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . 1
III. INTERESTS OF PARTIES . . . . . . . . . . . . . . . . . . 2
A. OIL AND GAS INTERESTS . . . . . . . . . . . . . . . 2
B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION . . 2
C. SUBSEQUENTLY CREATED INTERESTS . . . . . . . . . . . 2
IV. TITLES . . . . . . . . . . . . . . . . . . . . . . . . . . 2
A. TITLE EXAMINATION . . . . . . . . . . . . . . . . . . 2
B. LOSS OR FAILURE OF TITLE . . . . . . . . . . . . . 3
1. Failure of Title . . . . . . . . . . . . . . . . . 3
2. Loss by Non-Payment or Erroneous
Payment of Amount Due . . . . . . . . . . . . . 3
3. Other Losses . . . . . . . . . . . . . . . . . . . 3
4. Curing Title . . . . . . . . . . . . . . . . . . . 3
IV. OPERATOR . . . . . . . . . . .. . . . . . . . . . . . 4
A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR . . . 4
B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION
OF SUCCESSOR . . . . . . . . . . . . . . . . . . . . 4
1. Resignation or Removal of Operator. . . . . . . 4
2. Selection of Successor Operator . . . . . . . . 4
3. Effect of Bankruptcy . . . . . . . . . . . . . . 4
C. EMPLOYEES AND CONTRACTORS: . . . . . . . . . . . . 4
D. RIGHTS AND DUTIES OF OPERATOR: . . . . . . . . . 4
1. Competitive Rates and Use of Affiliates . . . 4
2. Discharge of joint Account Obligations . . . . 4
3. Protection from Liens . . . . . . . . . . . . . 4
4. Custody of Funds. . . . . . . . . . . . . . . . 5
5. Access to Contract Area and Records . . . . 5
6. Filing and Furnishing Governmental Reports. . . 5
7. Drilling and Testing Operations . . . . . . . . 5
8. Cost Estimates . . . . . . . . . . . . . . . . . . 5
9. Insurance . . . . . . . . . . . . . . . . . . . . 5
VI. DRILLING AND DEVELOPMENT. . . . . . . . . . . . . . . . 5
A.INITIAL WELL: . . . . . . . . . . . . . . . . . . . . 5
B.SUBSEQUENT OPERATIONS: . . . . . . . . . . . . . . . 5
1. Proposed Operations . . . . . . . . . . . . . . 5
2. Operations by Less Than All Parties . . . . . 6
3. Stand-By Costs . . . . . . . . . . . . . . . . . 7
4. Deepening . . . . . . . . . . . . . . . . . . . . 8
5. Sidetracking . . . . . . . . . . . . . . . . . . 8
6.Order of Preference of Operations . . . . . . . 8
7. Conformity to Spacing Pattern . . . . . . . 9
8. Paying Wells . . . .. . . . . . . . . . . . . . 9
C. COMPLETION OF WELLS; REWORKING AND PLUGGING BACK:. 9
1. Completion . . . . . . . . . . . . . . . . .. . . 9
2. Rework, Recomplete or Plug Back . . . . . . . 9
D. OTHER OPERATIONS: . . . . . . . . . . . . . . . . . 9
E. ABANDONMENT OF WELLS: . . . . . . . . . . . . . . 9
1. Abandonment of Dry Holes . . . . . . . . . . . 9
2. Abandonment of Wells That Have Produced . . 10
3. Abandonment of Non-Consent Operations . . . . 10
F. TERMINATION OF OPERATIONS: . . . . . . . . . . . 10
G. TAKING PRODUCTION IN KIND . . . . . . . . . . . 10
(Option 1) Gas Balancing Agreement . . . . . . .. 10
(Option 2) No Gas Balancing Agreement . . . . . 11
VII. EXPENDITURES AND LIABILITY OF PARTIES . . . . . . 11
A. LIABILITY OF PARTIES: . . . . . . . . . . . . . 11
B. LIENS AND SECURITY INTERESTS: . . . . . . . . . . 11
C. ADVANCES: . . . . . . . . . . . . . . . . . . . . . . 12
D. DEFAULTS AND REMEDIES: . . . . . . . . . . . . . 12
1. Suspension of Rights . . . . . . . . . . . . . . 13
2. Suit for Damages . . . . . . . . . . . . . . . . 13
3. Deemed Non-Consent . . . . . . . . . . . . . . . 13
4. Advance Payment . . . . . . . . . . . . . . . . . 13
5. Costs and Attorneys' Fees . . . . . . .. . . . . 13
A. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES: 13
B. TAXES: . . . . . . . . . . . . . . . . . . . . . . . 13
VIII.ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST .. 14
A. SURRENDER OF LEASES: . . . . . . . . . . . . . . . . 14
B. RENEWAL OR EXTENSION OF LEASES: . . . . . . . . . 14
C. ACREAGE OR CASH CONTRIBUTIONS: . . . . . . . . . 14
<PAGE>
A.A.P.L. FORM 610 - MODEL FROM AOPEATING AGREEMENT - 1989
D. ASSIGNMENT; MAINTENANCE OF UNIFORM INTEREST:.. . . 15
E. WAIVER OF RIGHTS TO PARTITION: . . . . . . . . . 15
F. PREFERENTIAL RIGHT TO PURCHASE: . . . . . . . . . 15
IX. INTERNAL REVENUE CODE ELECTION . . . . . . . . . . 15
X. CLAIMS AND LAWSUITS . . . . . . . . . . . . . . . . 15
XI. FORCE MAJEURE . . . . . . . . . . . . . . . . . . 16
XII. NOTICES . . . . . . . . . . . . . . . . . . . . . . 16
XIII. TERM OF AGREEMENT . . . . . . . . . . . . . . . 16
XIV. COMPLIANCE WITH LAWS AND REGULATIONS . . . . . . . 16
A. LAWS, REGULATIONS AND ORDERS: . . . . . . . . . . 16
B. GOVERNING LAW: . . . . . . . . . . . . . . . . . . 16
C. REGULATORY AGENCIES: . . . . . . . . . . . . .. 17
IX. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . 17
A. EXECUTION: . . . . . . . . . . . . . . . . . . . . 17
B. SUCCESSORS AND ASSIGNS: . . . . . . . . . . . . . 17
C. COUNTERPARTS: . . . . . . . . . . . . . . . . . ... 17
D. SEVERABILITY: . . . . . . . . . . . . . . . . . ... 17
XV1. OTHER PROVISIONS . . . . . . . . . . . . . . . . . . 17
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
OPERATING AGREEMENT
THIS AGREEMENT, ENTERED INTO BY AND BETWEEN Everest Minerals Corporation,
through first, log on on the bank, then Cummins & Walker Oil Company, Inc.
hereinafter designated and referred to as "Operator," and the signatory party or
parties other than Operator, sometimes heinafter referred to individually as
"Non-Operator," and collectively as "Non-Operators."
WITNESSETH:
WHEREAS, the parties to this agreement are owners of Oil and Gas Leases and/or
Oil and Gas Interests in the land identified in Exhibit "A," and the parties
hereto have reached an agreement to explore and develop these Leases and/or Oil
and Gas Interests for the production of Oil and Gas to the extent and as
hereinafter provided,
NOW, THEREFORE, it is agreed as follows:
ARTICLE I.
DEFINITIONS
As used in this agreement, the following words and terms shall have the meanings
here ascribed to them:
A. The term "AFE" shall mean an Authority for Expenditure prepared by a
party to this agreement for the purpose of estimating the costs to be incurred
in conducting an operation hereunder.
B. The term "Completion" or "Complete" shall mean a single operation
intended to complete a well capable of commercial production of Oil and Gas in
one or more Zones, including, but not limited to, the setting of production
casing, perforating, well stimulation and production testing conducted in such
operation.
C. The term "Contract Area" shall mean all of the lands, Oil and Gas
Leases and/or Oil and Gas Interests intended to be developed and operated for
Oil and Gas purposes under this agreement. Such lands, Oil and Gas Leases and
Oil and Gas Interests are described in Exhibit "A."
D. The term "Deepen" shall mean a single operation whereby a well is
drilled either to an objective Zone below the deepest Zone in which the well was
previously drilled, or below the Deepest Zone proposed in the associated APE.
E. The terms "Drilling Party" and "Consenting Party" shall mean a party who
agrees to join in and pay its share of the cost of any operation conducted under
the provisions of this agreement.
F. The term "Drilling Unit" shall mean the area fixed for the drilling of
one well by order or rule of any state or federal body having authority. If a
Drilling Unit is not fixed by any such rule or order, a Drilling Unit shall be
the drilling unit as established by the pattern of drilling in the Contract Area
unless fixed by express agreement of the Drilling Parties.
G. The term "Drillsite" shall mean the Oil and Gas Lease or Oil and Gas
Interest on which a proposed well is to be located.
H. The term "Initial Well" shall mean the well required to be drilled by
the parties hereto as provided in Article VI.A.
I. The term "Non-Consent Well" shall mean a well in which less than all
parties have conducted an operation as provided in Article VI.B.2.
J. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a
party who elects not to participate in a proposed operation.
K. The term "Oil and Gas" shall mean oil, gas, casinghead gas, gas
condensate, and/or all other liquid or gaseous hydrocarbons and other marketable
substances produced therewith, unless an intent to limit the inclusiveness of
this term is stated.
L. The term "Oil and Gas Interests" or "Interests" shall mean unleased fee
and mineral interests in Oil and Gas in tracts of land lying within the Contract
Area which are owned by parties to this agreement.
M. The terms "Oil and Gas Lease," "Lease" and "Leasehold" shall mean the
oil and gas leases or interests therein covering tracts of land lying within the
Contract Area which are owned by the parties to this agreement.
N. The term "Plug Back" shall mean a single operation whereby a deeper Zone
is abandoned in order to attempt a Completion in a shallower Zone.
0. The term "Recompletion" or "Recomplete" shall mean an operation whereby
a Completion in one or more Zones is abandoned in order to attempt a Completion
in a different Zone or zones within the existing wellbore.
P. The term "Rework" shall mean an operation conducted in the wellbore of a
well after it is Completed to secure, restore, or improve production in a Zone
which is currently open to production in the wellbore. Such operations include,
but are not limited to, well stimulation operations but exclude any routine
repair or maintenance work or drilling, Sidetracking, Deepening, Completing,
Recompleting, or Plugging Back of a well.
Q. The term "Sidetrack" shall mean the directional control and intentional
deviation of a well from vertical so as to change the bottom hole location
unless done to straighten the hole or to drill around junk in the hole to
overcome other mechanical difficulties.
R. The term "Zone" shall mean a stratum of earth containing or thought to
contain a common accumulation of Oil and Gas separately producible from any
other common accumulation of Oil and Gas.
Unless the context otherwise clearly indicates, words used in the singular
include the plural, the word "person" includes natural and artificial persons,
the plural includes the singular, and any gender includes the masculine,
feminine, and neuter.
ARTICLE II.
EXHIBITS
The following exhibits, as indicated below and attached hereto, are
incorporated in and made a part hereof:
[X] A. Exhibit "A," shall include the following information:
(1) Description of lands subject to this Agreement,
(2) Restrictions, if any, as to depths, formations, or substances,
(3) Deleted
(4) Deleted
(5) Deleted
(6) Deleted
_____ B. Exhibit "B," Form of Lease.
[X] C. Exhibit "C," Accounting Procedure.
[X] D. Exhibit "D," Insurance.
[X] E. Exhibit "E," Gas Balancing Agreement.
_____ F. Exhibit "F," Non-Discrimination and Certification of
Non-Segregated Facilities.
_____ G. Exhibit "G," Tax Partnership.
[X] H. Other Notice of Operating Agreement
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
If any provision of any exhibit, except Exhibits "E," "F" and "G," is
inconsistent with any provision contained in the body of this agreement, the
provisions in the body of this agreement shall prevail.
ARTICLE III.
INTERESTS OF PARTIES
A. Oil and Gas Interests:
If any party owns all Oil and Gas Interest in the Contract Area, that
Interest shall be treated for all purposes of this agreement and during the term
hereof as if it were covered by the form of Oil and Gas Lease attached hereto as
Exhibit "B," and the owner thereof shall be deemed to own both royalty interest
in such lease and the interest of the lease thereunder.
B. Interests of Parties in Costs and Production:
Unless changed by other provisions, all costs and liabilities incurred in
operations under this agreement shall be borne and paid, and all equipment and
materials acquired in operations on the Contract Area shall be owned, by the
parties as their interests are set forth in Exhibit "A." In the same manner, the
parties shall also own all production of Oil and Gas from the Contract Area
subject, however, to the payment of royalties and other burdens on production as
described hereafter.
Regardless of which party has contributed any Oil and Gas Lease or Oil and
Gas Interest on which royalty or other burdens may be payable and except as
otherwise expressly provided in this agreement, each party shall pay or deliver,
or cause to be paid or delivered, all burdens on its share of the production
from the Contract Area up to, but not in excess of, 25% and shall indemnify,
defend and hold the other parties free from ally liability therefor. Except as
otherwise expressly provided in this agreement, if any party has contributed
herein any Lease or Interest which is burdened with any royalty, overriding,
royalty, production payment or other burden on production in excess of the
amounts stipulated above, such party so burdened shall assume and alone bear all
such excess obligations and shall indemnify, defend and hold the other parties
hereto harmless from any and all claims attributable to such excess burden.
However, so long as the Drilling Unit for the productive Zone(s) is identical
with the Contract Area, each party shall pay or deliver, or cause to be paid or
delivered, all burdens on production from the Contract Area due under the terms
of the Oil and Gas Lease(s) which such party has contributed to this agreement,
and shall indemnify, defend and hold the other parties free from any liability
therefor.
No party shall ever be responsible, on a price basis higher than the price
received by such party, to any other party's lessor or royally owner, and if
such other party's lessor or royalty owner should demand and receive settlement
on a higher price basis, the party contributing the affected Lease shall bear
the additional royalty burden attributable to such higher price.
Nothing contained in this Article III.B. shall be deemed an assignment or
cross-assignment of interests covered hereby, and in the event two or more
parties contribute to this agreement jointly owned Leases, the parties'
undivided interests in said Leaseholds shall be deemed separate leasehold
interests for the purposes of this agreement.
C. Subsequently Created Interests:
It any party has contributed hereto a Lease or Interest that is burdened
with an assignment of production given as security for the payment of money, or
if, after the date of this agreement, any party creates an overriding royalty,
production payment, net profits interest, assignment of production or other
burden payable out of production attributable to its working interest hereunder,
such burden shall be deemed a "Subsequently Created Interest." Further, if any
party has contributed hereto a Lease or Interest burdened with an overriding
royalty, production payment, net profits interest, or other burden payable out
of production created prior to the date of this agreement, and such burden is
not shown on Exhibit "A," such burden also shall be deemed a Subsequently
Created Interest.
The party whose interest is burdened with the Subsequently Created Interest
(the "Burdened Party") shall assume and alone bear, pay and discharge the
Subsequently Created Interest and shall indemnify, defend and hold harmless the
other parties from and against any liability therefor. Further, if the Burdened
Party fails to pay, when due, its share of expenses chargeable hereunder, all
provisions of Article VII.B. shall be enforceable against the Subsequently
Created Interest in the same manner as they are enforceable against the working
interest of the Burdened Party. If the Burdened Party is required under this
agreement to assign or relinquish to any other party, or parties, all or a
portion of its working interest and/or the production attributable thereto, said
other party, or parties, shall receive said assignment and/or production free
and clear of said Subsequently Created Interest, and the Burdened Party shall
indemnify, defend and hold harmless said other party, or parties, from any and
all claims and demands for payment asserted by owners of the Subsequently
Created Interest.
ARTICLE IV.
TITLES
A. Title Examination:
Title examination shall be made on the Drillsite of any proposed well prior
to commencement of drilling operations or Operator so elects, title examination
shall be made on the entire Drilling Unit, or maximum anticipated Drilling Unit,
of the well. The opinion will include the ownership of the working interest,
minerals, royalty, overriding royalty and production payments under the
applicable Leases. Each party contributing
Leases and/or Oil and Gas Interests to be included in the Drillsite or Drilling
Unit, if appropriate, shall furnish to Operator all abstracts (including federal
lease status reports), title opinions, title papers and curative material in its
possession free of
Charge. All such information not in the possession of or made available to
Operator by the parties, but necessary for the examination of the title, shall
be obtained by Operator. Operator shall cause title to be examined by attorneys
on its staff or by outside attorneys. Copies of all title opinions shall be
furnished to each Drilling Party requesting same. Costs incurred by Operator in
procuring abstracts, fees paid outside attorneys for the examination (including
preliminary, supplemental, shut-in royalty opinions and individual order title
opinions) and other direct charges as provided in Exhibit "C" shall be borne by
the Drilling Parties in the proportion that the interest of each Drilling Party
bears to the total interest of all Drilling Parties such interests appear in
Exhibit "A." Operator shall make no charge for services rendered by its staff
or other personnel in the performance of the above functions.
Each party shall be responsible for securing curative matter and pooling
amendments or agreements required in connection with Leases or Oil and Gas
Interests contributed by such party. Operator shall be responsible for the
preparation and recording of pooling designations or declarations and
communitization agreements as well as the conduct of hearings before
governmental agencies for the securing of spacing or pooling orders or any other
orders necessary or appropriate to the conduct of operations hereunder. This
shall not prevent any party from appearing on its own behalf at such hearings.
Costs incurred by Operator, including fees paid to outside attorneys, which are
associated with hearing before governmental agencies, and which costs are
necessary and proper for the activities contemplated under this agreement, shall
be direct charges to the joint account and shall not be covered by the
administrative overhead charges as provided in Exhibit "C."
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
Operator shall make no charge for services rendered by its staff attorneys or
other personnel in the performance of the above functions.
No well shall be drilled on the Contract Area until after (1) the title to
the Drillsite or Drilling Unit, if appropriate, has been examined as above
provided, and (2) the title has been approved by the examining attorney or title
has been accepted by all of the Drilling parties in such well.
B. Loss or Failure of Title:
1. (a), (b), (c), (d), (e), (f) & (g) DELETED
2. (a), (b), & (c) DELETED
3. Other Losses: All losses of Leases or Interests committed to this
agreement, above, shall be joint losses and shall be borne by all parties in
proportion to their interests shown on Exhibit "A." This shall include but not
be limited to the loss of any Lease or Interest through failure to develop or
because express or implied covenants have not been performed and loss of any
Lease by expiration at the end of its primary term if it is not renewed or
extended. There shall be no readjustment of interests in the remaining portion
of the Contract Area on account of joint loss.
4. Curing Title: In the event of a Failure of Title under Article IV.B.I.
above, any Lease or Interest acquired by any party hereto (other than the party
whose interest has failed or was lost) during the ninety (90) day period
provided by Article IV.B.1. above covering all or a portion of the interest that
has failed or was lost shall be offered at cost to the party whose interest has
failed or was lost, and the provisions of Article VIII.B. shall not apply to
such acquisition.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
ARTICLE V.
OPERATOR
A. Designation and Responsibilities of Operator: Everest Minerals
Corporation, through the first log on the bank, then Cummins & Walker Oil
Company, Inc. shall be the Operator of the Contract Area, and shall conduct and
direct and have full control of all operations on the Contract Area as permitted
and required by, and within the limits of this agreement. In its performance of
services hereunder for the Non-Operators, Operator shall be an independent
contractor not subject to the control or direction of the Non-operators except
as to the type of operation to be undertaken in accordance with the election
procedures contained in this agreement. Operator shall not be deemed, or hold
itself out as, the agent of the Non-Operators with authority to bind them to any
obligation or liability assumed or incurred by Operator as to any third party.
Operator shall conduct its activities under this agreement as a reasonable
prudent operator, in a good and workmanlike manner, with due diligence and
dispatch, in accordance with good oilfield practice, and in compliance with
applicable law and regulation, but in no event shall it have any liability as
Operator to the other parties for losses sustained or liabilities incurred
except such as may result from gross negligence or willful misconduct. *unless
written approval obtained by Operator
B. Resignation or Removal of Operator. Operator may resign at any time by
giving written notice thereof to Non-Operators. If Operator terminates its
legal existence, no longer owns an interest hereunder in the Contract Area or is
no longer capable of serving as Operator, Operator shall be deemed to have
resigned without any action by Non-Operators except the selection of a
successor. Operator may be removed only for good cause by the affirmative vote
of Non-Operators owning a majority interest based on ownership as shown on
Exhibit "A" remaining after excluding the voting interest of Operator;
Subject to Article VII.D.1., such resignation or removal shall not become
effective until 7.00 o'clock A.M. on the first day of the calendar month
following the expiration of ninety (90) days after the giving of notice of
resignation by Operator or action by the Non-Operators to remove Operator,
unless a successor Operator has been selected and assumes the duties of Operator
at an earlier date. Operator, after effective date of resignation or removal,
shall be bound by the terms hereof as a Non-Operator. A change of a corporate
name or structure of Operator or transfer of Operator's interest to any single
subsidiary, parent or successor corporation shall not be the sole basis for
removal of Operator.
2. Selection of Successor Operator: Upon the resignation or removal of
Operator under any provision of this agreement, a successor Operator shall be
selected by the parties. The successor Operator shall be selected from the
parties owning an interest in the Contract Area at the time such successor
Operator is selected. The successor Operator shall be selected by the
affirmative vote of two (2) or more parties owning a majority interest based on
ownership as shown on Exhibit "A"; provided, however, if an Operator which has
been removed or is deemed to have resigned fails to vote or votes only to
succeed itself, the successor Operator shall be selected by the affirmative vote
of the party or parties owning a majority interest based on ownership as shown
on Exhibit "A" remaining after excluding the voting interest of the Operator
that was removed or resigned. The former Operator shall promptly deliver to the
successor Operator all records and data relating to the operations conducted by
the former Operator to the extent such records and data are not already in the
possession of the successor operator. Any cost of obtaining or copying the
former Operator's records and data shall be charged to the joint account.
3. Effect of Bankruptcy: If Operator becomes insolvent, bankrupt or is placed in
receivership, it shall be deemed to have resigned without any action by
Non-Operators except the selection of a successor. If a petition for relief
under the federal bankruptcy laws is filed by or against Operator and the
removal of Operator is prevented by the federal bankruptcy court, all
Non-Operators and Operator shall comprise an interim operating committee to
serve until Operator has elected to reject or assume this agreement pursuant to
the Bankruptcy Code, and an election to reject this agreement by Operator as a
debtor in possession, or by a trustee in bankruptcy, shall be deemed a
resignation as Operator without any action by Non-Operators, except the
selection of a successor. During the period of time the operating committee
controls operations, all actions shall
require the approval of two (2) or more parties owning a majority interest based
on ownership as shown on Exhibit "A." In the event there are only two (2)
parties to this agreement, during the period of time the operating committee
controls operations, a third party acceptable to Operator, Non-Operator and the
federal bankruptcy court shall be selected as a member of the operating
committee, and all actions shall require the approval of two (2) members of the
operating committee without regard for their interest in the Contract Area based
on Exhibit "A."
C. Employees and Contractors:
The number of employees or contractors used by Operator in conducting
operations hereunder, their selection, and the hours of labor and the
compensation for services performed shall be determined by Operator, and all
such employees or contractors shall be the employees or contractors of Operator.
D. Rights and Duties of Operator:
1. Competitive Rates and Use of Affiliates: All wells drilled on the Contract
Area shall be drilled on a competitive contract basis at the usual rates
prevailing in the area. If so desires, Operator may employ its own tools and
equipment in the drilling of wells, but its charges therefore shall not exceed
the prevailing rates in the area and the rate of such charges shall be agreed
upon by the parties in writing before drilling operations are commenced, and
such work shall be performed by Operator under the same terms and conditions as
are customary and usual in the area in contracts of independent contractors who
are doing work of a similar nature. All work performed or materials supplied by
affiliates or related parties or Operator shall be performed or supplied at
competitive rates and in accordance with customs and standards prevailing in the
industry.
2. Discharge of Joint Account Obligations: Except as herein otherwise
specifically provided, Operator shall promptly pay and discharge expensed
incurred in the development and operation of the Contract Area pursuant to this
agreement and shall charge each of the parties hereto with their respective
proportionate shares upon the expense basis provided in Exhibit "C." Operator
shall keep an accurate record of the joint account hereunder, showing expenses
incurred and charges and credits made and received.
3. Protection from Liens: Operator shall pay, or cause to be paid, as and
when they become due and payable all accounts of contractors and suppliers and
wages and salaries for services rendered or performed, and for materials
supplied on to or in respect of the Contract Area or any operations for the
joint account thereof, and shall keep the Contract Area free from
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
liens and encumbrances resulting therefrom except for those resulting from a
bona fide dispute as to services rendered or materials supplied.
4. Custody of Funds: Operator shall hold for the account of the Non-Operators
any funds of the Non-Operators advanced or paid to the Operator, either for the
conduct of operations hereunder or as a result of the sale of production from
the Contract Area, and Such funds shall remain the funds of the Non-Operators on
whose account they are advanced or paid until used for their intended purpose or
otherwise delivered to the Non-Operators or applied toward the payment of debts
as provided in Article VII.B. Nothing in this paragraph shall be construed to
establish a fiduciary relationship between Operator and Non-Operators for any
purpose other than to account for Non-Operator funds as herein specifically
provided. Nothing in this paragraph shall require the maintenance by Operator of
separate accounts for the funds of Non-Operators unless the parties otherwise
specifically agree.
5. Access to Contract Area and Records: Operator shall, except as otherwise
provided herein, permit each Non-Operator or its duly authorized representative,
at the Non-Operator's sole risk and cost, full and free access at all reasonable
times to all operations of every kind and character being conducted for the
joint account on the Contract Area and to the records of operations conducted
thereon or production therefrom, including Operator's books and records relating
thereto. Such access rights shall not be exercised in a manner interfering with
Operator's conduct of an operation hereunder and shall not obligate Operator to
furnish any geologic or geophysical data of an interpretive nature unless the
cost of preparation of such interpretive data was charged to the joint account.
Operator will furnish to each Non-Operator upon request copies of any and all
reports and information obtained by Operator in connection with production and
related items, including, without limitation, meter and chart reports,
production purchaser statements, ran tickets and monthly gauge reports, but
excluding purchase contracts and pricing information to the extent not
applicable to the production of the Non-Operator seeking the information. Any
audit of Operator's records relating to amounts expanded and the appropriateness
of such expenditures shall be conducted in accordance with the audit protocol
specified in Exhibit "C." See XVI.H.
6. Filing and Furnishing Governmental Reports: Operator will file, and upon
written request promptly furnish copies to each requesting Non--Operator not in
default of its payment obligations, all operational notices, reports or
applications required to be filed by local, State, Federal or Indian agencies or
authorities having jurisdiction over operations hereunder. Each Non-Operator
shall provide to Operator on a timely basis all information necessary to
Operator to make such filings.
7. Drilling and Testing, Operations: The following provisions shall apply to
each well drilled hereunder, including but not limited to the Initial Well:
(a) Operator will promptly advise Non-Operators of the date on which the
well is spudded, or the date on which drilling operations are commenced.
(b) Operator will send to Non-Operators such reports, test results and
notices regarding the progress of operations on the well as the Non--Operators
shall reasonably request, including, but not limited to, daily drilling reports,
completion reports, and well logs.
(c) Operator shall adequately test all Zones encountered which may
reasonably be expected to be capable of producing Oil and Gas in paying
quantities as a result of examination of the electric log or any other logs or
cores or tests conducted hereunder.
8. Cost Estimates. Upon request of any Consenting Party, Operator shall furnish
estimates of current and cumulative costs incurred for the joint account at
reasonable intervals during the conduct of any operation pursuant to this
agreement. Operator shall not be held liable for errors in such estimates so
long as the estimates are made in good faith.
9. Insurance: At all times while operations are conducted hereunder, Operator
shall comply with the workers compensation law of the state where the operations
are being conducted; provided, however, that Operator may be a self insurer for
liability under said compensation laws in which event the only charge that shall
be made to the joint account shall be as provided in Exhibit "C." Operator shall
also carry or provide insurance for the benefit of the joint account of the
parties as outlined in Exhibit "D" attached hereto and made a part hereof.
Operator shall require all contractors engaged in work on or for the Contract
Area to comply with the workers compensation law of the state where the
operations are being conducted and to maintain such other insurance as Operator
may require.
In the event automobile liability insurance is specified in said Exhibit
"D," or subsequently receives the approval of the parties, no direct charge
shall be made by Operator for premiums paid for such insurance for Operator's
automotive
equipment.
ARTICLE VI.
DRILLING AND DEVELOPMENT
A. Initial Well:
On or before the 1st day of July, 1999, Operator shall commence the
drilling of the Initial Well at the following location:
on the Leases within the I.G.N. RR. Co. Survey No. 5, A-313, Colorado County,
Texas
and shall thereafter continue the drilling of the well with due diligence to a
depth to test Yegua formation at an estimated total depth of 7000'.
The drilling of the Initial Well and the participation therein by all parties is
obligatory, subject to Article VI.C.1 as to participation in Completion
operations and Article VI.F. as to termination of operations and Article XI as
to occurrence of force majeure.
B. Subsequent Operations:
1. Proposed Operations: If any party hereto should desire to drill any
well on the Contract Area other than the Initial Well, or if any party should
desire to Rework, Sidetrack, Deepen, Recomplete or Plug Back a dry hold or a
well no longer capable of producing in paying quantities in which such party has
not otherwise relinquished its interest in the proposed objective Zone under
this agreement, the party desiring to drill, Rework, Sidetrack, Deepen,
Recomplete or Plug Black such a well shall give written notice of the proposed
operation to the parties who have not otherwise relinquished their interest in
such objective Zone.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
under this agreement and to all other parties in the case of a proposal for
Sidetracking or Deepening, specifying the work to be performed, the location,
proposed depth, objective Zone and the estimated cost of the operation. The
parties to whom such a notice is delivered shall have fifteen (15) days after
receipt of the notice within which to notify the party proposing to do the work
whether they elect to participate in the cost of the proposed operation. If a
drilling rig is on location, notice of a proposal to Rework, Sidetrack,
Recomplete, Plug Back or Deepen may be given by telephone and the response
period shall be limited to forty-eight (48) hours. Failure of a party to whom
such notice is delivered to reply within the period above fixed shall constitute
an election by that party not to participate in the cost of the proposed
operation. Any proposal by a party to conduct an operation conflicting with the
operation initially proposed shall be delivered to all parties within the time
and in the manner provided in Article VI.B.6.
If all parties to whom such notice is delivered elect to participate in
such a proposed operation, the parties shall be contractually committed to
participate therein provided such operations are commenced within the time
period hereafter set forth, and Operator shall, no later than ninety (90) days
after expiration of the notice period of thirty (30) days (or as promptly as
practicable after the expiration of the forty-eight (48) hour period when a
drilling rig is on location, as the case may be), actually commence the proposed
operation and thereafter complete it with due diligence at the risk and expense
of the parties participating therein; provided, however, said commencement date
may be extended upon written notice of same by Operator to the other parties,
for a period of up to thirty (30) additional days if, in the sole opinion of
Operator, such additional time is reasonably necessary to obtain permits from
governmental authorities, surface rights (including rights-of-way) or
appropriate drilling equipment, or to complete title examination or curative
matter required for title approval or acceptance. If the actual operation his
not been commenced within the time provided (including any extension thereof as
specifically permitted herein or in the force majeure provisions of Article XI)
and if any party hereto still desires to conduct said operation, written notice
proposing same must be resubmitted to the other parties in accordance herewith
as if no prior
proposal had been made.
2. Operations by Less Than All Parties:
(a) Determination of Participation. If any party to whom such notice is
delivered as provided in Article VI.B.I. or VI.C.I. (Option No. 2) elects not to
participate in the proposed operation, then in order to be entitled to the
benefits of this Article, the party or parties giving the notice and such other
parties as shall elect to participate in the operation shall, no later than
ninety (90) days after the expiration of the notice period of thirty (30) days
(or as promptly as practicable after the expiration of the forty-eight (48) hour
period when a drilling rig is on location, as the case may be) actually commence
the proposed operation and complete it with due diligence. Operator shall
perform all work for the account of the Consenting Parties provided, however, if
no drilling rig or other equipment is on location, and if Operator is a
Non-Consenting Party,
the Consenting Parties shall either: (i) request Operator in perform the work
required by such proposed operation for the account of the Consenting Parties,
or (ii) designate one of the Consenting Parties as Operator to perform such
work. The rights and duties granted to and imposed upon the Operator under this
agreement are granted to and imposed upon the
party designated as Operator for an operation in which the original Operator is
a Non-Consenting Party. Consenting Parties, when conducting operations (in
the Contract Area pursuant to this Article VI.B.2., shall comply with all terms
and conditions of
this agreement
If less than all parties approve any proposed operation, the proposing
party, immediately after the expiration of the applicable notice period, shall
advise all Parties of the total interest of the parties approving such operation
and its recommendation as to whether the Consenting Parties should proceed with
the operation as proposed. Each Consenting Party, within forty-eight (48) hours
after delivery of such notice, shall advise the proposing party of its desire to
(i) limit participation to such party's interest as shown on Exhibit "A" or (ii)
carry only its proportionate part (determined by dividing such party's interest
in the Contract Area by the interests of all Consenting Parties in the Contract
Area) of Non-Consenting Parties' interests, or (iii) carry its proportionate
part (determined as provided in (ii)) of Non-Consenting Parties' interests
together with all or a portion of its proportionate part of any Non-Consenting
Parties' interests that any Consenting Party did not elect to take. Any interest
of Non-Consenting Parties that is not carried by a Consenting Party shall be
deemed to be carried by the party proposing the operation if such party does not
withdraw its proposal. Failure to advise the proposing party within the time
required shall he deemed an election under (i). In the event a drilling rig is
on location, notice may be given by telephone and the time permitted for such a
response shall not exceed a total of forty-eight (48) hours. The proposing
party, at its election, may withdraw such proposal if there is less than 100%
participating and shall notify all parties of such decision within ten (10)
days, or within twenty-four (24) hours if a drilling rig is on location,
following expiration of the applicable response period. If 100% subscription to
the proposed operation is obtained, the proposing party shall promptly notify
the Consenting Parties of their proportionate interests in the operation and the
party serving as Operator shall commence such operation within the period
provided in Article VI.B.I., subject to the same extension right as provided
therein.
(b) Relinquishment of Interest for Non-Participation. The entire cost and risk
of conducting such operations shall be -borne by the Consenting Parties in the
proportions they have elected to bear same under the terms of the proceeding
paragraph. Consenting Parties shall keep the leasehold estates involved in such
operations free and clear of all liens and encumbrances of every kind created by
or arising from the operations of the Consenting Parties. If such an operation
results in a dry hole, then subject to Articles VI.B.6. and VI.E.3., the
Consenting Parties shall plug and abandon the well and restore the surface
location at their sole cost, risk and expense, If any well drilled, Reworked,
Sidetracked, Deepened, Recompleted or Plugged Back under the provisions of this
Article results in the well tested to be capable of producing Oil and/or Gas in
the paying quantities, the Consenting Parties shall Complete and equip the well
to produce at their sole cost and risk, and the well shall then be turned over
to Operator (if the Operator did not conduct the operation)and shall be operated
by it at the expense and for the account of the Consenting Parties. Upon
commencement of operations for the drilling, Reworking, Sidetracking,
Recompleting, Deepening or Plugging Back of any such well by Consenting Parties
in accordance with the provisions of this Article, each Non-Consenting Party
shall be deemed to have relinquished to Consenting Parties, and the Consenting
Parties shall own and be entitled to receive, in proportion to their respective
interests, all of such Non-Consenting Party's interest in the well and share of
production therefrom or, in the case of a Reworking, Sidetracking,
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
Deepening, Recompleting or Plugging Back, or a Completion pursuant to Article
VI.C.I. Option No. 2, all of such Non-Consenting Party's interest in the
production obtained from the operation in which the Non-Consenting Party did not
elect to participate. Such relinquishment shall include until the proceeds from
the sale of production of such share, calculated at the well, or market value
thereof if such share is not sold (after deducting applicable ad valorem,
production, severance, and excise taxes, royalty, overriding royalty and other
interests not excepted by Article III.C., payable out of or measured by the
production from such well accruing with respect to such interest.
(i) & (ii) DELETED
(c) Reworking, Recompleting or Plugging Back. An election not to participate in
the drilling, Sidetracking or Deepening of a well shall be deemed an election
not to participate in any Reworking or Plugging Back operation proposed in such
a well, or portion thereof, to which the initial non-consent election applied
that is conducted at any time. Similarly, an election not to participate in the
Completing or Recompleting of a well shall be deemed an election not to
participate in any Reworking operation proposed its such a well, or portion
thereof, to which the initial non-consent election applied that is conducted at
any time. If such a Reworking, Recompleting or Plugging Back operation is
proposed during such recoupment period, the provisions of this Article VI.B.
shall be applicable as between said Consenting parties in said well.
(d) Recoupment - Matters. During tile period of time Consenting Parties are
entitled to receive Non-Consenting Party's share of production, or the proceeds
therefrom, Consenting Parties shall be responsible for the payment of all ad
valorem, production, severance, excise, gathering and other taxes, and all
royalty, overriding royalty and other burdens applicable to Non-Consenting
Party's share of production not excepted by Article III.C.
In the case of any Reworking, Sidetracking, Plugging Back, Recompleting or
Deepening operation, the Consenting Parties shall be permitted to use, free of
cost, all casing, tubing and other equipment in the well, but the ownership of
all such equipment shall remain unchanged; and upon abandonment of a well after
such Reworking, Sidetracking, Plugging Back, Recompleting or Deepening, the
Consenting Parties shall account for all such equipment to the owners thereof,
with each party receiving its proportionate part in kind or in value, less cost
of salvage.
Within ninety (90) days after the completion of any operation under this
Article, the party conducting the operations for the Consenting Parties shall
furnish each Non-Consenting Party with an inventory of the equipment in and
connected to the well, and an itemized statement of the cost of drilling,
Sidetracking, Deepening, Plugging Back, testing, Completing, Recompleting, and
equipping the well for production; or, at its option, the operating party, in
lieu of an itemized statement of such costs of operation, may submit a detailed
statement of monthly billings. Any amount realized from the sale or other
disposition of equipment newly acquired in connection with any such operation
which would have been owned by a Non-Consenting Party had it participated
therein shall be credited against the total unreturned costs of the work done
and of the equipment purchased in determining when the interest of such
Non-Consenting Party shall revert to it as above provided; and if there is a
credit balance, it shall be paid to such Non-Consenting Party.
If and when a Non-Consenting Party becomes entitled to its relinguished
interest, the relinquished interests of such Non-Consenting Party shall
automatically revert to it as of 7:00 a.m. on the day on which such recoupment
occurs, and, from and after such reversion, such Non-Consenting Party shall own
the same interest in such well, the material and equipment in or pertaining
thereto, and the production therefrom as such Non-Consenting Party would have
been entitled to had it participated in the drilling, Sidetracking, Reworking,
Deepening, Recompleting or Plugging Back of said well. Thereafter, such
Non-Consenting Party shall be charged with and shall pay its proportionate part
of the further costs of the operation of said well in accordance with the terms
of this agreement and Exhibit "C" attached hereto.
3. Stand-By Costs: When a well which has been drilled or Deepened has
reached it authorized depth and all tests have been completed and the results
thereof furnished to the parties, or when operations on the well have been
otherwise terminated pursuant to Article VI.F., stand-by costs incurred pending
response to a party's notice proposing a Reworking,
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
Sidetracking, Deepening, Recompleting Plugging Back or Completing operation in
such a well (including the period required under Article VI.B.6. to resolve
competing proposals) shall be charged and borne as part of the drilling or
Deepening operation just completed. Stand-by costs subsequent to all parties
responding, or expiration of the response time Permitted, whichever first
occurs, and prior to agreement as to the participating interests of all
Consenting Parties pursuant to the terms of the second grammatical paragraph of
Article VI.B.2. (a), shall be charged to and borne as part of the proposed
operation, but if the proposal is subsequently withdrawn because of insufficient
participation, such stand-by costs shall be allocated between the Consenting
Parties in the proportion each Consenting Party's interest as shown on Exhibit
"A" bears to the total interest as shown on Exhibit "A" of all Consenting
Parties.
In the event that notice for a Sidetracking operation is given while the
drilling rig to be utilized is on location, any party may request and receive up
to five (5) additional days after expiration of the forty-eight hour response
period specified in
Article VI.B.I. within which to respond by paying for all stand-by costs and
other costs incurred during such extended response period; Operator may require
such party to pay the estimated stand-by time in advance as a condition to
extending the response period. If more than one party elects to take such
additional time to respond to the notice, standby costs shall be allocated
between the parties taking additional time to respond on a day-to-day basis in
the proportion each electing party's interest as shown on Exhibit "A" bears to
the total interest as shown on Exhibit "A" of all the electing parties.
4. Deepening: If less than all the parties elect to participate in a
drilling, Sidetracking, or Deepening operation proposed pursuant to Article
VI.B.I., the interest relinquished by the Non-Consenting Parties to the
Consenting Parties under Article VI.B.2. shall relate only and be limited to all
new zones encountered in such deepening or sidetracking. Such well shall not be
Deep4ened beyond the Initial Objective without first complying with this Article
to afford all eligible the opportunity to participate in the Deepening
operation, subject to the provisions of Article XVI.C.
In the event any Consenting Party desires to drill or Deepen a Well to a
depth below the Initial Objective, such party shall give notice thereof,
complying with the requirements of Article VI.B.I., to all eligible parties.
Thereupon, Articles VI.B.I. and 2. Shall apply and all parties receiving such
notice shall have the right to participate or not participate in the Deepening
of such well pursuant to said Articles VI.B.I and 2.
The foregoing shall not imply a right of any Consenting Party to propose
any Deepening for a Non-Consent Well prior to the drilling of such well to its
Initial Objective without the consent of the other Consenting Parties as
provided in Article VI.F.
Section 4 (a) & (b) DELETED
Section 5 DELETED
1. Order of Preference of Operations. Except as otherwise specifically
provided in this agreement, if any party desires to propose the conduct of an
operation that conflicts with a proposal that has been made by a party under
this Article VI, such party shall have fifteen (15) days from delivery of the
initial proposal, in the case of a proposal to drill a well or to perform an
operation on a well where no drilling rig is on location, or twenty-four (24)
house, from delivery of the initial proposal, if a drilling rig is on location
for the well on which such operation s to be conducted, to deliver to all
parties entitled to participate in the proposed operation such party's
alternative proposal, such alternate proposal to contain the same information
required to be included in the initial proposal. Each party receiving such
proposals shall elect by delivery of notice to Operator within five (5) days
after expiration of the proposal period, or within twenty-four (24) hours if a
drilling rig is on location for the well that is the subject of the proposals,
to participate in one of the competing proposals. Any party not electing within
the time required shall be deemed not to have voted. The proposal receiving the
vote of parties owing sixty-seven percent (67%) of the parties entitled to vote
shall have priority over all other competing proposals; in the case of a tie
vote, the
2.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
initial proposal shall prevail. Operator shall deliver notice of such result to
all parties entitled to participate in the operation within five (5) days after
expiration of the election period (or within twenty-four (24) hours, if a
drilling rig is on location). Each party shall then have two (2) days (or
twenty-four (24) hours if a rig is on location) from receipt of such notice to
elect by delivery of notice to Operator to participate in such operation or to
relinquish interest in the affected well pursuant to the provisions of Article
VI.B.2.; failure by party to deliver notice within such period shall be deemed
an election not to participate in the prevailing proposal. Article XVI.A. & B.
shall take precedence over Article VI.B.6.
7. Conformity so Spacing Pattern. Notwithstanding the provisions of this
Article VI.B.2., it is agreed that no wells shall be proposed to be drilled to
or Completed in or produced from a Zone from which a well located elsewhere on
the Contract Area is producing, unless such well conforms to the then-existing
well spacing pattern for such Zone. *
8 Paying Wells. No party shall conduct any Reworking, Deepening, Plugging Back,
Completion, Recompletion, or Sidetracking operation under this agreement with
respect to any well then capable of producing in paying quantities except with
the consent of all parties that have not relinquished interests in the well at
the time of such operation.
C. Completion Of Wells; Reworking and Plugging Back:
1. Completion: Without the consent of all parties, no well shall be drilled,
Deepened or Sidetracked, except any well drilled, Deepened or Sidetracked
pursuant to the provisions of Article VI.B.2. of this agreement. Consent to the
drilling, Deepening or Sidetracking shall include:
[ ] Option No. 1: All necessary expenditures for the drilling, Deepening or
Sidetracking, testing, Completing and equipping of the well, including necessary
tankage and/or surface facilities.
[*] Option No. 2: All necessary expenditures for the drilling,
Deepening or Sidetracking and testing of the well. When such well has reached
its authorized depth, and all logs, cores and other tests have been completed,
and the results thereof furnished to the parties, Operator shall give
immediate notice to the Non-Operators having the right to participate in a
Completion attempt whether or not Operator recommends attempting to Complete the
well, together with Operator' AFE for Completion costs if not previously
provided. The parties receiving such notice shall have Forty-eight (48) hours in
which to elect by delivery of notice to Operator to participate in a recommended
Completion attempt or to make a Completion proposal with any accompanying AFE.
Operator shall deliver any such Completion proposal, or any Completion proposal
conflicting with Operator's proposal, to the other parties entitled to
participate in such Completion in accordance with the procedures specified in
Article VI.B.6. Election to participate in a Completion attempt shall include
consent to all necessary expenditures for the Competing and equipping of such
well, including necessary tankage and/or surface facilities but excluding any
stimulation operation not contained on the Completion AFE. Failure of any party
receiving such notice to reply within the period above fixed shall constitute an
election by that party not to participate in the cost of the Completion attempt;
provided that Article VI.B.6. shall control in the case of conflicting
Completion proposals. If one or more, but less than all of the parties, elect to
attempt a Completion, the provisions of Article VI.B.2. hereof (the phrase
"Reworking, Sidetracking, Deepening, Recompleting or Plugging
Back" as contained in Article VI.B.2. shall be deemed to include "Completing")
shall apply to the operations thereafter conducted by less than all parties;
provided, however, that Article VI.B.2 shall apply separately to each separate
Completion or Recompletion attempt undertaken hereunder, and an election to
become a Non-Consenting party as to one Completion or Recompletion attempt shall
not prevent a party from becoming a Consenting Party in subsequent Completion or
Recompletion attempts. Election by a previous Non-Consenting Party to
participate in a subsequent Completion or Recompletion attempt shall require
such party to pay its proportionate share of the cost of salvable Materials and
equipment installed in the well pursuant to the previous Completion or
Recompletion attempt, insofar and only insofar as such materials and equipment
benefit the Zone in which such party participates in a Completion attempt.
2. Rework, Recomplete or Plug Back: No well shall be Reworked, Recompleted or
Plugged Back except a well Reworked, Recompleted, or Plugged Back pursuant to
the provisions of Article VI.B.2. of this agreement. Consent to the Reworking,
Recompleting or Plugging Back of a well shall include all necessary expenditures
in conducting such operations and Completing and equipping of said well,
including necessary tankage and/or surface facilities.
D. Other Operations:
Operator shall not undertake any single project reasonably estimated to
require an expenditure in excess of Twenty-five thousand Dollars ($25,000.00)
except in connection with the drilling, Sidetracking, Reworking, Deepening,
Completing, Recompleting or Plugging Back of a well that has been previously
authorized by or pursuant to this agreement; provided, however, that, in case of
explosion, fire, flood or other sudden
emergency, whether of the same or different nature, Operator may take such steps
and incur such expenses as in its opinion are required to deal with the
emergency, to safeguard life and property but Operator, as promptly as possible,
shall report the emergency to the other parties. If Operator prepares an AFE
for its own use, Operator shall furnish any Non-Operator so requesting an
information copy thereof for any single project costing in excess of Twenty-five
thousand Dollars ($25,000.00). Any party who has not relinquished its interest
in a well shall have the right to propose that Operator perform repair work or
undertake the installation of artificial lift equipment or ancillary production
facilities such as salt water disposal wells or to conduct additional work with
respect to a well drilled hereunder or other similar project (but not including
the installation of gathering lines or other transportation or marketing
facilities, the installation of which shall be governed by separate agreement
between the parties) reasonably estimated to require an expenditure in excess of
the amounts first set for the above in this Article VI.D. (except in connection
with an operation required to be proposed under Articles VI.B.I. or VI.C.I.
Option No. 2, which shall be governed exclusively by those Articles). Operator
shall deliver such proposal to all parties entitled to participate therein. If
within thirty (30) days thereof Operator secures the written consent of any
party or parties owing at least 67% of the interest of the parties entitled to
participate in such operation, each party having the right to participate in
such project shall be bound by the terms of such proposal and shall be obligated
to pay its proportionate share of the costs of the proposed project as if it had
consented to such project pursuant to the terms of the proposal.
E. Abandonment of Wells:
1. Abandonment of Dry Holes: Except for any well drilled or Deepened
pursuant to Article VI.B.2., any well which has been drilled or Deepened under
the terms of this agreement and is proposed to be completed as a dry hole shall
not be * or such well have been approved as an exception to the then existing
spacing pattern
<PAGE>
A.A.P.L. FORM 610 - MODEL FROM AOPEATING AGREEMENT - 1989
plugged and abandoned without the consent of all parties. Should Operator, after
diligent effort, be unable to contact any party, or should any party fail to
reply within forty-eight (48) hours after delivery of notice of the proposal to
plug and abandon such well, such party shall be deemed to have consented to the
proposed abandonment. All such wells shall be plugged and abandoned in
accordance with applicable regulations and at the cost, risk and expense of the
parties who participated in the cost of drilling or Deepening such well. Any
party who objects to plugging and abandoning such well by notice delivered to
Operator within forty-eight (48) hours after delivery of notice of the proposed
plugging shall take over the well as of the end of such forty-eight (48) hour
notice period and conduct further operations its search of Oil and/or Gas
subject to the provisions of Article VI.B.; failure of such party to provide
proof reasonably satisfactory to Operator of its financial capability to conduct
such operations or to take over the well within such period or thereafter to
conduct operations on such well or plug and abandon such well shall entitle
Operator to retain or take possession of the well and plug and abandon the well.
The party taking over the well shall indemnify Operator (if Operator is an
abandoning party) and the other abandoning parties against liability for any
further operations conducted on such well.
2. Abandonment of Wells That Have Produced: Except for any well in which a
Non-Consent operation has been conducted hereunder any well which has been
completed as a producer shall not be plugged and abandoned without the consent
of all parties* If such parties consent to such abandonment, the well shall be
plugged and abandoned in accordance with applicable regulations and at the cost,
risk and expense of such parties hereto. Failure of a party to reply within
sixty (60) days of delivery of notice of proposed abandonment shall be deemed an
election to consent to the proposal. If, within sixty (60) days after delivery
of notice of the proposed abandonment of any well, all parties do not agree to
the abandonment of such well, those wishing to continue its operation from the
Zone then Open to production shall be obligated to take over the well as of the
expiration of the applicable notice period and shall indemnify Operator (if
Operator is an abandoning party) and the other abandoning parties against
liability for any further operations on the well conducted by such parties.
Failure of such party or parties to provide proof reasonably satisfactory to
Operator of their financial capability to conduct such operations or to take
over the well within the required period or thereafter to conduct operations on
such well shall entitle Operator to retain or take possession of such well and
plug and abandon the well.
Parties taking over a well as provided herein shall tender to each of the other
parties its proportionate share of the value of the well's salvable material and
equipment, determined in accordance with the provisions of Exhibit "C," less the
estimated cost of salvaging and the estimated cost of plugging and abandoning
and restoring the surface; provided, however, that in the event the estimated
plugging and abandoning and surface restoration costs and the estimated cost of
salvaging are higher than the value of the well's salvable material and
equipment, each of the abandoning parties shall tender to the parties continuing
operations their proportionate shares of the estimated excess cost. Each
abandoning party shall assign to the non-abandoning parties, without warranty,
express or implied, as to title or as to quantity, or fitness for use of the
equipment and material, all of its interest in the wellbore of the well and
related equipment, together with its interest in the Leasehold insofar and only
insofar as such Leasehold covers the right to obtain production from that
wellbore in the Zone then open to production. If the interest of the abandoning
party is or includes an Oil and Gas Interest, such party shall execute and
deliver to the nonabandoning party or parties an oil and gas lease, limited to
the wellbore and tile Zone then open to production, for a term of one (1) year
and so long thereafter as Oil and/or Gas is produced from the Zone covered
thereby, such lease to be on the form attached as Exhibit "B." The assignments
or leases so limited shall encompass the Drilling Unit upon which the well is
located. The payments by, and the assignments or leases to, the assignees shall
be in a ratio based upon the relationship of their respective percentage of
participation in the Contract Area to the aggregate of the percentages of
participation in the Contract Area of all assignees. There shall be no
readjustment of interests in the remaining portions of the Contract Area.
Thereafter, abandoning parties shall have no further responsibility,
liability, or interest in the operation of or production from the well in the
Zone than open other than the royalties retained in any lease made under the
terms of this Article. Upon request, Operator shall continue to operate the
assigned well for the account of the non-abandoning parties at the rates and
charges contemplated by this agreement plus any additional cost and charges
which may arise as the result of the separate ownership of the assigned well.
Upon proposed abandonment of the producing Zone assigned or leased, the assignor
or lessor shall than have the option to repurchase its prior interest in the
well (using the same valuation formula) and participate in further operations
therein subject to the provisions hereof.
3. Abandonment of Non-Consenting Operations: The provisions Article V.I.E.I or
V.I.E.2. above shall be applicable as between Consenting Parties in the event of
the proposed abandonment of any well excepted from said Articles; provided,
however, no well shall be permanently plugged and abandoned unless and until all
parties having the right to conduct further operations therein have been
notified of the proposed abandonment and afforded the opportunity to elect to
take over the well in accordance with the provisions of this Article VI.E. and
provided further, that Non-Consenting Parties who own an interest in a portion
of the well at the time of proposed abandonment shall pay their proportionate
shares of abandonment and surface restoration costs for such well as provided in
Article VI.B.2.(b).
F. Termination of Operations:
Upon the commencement of an operation for the drilling, Reworking, Sidetracking,
Plugging Back, Deepening, testing Completion or plugging of a well, including
but not limited to the Initial Well, such operation shall not be terminated
without consent of parties bearing 80% of the costs of such operation; provided,
however, that in the event granite or other practically impenetrable substance
or condition in the hole is encountered which renders further operations
impractical, Operator may discontinue operations and give notice of such
condition in the manner provided in Article VI.B.I. and the provisions of
Article VI.B. or VI.E. shall hereafter apply to such operation, as appropriate.
G. Taking Production in Kind:
[X] Option No. 1: Gas Balancing Agreement Attached (See Article XVI.F.)
Each party shall take in kind or separately dispose of its proportionate
share of all Oil and Gas produced from the Contract Area, exclusive of
production which may be used in development and producing operations and in
preparing and treating Oil and Gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the taking in kind or
separate disposition by and party of its proportionate share of the production
shall be borne by such party. Any party taking its share of production in kind
shall be required to pay for only its proportionate share of such part of
Operator's surface facilities which it uses.
Each party shall execute such division orders and contracts as may be necessary
for the sale of its interest in production from the Contract Areas, and, except
as provided in Article VII.B., shall be entitled to receive payment *All parties
who are entitled to participate in a subsequent operation in the well.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
directly from the purchaser thereof for its share of all production.
If any party fails to make the arrangements necessary to take in kind or
separately dispose of its proportionate share of the Oil produced from the
Contract Area, Operator shall have the right, subject to the revocation at will
by the party owning it, but not the obligation, to purchase such Oil or sell it
to others at any time and from time to time, for the account of the non-taking
party. Any such purchase or sale by Operator may be terminated by Operator upon
at least ten (10) days written notice to the owner of said production and shall
be subject always to the right of the owner of the production upon at least ten
(10) days written notice to Operator to exercise at any time its right to take
in kind, or separately dispose of, its share of all Oil not previously delivered
to a purchaser. Any purchase or sale by Operator of any other party's share of
Oil shall be only for such reasonable periods of time are consistent with the
minimum needs of the industry under the particular circumstances, but in no
event for a period in excess of one (1) year.
Any Such sale by Operator shall be in a manner commercially reasonable under the
circumstances. The sale or delivery by Operator of a non-taking party's share
of Oil under the terms of any existing contract of Operator shall not give the
non-taking party any interest in or make the non-taking party a party to said
contract. No purchase shall be made by Operator without first giving the
non-taking party at least ten (10) days written notice of such intended purchase
and the price to be paid or the pricing basis to be used.
All parties shall give timely written notice to Operator of their Gas
marketing arrangements for the following month excluding price, and shall notify
Operator immediately in the event of a change in such arrangements. Operator
shall maintain records of all marketing arrangements, and of volumes actually
sold or transported, which records shall be made available to Non--Operators
upon reasonable request.
In the event one or more parties' separate disposition of its share of the
Gas causes split-stream deliveries to separate pipelines and/or deliveries
which on a day-to-day basis for any reasons are not exactly equal to a party's
respective proportion share of total Gas sales to be allocated to it, the
balancing or accounting between the parties shall be in accordance with, any Gas
balancing agreement between the parties hereto, whether such an agreement is
attached as Exhibit "E" or is a separate agreement. Operator shall give notice
to all parties of the first sales of Gas from any well under this agreement.
Option No. 2: No Gas Balancing Agreement:
Each party shall take in kind or separately dispose of its proportionate
share of all Oil and Gas produced from the Contract Area, exclusive of
production which may be used in development and producing operations and in
preparing and treating Oil and Gas for marketing purposes and production
unavoidably lost. Any extra expenditure incurred in the taking in kind or
separate disposition by any party of its proportionate share of the production
shall be borne by such party. Any party taking its share of production in kind
shall be required to pay for only its proportionate share of such part of
Operator's surface facilities which it uses.
Each party shall execute such division orders and contracts as may be
necessary for the sale of its interest in production from the Contract Area,
and, except as provided in Article VII.B., shall be entitled to receive payment
directly from the purchaser thereof for its share of all production.
If any party fails to make the arrangements necessary to take in kind or
separately dispose of its proportionate share of the Oil and/or Gas produced
from the Contract Area, Operator shall have the right, subject to the revocation
at will by the party owning it, but not the obligation, to purchase such Oil
and/or Gas or sell it to others at any time and from time to time, for the
account of the non-taking party. Any such purchase or sale by Operator may be
terminated by Operator upon at least ten (10) days written notice to the owner
of said production and shall be subject always to the right of the owner of the
production upon at least ten (10) days written notice to Operator to exercise
its right to take in kind, or separately dispose of, its share of all Oil and/or
Gas not previously delivered to a purchaser; provided, however, that the
effective date of any such revocation may be deferred at Operator's election for
a period not to exceed ninety (90) days if Operator has committed such
production to a purchase contract having a term extending beyond such ten (10)
day period. Any purchase or sale by Operator of any other party's share of Oil
and/or Gas shall be only (or such reasonable periods of time as are consistent
with the minimum needs of the industry under the particular circumstances, but
in no event for a period in excess of one (1) year.
Any such sale by Operator shall be in a manner commercially reasonable under
the circumstances, but Operator shall have no duty to share any existing market
or transportation arrangement or to obtain a price or transportation fee equal
to that received under any existing market or transportation arrangement. The
sale or delivery by Operator of a non-taking party's share of production under
the terms of any existing contract of Operator shall not give the non-taking
party any interest in or make the non-taking party a party to said contract. No
purchase of Oil and Gas and no sale of Gas shall be made by Operator without
first giving the non-taking party ten days written notice of such intended
purchase or sale and the price to be paid or the pricing basis to be used.
Operator shall give notice to all parties of the first sale of Gas from any well
under this Agreement.
All parties shall give timely written notice to Operator of their Gas
marketing arrangements for the following month, excluding price, and shall
notify Operator immediately in the event of a change in such arrangements.
Operator shall maintain records of all marketing arrangements, and of volumes
actually sold or transported, which records shall be made available to
Non-Operators upon reasonable request.
ARTICLE VII.
EXPENDITURES AND LIABILITY OF PARTIES
A. Liability of Parties:
The liability of the parties shall be several, not joint or collective. Each
party shall be responsible only for its obligations, and shall be liable only
for its proportionate share of the costs of developing and operating the
Contract Area. Accordingly, the liens granted among the parties in Article
VII.B. are given to secure only the debts of each severally, and not party shall
have any liability to third parties hereunder to satisfy the default of any
other party in the payment of any expense or obligation hereunder. It is not the
intention of the parties to create, nor shall this agreement be construed as
creating a mining or other partnership, joint venture, agency relationship or
association, or to render the parties liable as partners, co-ventures, or
principals. In their relations with each other under this agreement, the
parties shall not be considered fiduciaries or to have established a
confidential relationship but rather shall be free to act on an arm's-length
basis in accordance with their own respective self-interest, subject, however,
to the obligation of the parties to act in good faith in their dealing s with
each other with respect to activities hereunder.
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A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
D. Liens and Security Interests:
Each party grants to the other parties hereto a lien upon any interest it
now owns or hereafter acquires in Oil and Gas Leases and Oil and Gas Interests
in the Contract Area, and a security interest and/or purchase money security
interest in any interest it now owns or hereafter acquires in the personal
property and fixtures on or used or obtained for use in connection therewith, to
secure performance of all of its obligations under this agreement including but
not limited to payment of expense, interest and fees, the proper disbursement of
all monies paid hereunder, the assignment or relinquishment of interest in Oil
and Gas Leases as required hereunder, and the proper performance of operations
hereunder. Such lien and security interest granted by each party hereto shall
include such party's leasehold interests, working interests, operating rights,
and royalty and overriding royalty interests in the Contract Area now owned or
hereafter acquired and in lands pooled or unitized therewith or otherwise
becoming subject to this agreement, the Oil and Gas when extracted therefrom and
equipment situated thereon or used or obtained for use in connection therewith
(including, without limitation, all wells, tools, and tubular goods), and
accounts (including, without limitation, accounts arising from gas imbalances or
from the sale of Oil and/or Gas at the wellhead), contract rights, inventory and
general intangibles relating thereto or arising therefrom, and all proceeds and
products of the foregoing.
To perfect the lien and security agreement provided herein, each party
hereto shall execute and acknowledge the recording supplement and/or any
financing statement prepared and submitted by any party hereto in conjunction
herewith or at any time following execution hereof, and Operator is authorized
to file this agreement or the recording supplement executed herewith as a lien
or mortgage in the applicable real estate records and as a financing statement
with the proper officer under the Uniform Commercial Code in the state in which
the Contract Area is situated and such other states as Operator shall deem
appropriate to perfect the security interest granted hereunder. Any party may
file this agreement, the recording supplement executed herewith, or such other
documents, as it deems necessary as a lien or mortgage in the applicable real
estate records and/or a financing statement with the proper officer under the
Uniform Commercial Code.
Each party represents and warrants to the other parties hereto that the
lien and security interest granted by such party to the other parties shall be a
first and prior lien, and each party hereby agrees to maintain the priority of
said lien and security interest against all persons acquiring oil interest in
Oil and Gas Leases and Interests covered by this agreement by, through or under
such party. All parties acquiring an interest in Oil and Gas Leases and Oil and
Gas Interests covered by this agreement, whether by assignment, merger,
mortgage, operation of law, or otherwise, shall be deemed to have taken subject
to the lien and security interest granted by this Article VII.B. as to all
obligations attributable to such interest hereunder whether or not such
obligations arise before or after such interest is acquired.
To the extent that parties have a security interest under the Uniform
Commercial Code of the state in which the Contract Area is situated, they shall
be entitled to exercise the rights and remedies of a secured party under the
Code. The bringing of a suit and the obtaining of judgment by a party for the
secured indebtedness shall not be deemed an election of remedies or otherwise
affect the lien rights or security interest as security for the payment thereof.
In addition upon default by any party in the payment of its share of expenses,
interests or fees, or upon the improper use of funds by the Operator, the other
parties shall have the right, without prejudice to other rights or remedies, to
collect from the purchaser the proceeds from the sale of such defaulting party's
share of Oil and Gas until the amount owed by such party, plus interest as
provided. in "Exhibit C," has been received, and shall have the right to offset
the amount owed against the proceeds from the sale of such defaulting party's
share of Oil and Gas. All purchasers of production may rely on a notification of
default from the non-defaulting party or parties stating the amount due as a
result of the default, and all parties waive any recourse available against
purchasers for releasing production proceeds as provided in this paragraph.
If any party fails to pay its share of cost within one hundred twenty (120)
days after rendition of a statement therefor by Operator, the non-defaulting
parties, including Operator, shall, upon request by Operator, pay the unpaid
amount in the portion that the interest of each such party bears to the interest
of all such parties. The amount paid by each party so paying its share of the
unpaid amount shall be secured by the liens and security rights described in
Article VII.B., and each paying party may independently pursue any remedy
available hereunder or otherwise.
If any party does not perform all of its obligations hereunder, and the
failure to perform subjects such party to foreclosure or execution proceedings
pursuant to the provisions of this agreement, to the extent allowed by governing
law, the defaulting
party waives any available right of redemption from and after the date of
judgment, any required valuation or appraisement of the mortgaged or secured
property prior to sale, any available right to stay execution or to require a
marshalling of assets and any required bond in the event a receiver is
appointed. In addition, to the extent permitted by applicable law, each party
hereby grants to the parties a power of sale as to any property that is subject
to the lien and security rights granted hereunder, such power to be exercised in
the manner provided by applicable law or otherwise in a commercially reasonable
manner and upon reasonable notice.
Each party agrees that the other parties shall be entitled to utilize the
provisions of Oil and Gas lien law or other lien law of any state in which the
Contract Area is situated to enforce the obligations of each party hereunder.
Without limiting the generality of the foregoing, to the extent permitted by
applicable law, Non-Operators agree that Operator may invoke or utilize the
mechanics or materialmen's lien law of the state in which the Contract Area is
situated in order in secure the payment to Operator of any sum due hereunder for
services performed or materials supplied by Operator.
C. Advances:
Operator, at its election, shall have the right from time to time to demand
and receive from one or more of the other parties payment in advance of their
respective shares of the estimated amount of the expense to be incurred in
operations hereunder during the next succeeding month, which right may be
exercised only by submission to each such party of an itemized statement of such
estimated expense, together with an invoice for its share thereof. Each such
statement and invoice for the payment in advance of estimated expense shall be
submitted on or before the 20th of the next preceding month. Each party shall
pay to Operator its proportionate share of such estimate within fifteen (15)
days after such estimate and invoice is received. If any party fails to pay its
share of said estimate within said time, the amount due shall bear interest as
provided in Exhibit "C" until paid. Proper adjustment shall be made monthly
between advances and actual expense to the end that each party shall bear and
pay its proportionate share of actual expenses incurred, and not more.
D. Defaults and Remedies:
If any party fails to discharge any financial obligation under this
agreement, including, without limitation the failure to make any advance under
the preceding Article VII.C. or any other provision of this agreement, within
the period required for such payment hereunder, than in addition to the remedies
provided in Article VII.B. or elsewhere in this agreement, the remedies
specified below shall be applicable. For purposes of this Article VII.D., all
notices and elections shall be delivered
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
only by Operator, except that Operator shall deliver any such notice and
election requested by a non-defaulting Non-Operator, and when Operator is the
party in default, the applicable notices and elections can be delivered by any
Non-Operator. Election of any one or more of the following remedies shall not
preclude the subsequent use of any other remedy specified below or otherwise
available to a non-defaulting party.
1. Suspension of Rights: Any party may deliver to the party in default a Notice
of Default, which shall specify the default, specify the action to be taken to
cure the default, and specify that failure to take such action will result in
the exercise of one
or more of the remedies provided in this Article. If the default is not cured
within thirty (30) days of the delivery of such Notice of Default, all of the
rights of the defaulting party granted by this agreement may upon notice be
suspended until the
default is cured, without prejudice to the right of the non-defaulting party or
parties to continue to enforce the obligations of the defaulting party
previously accrued or thereafter accruing under this agreement. If Operator is
the party in default, the
Non-Operators shall have in addition the right, by vote of Non-Operators owning
a majority in interest in the Contract Area after excluding the voting interest
of Operator, to appoint a new Operator effective immediately. The rights of a
defaulting party that may be suspended hereunder at the election of the
non-defaulting parties shall include, without limitation, the right to receive
information as to any operation conducted hereunder during the period of such
default, the right to elect to participate in an operation proposed under
Article VI.B. of this agreement, the right to participate in an operation being
conducted under this agreement even if the party has previously elected to
participate in such operation, and the right to receive proceeds of production
from any well subject to this agreement.
2. Suit for Damages: Non-defaulting parties or Operator for the benefit of
non-defaulting parties may sue (at joint account expense) to collect the amounts
in default, plus interest accruing on the amounts recovered from the date of
default until the date of collection at the rate specified in Exhibit "C"
attached hereto. Nothing herein shall prevent any party from suing any
defaulting party to collect consequential damages accruing to such party as a
result of the default.
3. Deemed Non-Consent: The non-defaulting party may deliver a written Notice of
Non-Consent Election to the defaulting party at any time after the expiration of
the thirty-day cure period following delivery of the Notice of Default, in which
event if the billing is for the drilling of a new well or the Plugging Back,
Sidetracking, Reworking or Deepening of a well which is to be or has been
plugged as a dry hole, or for the Completion or Recompletion of any well, the
defaulting party will be conclusively deemed to have elected not to participate
in the operation and to be a Non-Consenting Party with respect thereto under
Article VI.B. or VI.C., as the case may be, to the extent of the costs unpaid by
such party, notwithstanding any election to participate theretofore made. If
election is made to proceed under this provision, then the non--defaulting
parties may not elect to sue for the unpaid amount pursuant to Article VII.D.2.
Until the delivery of such Notice of Non-Consent Election to the defaulting
party, such party shall have the right to cure its default by paying its unpaid
share of costs plus interest at the rate set forth in Exhibit "C," provided,
however, such payment shall not prejudice the rights of the non-defaulting
parties to pursue remedies for damages incurred by the non-defaulting parties as
a result of the default. Any interest relinquished pursuant to this Article
VII.D.3. shall be offered to the non-defaulting parties in proportion to their
interests, and the non--defaulting parties electing to participate in the
ownership of such interest shall be required to contribute their shares of the
defaulted amount upon their election to participate therein.
4. Advance Payment: If a default is not cured within thirty (30) days of the
delivery of a Notice of Default, Operator, or Non-Operators if Operator is the
defaulting party, may thereafter require advance payment from the defaulting
party of such defaulting party's anticipated share of any item of expense for
which Operator, or Non-Operators, as the case may be, would be entitled to
reimbursement under any provision of this agreement, whether or not such expense
was the subject of the previous default. Such right includes, but is not limited
to, the right to require advance payment for the estimated costs of drilling a
well or Completion of a well as to which an election to participate in drilling
or Completion has been made. If the defaulting party fails to pay the required
advance payment, the non-defaulting parties may pursue any of the remedies
provided in this Article VII.D. or any other default remedy provided elsewhere
in this agreement. Any excess of funds advanced remaining when the operation is
completed and all costs have been paid shall be promptly returned to the
advancing party.
5. Costs and Attorneys Fees: In the event any party is required to bring legal
proceedings to enforce any financial obligation of a party hereunder, the
prevailing party in such action shall be entitled to recover all court costs,
costs of collection, and a reasonable attorney's fee, which the lien provided
for herein shall also secure.
E. Rentals, Shut-in Well Payment and Minimum Royalties:
Rentals, shut-in well payment and minimum royalties which may be required
under the terms of any lease shall be paid by the party or parties who subjected
such lease to this agreement at its or their expense. In the event two or more
parties own and have contributed interests in the same lease to this agreement,
such parties may designate one of such parties to make said payments for and on
behalf of all such parties. Any Party may request, and shall be entitled to
receive, proper evidence of all such payments. In the event of failure to make
proper payment of any rental, shut-in well payment or minimum royalty through
mistake or oversight where such payment is required to continue the lease in
force, any loss which results from such non-payment shall be borne in accordance
with the provisions of Article IV.B.2.
Operator shall notify Non-Operators of the anticipated completion of a
shut-in well, or the shutting in or return to production of a producing well at
least five (5) days (excluding Saturday, Sunday and legal holidays) prior to
taking such action, or at the earliest opportunity permitted by circumstances,
but assumes no liability for failure to do so. In the event of failure by
Operator to so notify Non--Operators, the loss of any lease contributed hereto
by Non-Operators for failure to make timely payments of any shut-in well payment
shall be borne jointly by the parties hereto under the provisions of Article I
.B.3.
F. Taxes:
Beginning with the first calendar year after the effective date hereof,
Operator shall render for ad valorem taxation all property subject to this
agreement which by law should be rendered for such taxes, and it shall pay all
such taxes assessed thereon before they become delinquent. Prior to the
rendition date, each Non-Operator shall furnish Operator info9rmation as to
burdens (to include, but not be limited to, royalties, overriding royalties and
production payments) on Leases and Oil and Gas Interests contributed by such
Non-Operator. If the assessed valuation of any Lease is reduced by reason of
this being subject to outstanding excess royalties, overriding royalties or
production payments, the reduction in ad valorem taxes resulting therefrom shall
inure to the benefit of the owner or owners of such Lease and Operator shall
adjust the charge to such owner or owners so as to reflect the benefit of such
reduction. If the ad valorem taxes are based in whole or in part upon separate
valuations of each party's working interest, then notwithstanding anything to
the contrary herein, charges to the joint account shall be made and paid by the
parties hereto in accordance with the tax value generated by each party's
working interest. Operator will bill the other parties for their proportionate
shares of all tax payments in the manner provided in Exhibit "C."
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT- 1989
If Operator considers any tax assessment improper, Operator may, at its
discretion, protest within the time and manner prescribed by law, and prosecute
the protest to a final determination, unless all parties agree to abandon the
protest prior to final determination. During the pendency of administrative or
judicial proceedings, Operator may elect to pay, under protest, all such taxes
and any interest and penalty. When any such protested assessment shall have been
finally determined, Operator shall pay the tax for the joint account, together
with any interest and penalty accrued, and the total cost shall then be assessed
against the parties, and be paid by them, as provided in Exhibit "C."
Each party shall pay or cause to be paid all production, severance, excise,
gathering and other taxes imposed upon or with respect to the production or
handling of such party's share of Oil and Gas produced under the terms of this
agreement.
ARTICLE VIII.
ACQUISITION, MAINTENANCE OF TRANSFER OF INTEREST
A. Surrender of Leases:
The Leases covered by this agreement, insofar as they embrace acreage in
the Contract Area, shall not be surrendered in whole or in part unless all
parties consent thereto.
However, should any party desire to surrender its interest in any Lease or
in any portion thereof, such party shall give written notice of the proposed
surrender to all parties, and the parties to whom such notice is delivered shall
have thirty (30) days after delivery of the notice within which to notify the
party proposing the surrender whether they elect to Consent thereto. Failure of
a party to whom such notice is delivered to reply within said 30-day period
shall constitute consent to the surrender of the Leases described in the notice.
If all parties do not agree or consent thereto, the party desiring to surrender
shall assign, without express or implied warranty of title, all of its interest
in such Lease, or portion thereof, and any well, material and equipment which
may be located thereon and any rights in production thereafter secured, to the
parties not consenting to such surrender. If the interest of the assigning party
is or includes an Oil and Gas Interest, the assigning party shall execute and
deliver to the party or parties not consenting to such surrender an oil and gas
lease covering such Oil and Gas Interest for a term of one (1) year and so long
thereafter as Oil and/or Gas produced from the land covered thereby, such lease
to be on the form attached hereto as Exhibit "B." Upon such assignment or lease,
the assigning party shall be relieved from all obligations thereafter accruing,
but full theretofore accrued, with respect to the interest assigned or leased
and the operation of any well attributable thereto, and the assigning party
shall have no further interest in the assigned or leased premises and its
equipment and production other than the royalties remitted in any lease made
under the terms of this Article. The party assignee or lessee shall pay to the
party assignor or lessor the reasonable salvage value of the latter's interest
in any well's salvable materials and equipment attributable to the assigned or
leased acreage. The value of all salvable materials still equipment shall be
determined in accordance with the provisions of Exhibit "C," less the estimated
cost of salvaging and the estimated cost of plugging and abandoning and
restoring fix surface. If such value is less than such costs, then the party
assignor or lessor shall pay to the party assignee or lessee the amount of such
deficit. If the assignment or lease is in favor of more than one party, the
interest shall be shared by such parties in the proportions that the interest of
each bears to the total interest of all such parties. If the interest of the
parties to whom the assignment is to be made varies according to depth, then the
interest assigned shall similarly reflect such variances.
Any assignment, lease or surrender made under this provision shall not reduce or
change the assignor's, lessor's or surrendering party's interest as it was
immediately before the assignment, lease or surrender in the balance of the
Contract Area; and the acreage assigned, leased or surrendered, and subsequent
operations thereon, shall not thereafter be subject to the terms and provisions
of this agreement but shall be deemed subject to all Operating Agreement in the
form of this agreement.
B. Renewal or Extension of Leases:
If any party secures a renewal or replacement of an Oil and Gas Lease or
Interest subject to ibis agreement, then all other parties shall be notified
promptly upon such acquisition or, in the case of a replacement Lease, taken
before expiration of an
existing Lease, promptly upon expiration of the existing Lease. The parties
notified shall have the right for a period of thirty (30) days following
delivery of such notice in which to elect to participate in the ownership of the
renewal or replacement Lease, insofar as such Lease effects lands within the
Contract Area, by paying to the party who acquired it their proportionate shares
of the acquisition cost allocated to the part of such Lease within the Contract
Area, which shall be in proportion to the interests held at that that time by
the parties in the Contract Area. Each party who participates in the purchase of
a renewal or replacement Lease shall be given an assignment of its proportionate
interest therein by the acquiring party.
If some, but not less than all, of the parties elect to participate in the
purchase of a renewal or replacement Lease, it shall be owned by the parties who
elect to participate therein, in a ratio based upon the relationship of their
respective percentage of participation in the Contract Area to the aggregate of
the percentages of participation in the Contract Area of all parties
participating in the purchase of such renewal or replacement Lease. The
acquisition of a renewal or replacement Lease by any or all of the parties
hereto shall not cause a readjustment of the interest of the parties stated in
Exhibit "A." but any renewal or replacement Lease in which less than all parties
elect to participate shall not be subject to this agreement but shall be deemed
subject to a separate Operating Agreement in the form of this agreement.
If the interests of the parties in the Contract Area vary according to
depth, then their right to participate proportionately in renewal or replacement
Leases and their right to receive all assignment of interest shall also reflect
such depth variances.
The provisions of this Article shall apply to renewal or replacement Leases
whether they are for the entire interest covered by the expiring Lease or cover
only a portion of its area or in interest therein. Any renewal or replacement
Lease taken before the expiration of its predecessor Lease, or taken or
contracted for or becoming effective within six (6) months after the expiration
of the existing Lease, shall be subject to this provision so long as this
agreement is in effect at the time of such acquisition or at the time the
renewal or replacement Lease becomes effective; but any Lease taken or
contracted for more than six (6) months after the expiration of an existing
Lease shall not be deemed a renewal or replacement Lease4 and shall not be
subject to the provisions of this agreement.
The provisions in this Article shall also be applicable to extensions of
Oil and Gas Leases.
C. Acreage or Cash Contributions:
While this agreement is in force, if any party contracts for a contribution
of cash towards the drilling of a well or any other operation on the Contract
Area, such contribution shall be paid to the party who conducted the drilling or
other operation and shall be applied by it against the cost of such drilling or
other operation. If the contribution be in the form of acreage, the party to
whom the contribution is made shall promptly tender an assignment of the
acreage, without warranty of title, to the Drilling Parties in the proportions
said Drilling Parties shared the cost of drilling the well. Such acreage shall
be come a separate Contract Area and, to the extent possible, be governed by
provisions identical to this agreement. Each party shall promptly notify all
other parties of any acreage or cash contributions it may obtain in support of
any well or any other operation on the Contract Area. The above provisions
shall also be applicable to additional rights to earn acreage outside the
Contract Area which are in support of well drilled inside the Contract Area.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
If any party contracts for any consideration relating to disposition of such
party's share of substances produced hereunder, such consideration shall not be
deemed a contribution as contemplated in this Article VIII.C.
D. Assignment; Maintenance of Uniform Interest:
For the purpose of maintaining uniformity of ownership in the Contract Area in
the Oil and Gas Leases. Oil and Gas Interests, wells, equipment and production
covered by this agreement no party shall sell, encumber, transfer or make other
disposition of its interest in the Oil and Gas Leases and Oil and Gas Interests
embraced within the Contract Area or in wells, equipment and production unless
such disposition covers either:
1. the entire interest of the party in all Oil and Gas Leases, Oil and Gas
Interests, wells, equipment and production; or
2. all equal undivided percent of the party's present interest in all Oil and
Gas Leases, Oil and Gas Interests, wells, equipment and production in the
Contract Area.
Every sale, encumbrance, transfer or other disposition made by any party shall
be made expressly subject to this agreement and shall be made without prejudice
to the right of the other parties, and any transferee of an ownership interest
in any Oil and Gas Lease or Interest shall be deemed a party to this agreement
as to the interest conveyed from and after the effective date of the transfer of
ownership; provided, however, that the other parties shall not be required to
recognize any such sale, encumbrance, transfer or other disposition for any
purpose hereunder until thirty (30) days after they have received a copy of the
instrument of transfer or other satisfactory evidence thereof in writing from
the transferor or transferee. No assignment or other disposition of interest by
a party shall relieve such party of obligations previously incurred by such
party hereunder with respect to the interest transferred, including without
limitation the obligation of a party to pay all costs attributable to on
operation conducted hereunder in which such party has agreed to participate
prior to making such assignment, and the lien and security interest granted by
Article VII.B. shall continue to burden the interest transferred to secure
payment of any such obligations.
If, at any time the interest of any party is divided among and owned by
four or more co-owners, Operator, at its discretion, may require such co-owners
to appoint a single trustee for agent with full authority to receive notices,
approve expenditures, receive billings for and approve and pay such party's
share of the joint expenses, and to deal generally with, and with power to bind,
the co-owners of such party's interest within the scope of the operations
embraced in this agreement; however, all such co-owners shall have the right to
enter into and execute all contracts or agreements for the disposition of their
respective shares of the Oil and Gas produced form the Contract Area and they
shall have the right to receive, separately, payment of the sale proceeds
thereof.
E. Waiver of Rights to Partition:
If permitted by the laws of the state or states its which the property
covered hereby is located, each party hereto owning an undivided interest in the
Contract Area waives any and all rights it may have to partition and have set
aside to it in severalty its undivided interest therein.
F. Deleted
ARTICLE IX.
INTERNAL REVENUE CODE ELECTION
If, for federal income tax purposes, this agreement and the operations
hereunder are regarded as it partnership, and if the parties have not otherwise
agreed to form a tax partnership pursuant to Exhibit "G" or other agreement
between them, each party thereby affected elects to be excluded from the
application of all of the provisions of Subchapter "K," Chapter1, Subtitle "A,"
of the Internal Revenue Code of 1986, an amended ("Code"), as permitted and
authorized by Section 761 of the Code and the regulations promulgated
thereunder. Operator is authorized and directed to execute on behalf of each
party hereby affected such evidence of this election as may be required by the
Secretary of the Treasury of the United States or the Federal Internal Revenue
Service, including specifically, cut not by way of limitation, all of the
returns, statements, and the data required by Treasury Regulations 1.761.
Should there by any requirement that each party hereby affected give further
evidence of this election, each such party shall execute such documents and
furnish such other evidence as may be required by the Federal Internal Revenue
Service or as may be necessary to evidence this election. No such party shall
give any notices or take any other action inconsistent with the election made
hereby. If any present or future income tax laws of the state or states in
which the Contract Area is located or any future income tax laws of the United
States contained provisions similar to those in Subchapter "K," Chapter 1,
Subtitle "A," of the Code, under which an election similar to that provided by
Section 761 of the Code is permitted, each party hereby affected shall make such
election as may be permitted or required by such laws. In making the foregoing
election, each such party states that the income derived by such party from
operations hereunder can be adequately determined without the computation of
partnership taxable income.
ARTICLE X.
CLAIMS AND LAWSUITS
Operator may settle any single uninsured third party damage claim or suit
arising from operations hereunder if the expenditure does not exceed Ten
thousand Dollars ($10,000.00) and if the payment is in complete settlement of
such claim or suit. If the amount required or settled exceeds that above
amount, the parties hereto shall assume and take over the further handling of
the claim or suit, unless such authority is delegated to Operator. All costs
and expenses of handling, settling, or otherwise discharging such claim or suit
shall be at the joint expense of the parties participating in the operation from
which the claim or suit arises. If a claim is mate against any party or if any
party is sued on account of any matter arising from operations hereunder over
which such individual has not control because of the rights given Operator by
this agreement, such party shall immediately notify all other parties, and the
claim or suite shall be treated as any other claim or suit involving operations
hereunder.
<PAGE>
A.A.P.L. FORM 610 - MODEL FROM OPERATING AGREEMENT - 1989
ARTICLE XI.
FORCE MAJEURE
If any party is rendered unable, wholly or in part, by force majeure to
carry out its obligations under this agreement, other than the obligation to
indemnify or make money payments or furnish security, that party shall give to
all other parties prompt written notice of the force majeure with reasonably
full particulars concerning it; thereupon, the obligations of the party giving
the notice, so far as they are affected by the force majeure, shall be suspended
during, but no longer than, the continuance of the force majeure. The term
"force majeure," as here employed, shall mean an act of God, strike, lockout, or
other industrial disturbance, act of the public enemy war, blockade, public
riot, lightning, fire, storm flood or other act of nature, explosion,
governmental action, governmental delay, restraint or inaction, unavailability
of equipment, and any other
cause, whether of the kind specifically enumerated above or otherwise, which is
not reasonably within the control of the party claiming suspension.
The affected party shall use all reasonable diligence to remove the force
majeure situation as quickly as practicable. The requirement that any force
majeure shall be remedied with all reasonable dispatch shall not require the
settlement of strikes, lockouts, or other labor difficulty by the party involved
contrary to its wishes; how all such difficulties shall be handled shall be
entirely within the discretion of the party concerned.
ARTICLE XII.
NOTICES
All notices authorized or required between the parties by any of the
provisions of this agreement, unless otherwise specifically provided, shall be
in writing and delivered in person or by United States mail, courier service,
telegram, telex, telecopier or any other form of facsimile, postage or charges
prepaid, and addressed to such parties at the addresses listed on Exhibit "A."
All telephone or oral notices permitted by this agreement shall be confirmed
immediately thereafter by written notice. The originating notice given under any
provision hereof shall be deemed delivered only when received by the party to
whom such notice is directed, and the time for such party to deliver any notice
in response thereto shall run from the date the originating notice is received.
"Receipt " for purposes of this agreement with respect to written notice
delivered hereunder shall be actual delivery of the notice to the address of the
party to be notified specified in accordance with this agreement, or to the
telecopy, facsimile or telex machine of such party. The second or any
responsive notice shall he deemed delivered when deposited in the United States
mail or at the office of the courier or telegraph, service, or upon transmittal
by telex, telecopy or facsimile, or when personally delivered to the party to be
notified, provided, that when response is required within 24 or 48 hours, such
response shall be given orally or by telephone, telex, telecopy or other
facsimile within such period. Such party shall have the right to change its
address; at any time, and from time to time, by giving written notice thereof to
all other parties. If a party is not available to receive notice orally or by
telephone when a party attempts to deliver a notice required to be delivered
within 24 or 48 hours, the notice may be delivered in writing by any other
method specified herein and shall be deemed delivered in the same manner
provided above for any responsive notice.
ARTICLE XIII.
TERM OF AGREEMENT
This agreement shall remain in full force and effect as to the Oil and Gas
Leases and/or Oil and Gas Interests subject hereto for the period of time
selected below, provided, however, no party hereto shall ever be construed as
having any right, title or interest in or to any Lease or Oil and Gas Interest
contributed by any other party beyond the term of this agreement.
[ X ] Option No. 1: So long as any of the Oil and Gas Leases subject to this
agreement remain or are continued tin force as to any part of the Contract Area,
whether by production, extension, renewal or otherwise.
[ ] Option No. 2: In the event the well described in Article VI.A., or any
subsequent well drilled under any provision of this agreement, results in the
Completion of a well as a well capable of production of Oil and/or Gas in paying
quantities, this agreement shall Continue in force so long as any such well is
capable of production, and for an additional period of _________________ days
thereafter; provided, however, if, prior to the expiration of such additional
period, one or more of the parties hereto are engaged in drilling, Reworking,
Deepening, Sidetracking, Plugging Back, testing or attempting to Complete or
re-complete a well or wells hereunder, this agreement shall continue in force
until such operations have been completed and if production results therefrom,
this agreement shall continue in force as provided herein. In the event the well
described in Article VI.A., or any subsequent well drilled hereunder, results in
a dry hole, and no other well is capable of producing Oil and/or Gas from the
Contract Area, this agreement shall terminate unless drilling, Deepening,
Sidetracking, Completing, Plugging Back or
Reworking operations are commended within _________ days from the date of
abandonment of said well. Abandonment for such purposes shall mean either (i) a
decision by all parties
not to Conduct any further operations on the well or (ii) the elapse of 180 days
from the conduct of any operations on the well, whichever first occurs.
The termination of this agreement shall not relieve any party hereto from
any expense, liability or other obligation or any remedy therefor which has
accrued or attached prior to the date of such termination.
Upon termination of this agreement and the satisfaction of sill obligations
hereunder, in the event a memorandum of this Operating Agreement has been filed
of record, Operator is authorized to file of record in all necessary recording
offices a notice of termination, and each party hereto agrees to execute such a
notice of termination as to Operator's interest, upon request of Operator, if
Operator has satisfied all its financial obligations.
ARTICLE XIV
COMPLIANCE WITH LAWS AND REGULATIONS-
A. Laws, Regulations and Orders:
This agreement shall be subject to the applicable laws of the state in which the
Contract Area is located, not the valid rules, regulations, and orders of any
duly constituted regulatory bode of said state; and to all other applicable
federal, state, and local laws, ordinances, rules, regulations and orders.
B. Governing Law:
This agreement and all matters pertaining hereto, including but not limited
to matters of performance, non-performance, breach, remedies, procedures, rights
duties, and interpretation or construction, shall be governed and determined by
the law of the state in which the Contract Area is located. If the Contract
Area is in two or more states, the laws of the state to Texas shall govern.
C. Regulatory Agencies:
Nothing herein contained shall grant, or be construed to grant, Operator on
the right or authority to waive or release4 any rights, privileges, or
obligations which Non-Operators may have under federal or state laws or under
rules, regulations or
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
orders promulgated under such laws in reference to oil, gas and mineral
operations, including the location, operation, or production of wells, on tracts
offsetting or adjacent to the Contract Area.
With respect to the operations hereunder, Non-Operators agree to release
Operator from any and all losses, damages, injuries, claims and causes of action
arising out of, incident to or resulting directly or indirectly from Operator's
interpretation or application of rules, rulings, regulations or orders of the
Department of Energy or Federal Energy Regulatory Commission or predecessor or
successor agencies to the extent such interpretation or application was made in
good faith and does not constitute gross negligence. Each Non-Operator further
agrees to reimburse Operator for such Non-Operator's share of production or any
refund, fine, levy or other governmental sanction that Operator may be required
to pay as a result of such an incorrect interpretation or application, together
with interest and penalties thereon owing by Operator as a result of such
incorrect interpretation or application.
ARTICLE XV.
MISCELLANEOUS
A. Execution:
This agreement shall be binding upon each Non-Operator when this agreement
or a counterpart thereof has been executed by such Non--Operator and Operator
notwithstanding that this agreement is not then or thereafter executed by all of
the parties to which it is tendered or which are listed on Exhibit "A" as owning
an interest in the Contract Area or which own, in fact, an interest in the
Contract Area. Operator may, however, by written notice to all Non-Operators who
have become bound by this agreement as aforesaid, given at any time prior to the
actual spud date of the Initial Well but in no event later than five days prior
to the date specified in Article VI.A. for commencement of the Initial Well,
terminate this agreement if Operator in its sole discretion determines that
there is insufficient participation to justify commencement of drilling
operations. In the event of such a termination by Operator, all further
obligations of the parties hereunder shall cease as of such termination. In the
event any Non-Operator has advanced or prepaid any share of drilling or other
costs hereunder, all sums so advanced shall be returned to such Non-Operator
without interest. In the event Operator proceeds with drilling operations for
the Initial Well without the execution hereof by all persons listed on Exhibit
"A" as having a current working interest in such well, Operator shall indemnify
Non-Operators with respect to all costs incurred for the Initial Well which
would have been charged to such person under this agreement if such person had
executed the same and Operator shall receive all revenues which would have been
received by such person under this agreement if such person had executed the
same.
B. Successors and Assigns:
This agreement shall be binding upon and shall inure to the benefit of the
parties hereto and their respective heirs, devisees legal representatives,
successors and assigns, and the terms hereof shall be deemed to run with the
Leases or Interests included within the Contract Area.
C. Counterparts:
This instrument may be executed in any number of counterparts, each of
which shall be considered an original for all purposes.
D. Severability:
For the purposes of assuming or rejecting this agreement as an executory
contract pursuant to federal bankruptcy laws, this agreement shall not be
severable, but rather must be assumed or rejected in its entirety, and the
failure of any party to this agreement to comply with all of its financial
obligations provided herein shall be a material default.
ARTICLE XVI.
OTHER PROVISIONS
A. Notwithstanding anything herein to the contrary, from time to time the
Operator shall invoice the Participating Parties for their share of costs and
expenses incurred or to be incurred in any well drilled on the Leased Lands.
Operator may invoice Participating Party for its proportionate share of actual
costs already incurred, or Operator may submit to Participating Parties an
itemized invoice for its proportionate share of the
estimated expenditures associated with operations on the Leased Lands for the
next thirty (30) day period. Within thirty (30) days of receipt of a properly
documented invoice for its proportionate share of such actual or estimated
expenditures, Participating Party shall pay to Operator the full amount
reflected on such invoice. Notwithstanding
any other provisions of this Operating Agreement and any rights or remedies of
Operator thereunder, Participating Party fails to pay any properly documented
invoice within thirty (30) days of Participating Party's receipt thereof,
Operator, at its option, may send written notice to Participating Party by
registered/certified mail of Operator's intention to foreclose pursuant to die
terms hereof Participating Party shall have thirty (30) days after receipt of
such notice to pay in full all amounts then due. In the event participating
party, has mortgaged its interest in any of the Leased Lands, the wells located
on the Leased Lands or the production therefrom, and in the further event that
Participating Party has furnished to Operator in writing the name and address of
such
mortgagee(s) prior to the expiration of the thirty (30) days period ensuing
after Participating Party's receipt of an invoice for its proportionate share of
actual or estimated expenditures, then in the event Operator elects to exercise
its foreclosure option, Operator shall contemporaneously with the sending of a
foreclosure notice to such
mortgagee(s) and shall give such mortgagee(s) the opportunity to cure
Participating Party's default within thirty (30) days after such mortgagee(s)
receipt of such foreclosure notice. If Participating Party or any such mortgage
does not pay in full all amounts then due within thirty (30) days after their
respective receipts of such foreclosure notice, the Operator shall proceed to
foreclose upon Participating Party's interest in accordance with the following
provisions:
If Operator should elect to proceed to foreclose the lien of Operator as
against the interest of a Participating Party having an interest in the Leased
Lands, this Operating Agreement does hereby include provisions for non-judicial
sale under the laws of the State of Texas and Gerald E. Thorton, Jr. attorney,
whose address is 802 N. Carancahua, Suite 1900, Corpus Christi, Texas 78470, is
hereby appointed as Trustee for such purpose. Under such default, said Trustee
or Operator shall, at least twenty-one (21) days preceding the date of the
non-judicial sale, serve written notice of the proposed sale by certified mail
on such Participating Party according to the records of Operator. Service of
such notice shall be deemed completed upon deposit of a notice, enclosed in a
post-paid wrapper properly addressed to the Participating Party and each Party
obligated to pay said
<PAGE>
obligations, at the most recent address or addresses as shown on the records of
Operator, in a post office or other official depository under the care and
custody of the United States Postal Service. After such notice said Trustee
shall proceed to sell those certain interests of the Participating Party whose
interest is being foreclosed in that portion of the Leased Lands hereinafter
defined, at public auction to the highest bidder for cash, after having notice
of the time and place of sale and in the manner and after the advertisement of
such sale as is now required by the statutes of the State of Texas. Any interest
conveyed to the Acquiring party shall be subject to the terms and conditions of
this agreement and other Parties as it related to said Leased Lands. In making
sales of real estate, the sale of a part of the realty would not exhaust the
power of sale and sales may be made from time to time until all of the property
is sold or the obligations paid in full. Said Trustee shall have the authority
to appoint an attorney-in-fact to act as Trustee in conducting the foreclosure
sale and execute a Deed to the purchaser or purchasers, and it is further agreed
that said Trustee or his successor may sell said property together or in lots
and/or parcels as he may deem expedient and after such sales as aforesaid are
made, the Trustee shall execute and deliver to the purchaser or purchasers good
and sufficient Deeds, Assignments and other lawful conveyances to vest in said
purchaser or purchasers title of such Participating Party in the involved Leased
Lands, in fee simple, together with all personal property used or obtained in
connection therewith, and together with all of the proceeds of production
attributable thereto, including proceeds of production held by any Party for the
payment to such Participating Party. From the proceeds of said sale. said
Trustee shall first pay all charges, costs and expenses in executing these
provisions, and secondly pay all sums due by the Trustee for taxes in the
preservation of the security, and thereafter shall pay all of the remaining sums
to the Operator for the satisfaction of the debts of such Participating Party
hereunder, and the balance, if any, shall be paid to such Participating Party.
It is agreed that such sale shall be a perpetual bar against said Participating
Party and his/its heirs, successors, assigns, legal representatives and all
other persons claiming under him/it them or any of them. It is further agreed
that said Trustee or any holder or holders of said obligation or Operator shall
have the right to become the purchaser or purchasers at such sale if they are
the highest bidder or bidders, in which event the bid or bids of the purchaser
or purchasers may be credited upon said indebtedness of said Participating
Party. It is stipulated and agreed that in case of any sale hereunder by the
Trustee or his successor, all prerequisites of said sale shall be presumed to
have been performed and in any conveyance given hereunder, all statements of
fact or recitals therein made as to the nonpayment of money secured or as to any
default under the terms hereof or as to the request of the Trustee to enforce
this trust or as to the proper and due appointment of any successor or
substitute Trustee or as to the advertisement of sale of the time, place and
terms of sale or as to any prima facie evidence that the facets so stated are
true. Operator may appoint a substitute or successor Trustee in the event the
Trustee above named is unable for any reason to serve.
Each Participating Party shall have the right to contest the validity of the
charges included in any invoice presented by Operator by providing written
notice to Operator within fifteen (15) days after receipt of said invoice. Said
notice should specify the charge(s) or expense(s) in question, and Operator will
be required to provide to Participating Party documentation of any expense
contested in said notice. In the event that the contested expense(s) shall be an
expense already incurred by Operator. Operator shall provide Participating Party
a copy of the corresponding invoice together with documentation of payment
thereof. In the event that the contested expense(s) shall be an expense to be
incurred by Operator, Operator shall provide to Participating Party a bid from a
bona fide third party contractor for the services to be provided. During this
fifteen (15) day period said Participating Party shall have no obligation to pay
the expense(s) which have been contested and, in this event, the thirty (30) day
period required for payment of invoices as outlined hereinabove shall not
commence until the end of said fifteen (15) day period or at such time that
proper documentation has been provided to Participating Party by Operator.
B. The defaulting Participating Party agrees, upon request by Operator, to
execute and deliver in recordable form such assignments, releases or other
documents necessary to evidence such foreclosure.
C. Notwithstanding anything contained in this Joint Operating Agreement to the
contrary, it is agreed and understood that Operator may be removed for any
reason, with or without cause, by the affirmative vote of any Non-Operator(s)
owning a majority interest based on the ownership as shown on Exhibit "A"
remaining after excluding the voting interest of Operator.
D. Operator shall be responsible for payment of delay rentals, shut-in well
payments and minimum royalties required under die terms of leases initially
subjected to this agreement or of subsequently acquired leases if same are owned
by all parties hereto. All parties who shall have authorized such payments shall
reimburse Operator for their proportionate shares thereof. Any party may request
and be entitled to receive appropriate evidence of such payments. At least 30
days prior to the date on which a payment is payable, Operator shall notify the
other parties hereto of its recommendation regarding such payment and said other
parties shall have 15 days in which to respond: failure to respond shall be
deemed express concurrence with Operator's recommendation. Upon being advised to
do so by any party thereto, Operator shall make the appropriate payment and
those who elected not to participate therein shall promptly make assignment of
their interest to the parties who participated in such payment and such lease
shall be subject to this agreement as to the revised ownership interest.
E. It is contemplated that Operator may from time to time employ temporary
employees and/or consultants to accomplish operations agreed to or which may be
hereafter agreed to under the terms of this Operating Agreement; and
notwithstanding anything to the contrary in this agreement or any exhibit
hereto, charges for the services of such temporary employees and/or consultants
shall be borne by the joint account.
F. Except as otherwise expressly provided, this Agreement shall not be amended
except by written instrument expressly referring to this Agreement and executed
by the parties to such amendment.
G. This agreement is made solely for the benefit of the parties hereto and
their heirs, successors, assigns and legal representatives. No other person
shall have claim or be entitled to enforce any rights or receive any benefits
under this Agreement. This agreement shall bind each party who executed it
(either directly or through
<PAGE>
execution of any agreement to which this Agreement is an exhibit, regardless of
whether this Agreement is then or thereafter executed by all the persons or
companies to which it is tendered or which are listed on Exhibit "A" as owning
an interest in the Contract Area or which, in fact, own an interest in the
Contract Area, and regardless of whether counterparts executed by other parties
may differ in some respects.
H. This agreement may be signed in any number of counterparts but all
counterparts shall be deemed to be one and the same agreement.
I. The printed portion of this Agreement may contain deletions and insertions
made by hand and typewriter. The parties acknowledge the existence and binding
effect of these changes and agree to dispense with the necessity of initialing
them or otherwise individually acknowledging their existence.
J. Notwithstanding anything to the contrary contained herein, unless and until
otherwise agreed to in writing, Operator shall for the benefit of the joint
account, render and make timely payment, if and when due, of all royalties or
other payments out of production due lessors or others as listed on Exhibit "A"
under the terms of the leases or other agreements affecting or comprising the
Contract Area. Each party, shall bear and be responsible for its proportionate
part of such payments by Operator. It is agreed however, that any party who
exercises its right to take production in kind under the provisions of this
Agreement shall pay or deliver or cause to be paid or delivered all royalties,
overriding royalties, or other payments due on its share of production so taken,
and shall hold the other parties free from any liability therefor.
K. Notwithstanding any provisions in this Agreement to the contrary, where,
under the terms of this Agreement, a party hereto is required to assign to one
or more of the other parties in interest in one or more leases or portion or
part thereof, such assignment shall be made free and clear of all overriding
royalties, production payments, net profits interests, mortgages, liens, or
other burdens placed on it by the assigning party or resulting from its
ownership and operation of such lease or interest on and after the date of this
instrument except such burdens as mentioned in Exhibit "A" or with which the
lease or interest was burdened when acquired by the party but otherwise without
warranty of title, either express or implied, except against those parties
claiming by, through or under such assignor but not otherwise, and assignee
shall the right of subrogation as to any warranties to which assignor may be
entitled.
L. The right of the parties hereto to have access to the Contract Area and
records from the Operator shall be limited to so much of the Contract Area and
operator records as relate to wells or operations in which a Non-Operator has
participated.
M. Each Non-Operator grants the Operator the right, at the Operator's election,
to net the revenues and expenses attributable to such Non-Operator's
proportionate share, in addition to all other rights of Operator hereunder to
enforce the Party's obligations hereunder.
N. At the point in time when a well achieves its initial objective depth
pursuant to Article VI A. or VI B. 1. whichever is applicable, and in the event
the parties hereto fail to mutually agree as to the conduct of operations
hereunder, the following shall control the order in which proposed operations
shall be considered:
(a) Proposals to do additional testing, coring or logging.
(b) Proposals to attempt a completion in the objective zone.
(c) Proposals to rework the well.
(d) Proposals to plug back and attempt completions in shallower zones in
ascending order.
(e) Proposals to deepen the well
(f) Proposals to sidetrack the well.
(g) Proposals to plug and abandon the well.
If the decision is to drill deeper or sidetrack, any party may be relieved of
further obligation and liability to such deepening or sidetracking, but shall
continue to be liable And owe to the Operator its proportionate part of the cost
of plugging and abandoning the well at the initial objective depth (in the event
it is not completed as a producing well), net of the salvage value of the
equipment used therein attributable to such party's interest, as well as the
cost of surface restoration.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
IN WITNESS WHEREOF, this agreement shall be effective as of the 17 day of May,
1999.
ATTEST OR WITNESS: OPERATOR
Cummins & Walker Oil Company, Inc.
By_______/s/______________________
Type or print name
M. L. Walker, II
Title President
Date 5-21-99
Tax ID or S.S. No._______________
NON-OPERATORS
______________________________________________
_____________________________________
By____________________________________________
______________________________________________
Type or print name
Title ________________________________________
Date _________________________________________
Tax ID or S.S. No.____________________________
______________________________________________
_____________________________________
By____________________________________________
______________________________________________
Type or print name
Title ________________________________________
Date _________________________________________
Tax ID or S.S. No.____________________________
______________________________________________
_____________________________________
By____________________________________________
______________________________________________
Type or print name
Title ________________________________________
Date _________________________________________
Tax ID or S.S. No.____________________________
<PAGE>
A.A.P.L FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
ACKNOWLEDGMENTS
Note: The following forms of acknowledgment are the short forms approved by the
Uniform Law on Notarial Acts. The validity and effect of these forms in any
state will depend upon the statutes of that state.
Individual acknowledgment:
State of _____________________)
)ss.
County of )
This instrument was acknowledged before me on
____________________________________________ by
_________________________________________
(Seal, if any)
_________________________________________
Title (and
Rank)_________________________
My commission expires:___________________
Acknowledgment in representative capacity:
State of TEXAS )
)ss.
County of Nveces )
This instrument was acknowledged before me on
May 21, 1999 by ML.Walker, II as President of Cummins Walker Oil Company Inc.
(Seal, if any)
______________________________________________
Title (and Rank) Notary Public
My commission
expires:________________________
<PAGE>
EXHIBIT "A"
Attached to and made a part hereof that certain Operating Agreement dated May
17, 1999 covering West Mustang Creek and Garwood Prospects, Colorado County,
Texas.
A.1 DESCRIPTION OF LANDS
Refer to Exhibit "A" of the Letter Agreement.
A.2 As to the depth restriction in Leases, see Exhibit "A" of the Letter
Agreement.
<PAGE>
EXHIBIT "B"
There is no Exhibit "B" to this Agreement, and any references in this Agreement
to Exhibit "B" shall be deemed to refer to a form of Oil and Gas Lease mutually
acceptable to all parties.
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
EXHIBIT "C"
Attached to and made a part of Operating Agreement dated May 17, 1999 West
Mustang Creek and Garwood Prospects, Colorado County, Texas.
ACCOUNTING PROCEDURE
JOINT OPERATIONS
I. GENERAL PROVISIONS
1. Definitions
"Joint Property" shall mean the real and personal property subject to the
agreement to which this Accounting Procedure is attached.
"Joint Operations" shall mean all operations necessary or proper for the
development operation, protection and maintenance of the Joint Property.
"Joint Account" shall mean the account showing the charges paid and credits
received in the conduct of the Joint Operations and which are to be shared by
the Parties.
"Operator" shall mean the party designated to conduct the Joint Operations.
"Non-Operators" shall mean the Parties to this agreement other than the
Operator. "Parties" shall mean Operator and Non-Operators.
"First Level Supervisors" shall mean those employees whose primary function in
Joint Operations is the direct supervision of other employees and/or contract
labor directly employed on the Joint Property in a field operating capacity.
"Technical Employees" shall mean those employees having special and specific
engineering, geological or other professional skills, and whose primary function
in Joint Operations is the handling of specific operating conditions and
problems for the benefit of the Joint Property.
"Personal Expenses" shall mean travel and other reasonable reimbursable expenses
of Operator's employees.
"Material" shall mean personal property equipment or supplies acquired or held
for use on the Joint Property.
"Controllable Material" shall mean Material which at the time is so classified
in the Material Classification Manual as most recently recommended by the
Council of Petroleum Accountants Societies.
2. Statement and Billings
Operator shall bill Non-Operators on or before the last day of each month for
their proportionate share of the Joint Account for the preceding month. Such
bills will be accompanied by statements which identify the authority for
expenditure, lease or facility, and all charges and credits summarized by
appropriate classifications of investment and expense except that items of
Controllable Material and unusual charges and credits shall be separately
identified and fully described in detail.
3. Advances and Payments by Non-Operators
A. Unless otherwise provided for in the agreement, the Operator may require
the Non-Operators to advance their share of estimated cash outlay for the
succeeding month's operation within fifteen (15) days after receipt of the
billing or by the first day of the month for which the advance is required,
whichever is later. Operator shall adjust each monthly billing to reflect
advances received from the Non-Operators.
B. Each Non-Operator shall pay its proportion of all bills within fifteen
(15) days after receipt. If payment is not made within such time, the unpaid
balance shall bear interest monthly at the prime rate in effect at Bank of
America, Texas on the first day of the month in which delinquency occurs plus 1%
or the maximum contract rate permitted by the applicable usury laws in the state
in which the Joint Property is located,
whichever is the lesser, plus attorney's fees, court costs, and other costs in
connection with the collection of unpaid amounts.
Adjustments
Payment of any such bills shall not prejudice the right of any Non-Operator to
protest or question the correctness thereof; provided, however, all bills and
statements rendered to Non-Operators by Operator during any calendar year shall
conclusively be presumed to be true and correct after twenty-four (24) months
following the end of any such calendar year, unless within the said twenty-four
(24) month period a Non-Operator takes written exception thereto and makes claim
on Operator for adjustment. No adjustment favorable to Operator shall be made
unless it is made within the same prescribed period. The provisions of this
paragraph shall not prevent adjustments resulting from a physical inventory of
Controllable Material as provided for in Section V.
COPYRIGHT 1985 by the Council of Petroleum Accountants Societies.
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
5. Audits
A. A Non-Operator, upon notice in writing to Operator and all other
Non-Operators, shall have the right to audit Operator's accounts and records
relating to the Joint Account for any calendar year within the twenty-four (24)
month period following the end of such calendar year; provided, however, the
making of an audit shall not extend the time for the taking of written exception
to and the adjustments of accounts as provided for in Paragraph 4 of this
Section 1. Where there are two or more Non-Operators the Non--Operators shall
make every reasonable effort to conduct a joint audit in a manner which will
result in a minimum of inconvenience to the Operator. Operator shall bear no
portion of the Non-Operators audit cost incurred under this paragraph unless
agreed to by the Operator. The audits shall not be conducted more than once each
year without prior approval of Operator, except upon the resignation or removal
of the Operator, and shall be made at the expense of those Non-Operators
approving such audit.
B. The Operator shall reply in writing to an audit report within 180 days
after receipt of such report.
6. Approval By Non-Operators
Where an approval or other agreement of the Parties or Non-Operators is
expressly required under other sections of this Accounting Procedure and if the
agreement to which this Accounting Procedure is attached contains no contrary
provisions in regard thereto, Operator shall notify all Non-Operators of the
Operators proposal and the agreement or approval of a majority in interest of
the Non--Operators shall be controlling on all Non-Operators.
H. DIRECT CHARGES
Operator shall charge the Joint Account with the following items:
1. Ecological and Environmental
Costs incurred for the benefit of the Joint Property as a result of governmental
or regulatory requirements to satisfy environmental considerations applicable to
the Joint Operations. Such costs may include surveys of an ecological or
archaeological nature and pollution control procedures as required by applicable
laws and regulations.
2. Rentals and Royalties
Lease rentals and royalties paid by Operator for the Joint Operations.
3. Labor
A. (1) Salaries and wages of Operator's field employees directly employed on
the Joint Property in the conduct of Joint Operations.
(2) Salaries of First Level Supervisors in the field.
(3) Salaries and wages of Technical Employees directly employed on the Joint
Property if such charges are excluded from the overhead rates.
(4) Salaries and wages of Technical Employees either temporarily or
permanently assigned to and directly employed in the operation of the Joint
Property if such charges are excluded from the overhead rates.
B. Operator's cost of holiday, vacation, sickness and disability benefits
and other customary allowances paid to employees whose salaries and wages are
chargeable to the Joint Account under Paragraph 3A of this Section 11. Such
costs under this Paragraph 3B may be charged on a "when and as paid basis" or by
"percentage assessment" on the amount of salaries and wages chargeable to the
Joint Account under Paragraph 3A of this Section II. If percentage assessment is
used, the rate shall be based on the Operators cost experience.
C. Expenditures or contributions made pursuant to assessments imposed by
governmental authority which are applicable to Operator's costs chargeable to
the Joint Account under Paragraphs 3A and 3B of this Section II.
D. Personal Expenses of those employees whose salaries and wages are chargeable
to the Joint Account under Paragraph 3A of this Section H.
4. Employee Benefits
Operator's current costs of established plans for employees' group life
insurance, hospitalization, pension, retirement, stock purchase, thrift, bonus,
and other benefit plans of a like nature, applicable to Operator's labor costs
chargeable to the Joint Account under Paragraphs 3A and 3B of this Section II
shall be Operator's actual cost not to exceed the percent most recently
recommended by the Council of Petroleum Accountants Societies.
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
5. Material
Material purchased or furnished by Operator for use on the Joint Property as
provided under Section IV. Only such Material shall be purchased for or
transferred to the Joint Property as may be required for immediate use and is
reasonably practical and consistent with efficient and economical operations.
The accumulation of surplus stocks shall be avoided.
6. Transportation
Transportation of employees and Material necessary for the Joint Operations but
subject to the following limitations:
A. If Material is moved to the Joint Property from the Operator's warehouse
or other properties, no charge shall he made to the Joint Account for it
distance greater than the distance from the nearest reliable supply store where
like material is normally available or railway receiving point nearest the Joint
Property unless agreed to by the Parties.
B. If surplus Material is moved to Operator's warehouse or other storage
point, no charge shall be made to the joint Account for a distance greater than
the distance to the nearest reliable supply store where like material is
normally available, or railway receiving point nearest the Joint Property unless
agreed to by the Parties. No charge shall be made to the Joint Account for
moving Material to other properties; belonging to Operator unless agreed to by
the Parties.
C. In the application of subparagraphs A and B above, the option to equalize
or charge actual trucking cost is available when the actual charge is $400 or
less excluding accessorial charges. The $400 will be adjusted to the amount most
recently recommended by the Council of Petroleum Accountants Societies.
7. Services
The cost of contract services, equipment and utilities provided by outside
sources, except services excluded by Paragraph 10 of Section II and Paragraph
i., ii., and iii of Section III. The cost of professional consultant services
and contract services of technical personnel directly engaged on the Joint
Property if such charges are excluded from the overhead rates. The cost of
professional consultant services or contract services of technical personnel not
directly engaged on the Joint Property shall not be charged to the Joint Account
unless previously agreed to by the Parties.
8. Equipment and Facilities Furnished By Operator
A. Operator shall charge the Joint Account for use of Operator owned
equipment and facilities at rates commensurate with costs of ownership and
Operation. Such rates shall include costs of maintenance, repairs, other
operating expense, insurance, taxes, depreciation and interest on gross
investment less accumulated depreciation not to exceed eight percent(8%) per
annum. Such rates shall not exceed average commercial rates currently
prevailing in the immediate area of the Joint Property.
B. In lieu of charges in paragraph 8A above Operator may elect to use
average commercial rates prevailing in the immediate area of the Joint Property
less 20%. For automotive equipment, Operator may elect to use rates published by
the Petroleum Motor Transport Association.
9. Damages and Losses to Joint Property
All costs or expenses necessary for the repair or replacement of Joint Property
made necessary because of damages or losses incurred by fire, flood, storm,
theft, accident, or other cause, except those resulting' from Operator's gross
negligence or willful misconduct. Operator shall furnish Non-Operator written
notice of damages or losses incurred as soon as practicable after a report
thereof has been received by Operator.
10. Legal Expense
Expense of handling, investigating and settling litigation or claims,
discharging of liens, payment of judgements and amounts paid for settlement of
claims incurred in or resulting from operations under the agreement or necessary
to protect or recover the Joint Property, except that no charge for services of
Operator's legal staff or fees or expense of outside attorneys shall be made
unless previously agreed to by the Parties. All other legal expense is
considered to be covered by the overhead provisions of Section III unless
otherwise agreed to by the Parties, except as provided in Section I, Paragraph
3.
11. Taxes
All taxes of every kind and nature assessed or levied upon or in connection with
the Joint Property, and operation thereof, or the production therefrom, and
which taxes have been paid or the Operator for the Benefit of the Parties. If
the ad valorem taxes are based ion whole or in part upon separate valuations of
each party's working interest, then notwithstanding anything to the contrary
herein, charges to the Joint Account shall be made and paid by the Parties
hereto in accordance with the tax value generated by each party's working
interest.
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
12. Insurance
Net premiums paid for insurance required to be carried for the Joint Operations
for the protection of the Parties. In the event Joint Operations are conducted
in a state in which Operator may act as self-insurer for Worker's Compensation
and/or Employers Liability under the respective state's laws, Operator may, at
its election, include the risk under its selfinsurance program and in that
event, Operator shall include a charge at Operator's cost not to exceed manual
rates.
13. Abandonment and Reclamation
Costs incurred for abandonment of the Joint Property, including costs required
by governmental or other regulatory authority.
14. Communications
Cost of acquiring, leasing, installing, operating, repairing and maintaining
communication systems, including radio and microwave facilities directly serving
the Joint Property. In the event communication facilities/systems serving the
Joint Property are Operator owned, charges to the Joint Account shall be made as
provided in Paragraph 8 of this Section 11.
15. 0ther Expenditures
Any other expenditure not covered or dealt with in the foregoing provisions of
this Section II or in Section III and which is of direct benefit to the Joint
Property and is incurred by the Operator in the necessary and proper conduct of
the Joint Operations.
III. OVERHEAD
1. Overhead - Drilling and Producing Operations
i. As compensation for administrative, supervision, office services and
warehousing costs. Operator shall charge drilling and producing operations on
either:
(X) Fixed Rate Basis, Paragraph 1A, or
( ) Percentage Basis, Paragraph 1B
Unless otherwise agreed to by the Parties, such charge shall be in lieu of costs
and expenses of all offices and salaries or wages plus applicable burdens and
expenses of all personnel, except those directly chargeable under Paragraph 3A,
Section 11. The cost and expense of services from outside sources in connection
with matters of taxation, traffic, accounting or matters before or involving
governmental agencies shall be considered as included in the overhead rates
provided for in the above selected Paragraph of this Section III unless such
cost and expense are agreed to by the Parties as a direct charge to the Joint
Account.
ii. The salaries, wages and Personal Expenses of Technical Employees
and/or the cost of professional consultant services and contract services of
technical personnel directly employed on the Joint Property:
( ) shall be covered by the overhead rates, or
(X) shall not be covered by the overhead rates.
iii. The salaries, wages and Personal Expenses ofTechnical Employees and/or
costs of professional consultant services and contract services of technical
personnel either temporarily or permanently assigned to and directly employed in
the operation of the Joint Property:
( ) shall be covered by the overhead rates, or
(X) shall not be covered by the overhead rates.
A. Overhead - Fixed Rate Basis
(1) Operator shall charge the Joint Account at the following rates per
well per month:
Drilling Well Rate $6,000.00
(Prorated for less than a full month)
Producing Well Rate $650.00
(2) Application of Overhead - Fixed Rate Basis shall be as follows:
(a) Drilling Well Rage
(1) Charges for drilling wells shall begin on the date the well is spudded
and terminate on the date the drilling rig, completion rig, or other units used
in completion of the well is released, whichever is later, except that no charge
shall be made during suspension of drilling or completion operations for fifteen
(15) or more consecutive calendar days.
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
(2) Charges for wells undergoing any type of workover or recompletion for a
period of five (5) consecutive work days or more shall be made at the drilling
well rate. Such charges shall be applied for the period from date workover
operations with rig or other units used in workover commence through date of rig
or other unit release, except that no charge shall be made during suspension of
operations for fifteen (15) or more consecutive calendar days.
(b) Producing Well Rates
(1) An active well, either produced or injected into for any portion of
the month shall be considered as a one -well charge for the entire month.
(2) Each active completion in a multi-completed well in which
production is not commingled down hole shall be considered as a one-well charge
providing each completion is considered a separate well by tile governing
regulatory authority.
(3) An inactive gas well shut in because of overproduction or failure
of purchaser to take the production shall be considered as a one-well charge
providing the gas well is directly connected to it permanent sales outlet.
(4) A one-well charge shall be made for the month in which plugging and
abandonment operations are completed on any well. This one-well charge shall be
made whether or not the well has produced except when drilling well rate
applies.
(5) All other inactive wells (including but not limited to inactive
wells covered by unit allowable, lease allowable, transferred allowable, etc.)
shall not qualify for an overhead charge.
(3) The well rates shall be adjusted as of the first day of April each year
following the effective date of the agreement to which this Accounting Procedure
is attached. The adjustment shall be computed by multiplying the rate currently
in use by the percentage increase or decrease in the average weekly earnings of
Crude Petroleum and Gas Production Workers for the last calendar year compared
to the calendar year preceding as shown by the index of average weekly earnings
of Crude Petroleum and Gas Production Workers as published by the United States
Department of Labor, Bureau of Labor Statistics, or the equivalent Canadian
index its published by Statistics Canada as applicable. The adjusted rates shall
be the rates currently in use, plus or minus the computed adjustment.
B. Overhead - Percentage Basis
(1) Operator shall charge the Joint Account at tile following rates:
(a) Development
_____ Percent(_______%) of the cost of development of the Joint Property
exclusive of costs provided under Paragraph 10 of Section II and all salvage
credits.
(b) Operating
______ Percent (_____ %) of the cost of operating the Joint Property
exclusive of costs provided under Paragraphs 2 and 10 of Section II, all salvage
credits, the value of injected substances purchased for secondary recovery and
all taxes and assessments which are levied, assessed and paid upon the mineral
interest in and to the Joint Property.
(2) Application of Overhead - Percentage Basis shall be as follows:
For the purpose of determining charges on a percentage basis Paragraph 1B
of this Section III, development shall include all costs in connection with
drilling, redrilling, deepening, or any remedial operations on any or all wells
involving the use of drilling rig and crew capable of drilling to the producing
interval on the Joint Property; also, preliminary expenditures necessary in
preparation for drilling and expenditures incurred in abandoning when the well
is not completed as a producer, and original cost of construction or
installation of fixed assets, the expansion of fixed assets and any other
project clearly discernible as a fixed asset, except Major Construction as
defined in Paragraph 2 of this Section III. All other costs shall be considered
as operation.
2. Overhead - Major Construction
To compensate Operator for overhead costs incurred in the construction and
installation of fixed assets, the expansion of fixed assets, and any other
project clearly dicernible as a fixed asset required for the development and
operation of the Joint Property, Operator shall either negotiate a rate prior to
the beginning of construction, or shall charge the Joint
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
Account for overhead based on the following rates for any Major Construction
project in excess of $___________________________________________:
A _______________% of the first $100,000 or total cost if less, plus
B. _______________% of costs in excess of $100,000 but less than $1,000,000,
plus
C. _______________% of costs in excess of $1,000000.
Total cost shall mean the gross cost of any one project. For the purpose of this
paragraph, the component parts of a single project shall not be treated
separately and the cost of drilling and workover wells and artificial lift
equipment shall be excluded.
3. Catastrophe Overhead
To compensate Operator for overhead costs incurred in the event of expenditures
resulting from a single occurrence due to oil spill, blowout, explosion, fire,
storm, hurricane, or other catastrophes as agreed to by the Parties, which are
necessary to restore the Joint Property to the equivalent condition that existed
prior to the event causing the expenditures, Operator shall either negotiate a
rate prior to charging the Joint Account or shall charge the Joint Account for
overhand based on the following rates:
A. __________ % of total costs through $100,000; plus
B. __________ % of total costs in excess of $100,000 but less than
$1,000,000; plus
C. __________ % of total costs in excess of $1,000,000.
Expenditures subject to the overheads above will not be reduced by insurance
recoveries, and no other overhead provisions of this Section III shall apply.
4. Amendment of Rates
The overhead rates provided for in this Section III may be amended from time to
time only by mutual agreement between the Parties hereto if, in practice, the
rates are found to be insufficient or excessive.
IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS
Operator is responsible for Joint Account Material and shall make proper and
timely charges and credits for all Material movements affecting the Joint
Property. Operator shall provide all Material for use on the Joint Property,
however, at Operators option, such Material may be supplied by the Non-Operator.
Operator shall make timely disposition of idle and/or surplus Material, such
disposal being made either through sale to Operator or Non-Operator, division in
kind, or sale to outsiders. Operator may purchase, but shall be under no
obligation to purchase, interest of Non-Operators in surplus condition A or B
Material. The disposal of surplus Controllable Material not purchased by the
Operator shall be agreed to by the Parties.
1. Purchases
Material purchased shall be charged at the price paid by Operator after
deduction of all discounts received. In case of Material found to be defective
or returned to vendor for any other reasons, credit shall be passed to the Joint
Account when adjustment has been received by the Operator.
2. Transfers and Dispositions
Material furnished to the Joint Property and Material transferred from the Joint
Property or disposed of by the Operator, unless otherwise agreed to by the
Parties, shall be priced on the following basis exclusive of cash discounts:
A. New Material (Condition A)
(1) Tubular Goods Other than Line Pipe
(a) Tubular goods, sized 2 3/8 inches OD and larger, except line pipe, shall
be priced at Eastern mill published carload base prices effective as of date of
movement plus transportation cost using the 80,000 pound rail rate may be used.
Freight charges for tubing will be calculated from Lorain, Ohio and casing from
Youngstown, Ohio.
(b) For grades which are special to one mill only, prices shall be computed
at the mill base of that mill plus transportation cost from that mill to the
railway receiving point nearest the Joint Property as provided above in
Paragraph 2.A(12)(a). For transportation cost from points other than Eastern
mills, the 30,000
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
pound Oil Field Haulers Association interstate truck rate shall be used.
(c) Special end finish tubular goods shall be priced at the lowest published
out-of-stock price, f.o.b. Houston, Texas, plus transportation cost, using Oil
Field Haulers Association interstate 30,000 pound truck rate, to the railway
receiving point nearest the Joint Property.
(d) Macaroni tubing (size less than 23/8 inch OD) shall be priced at the lowest
published out-of-stock prices f.o.b. the supplier plus transportation costs,
using the Oil Field Haulers Association interstate truck rate per weight of
tubing transferred, to the railway receiving point nearest tile Joint Property.
(2) Line Pipe
(a) Line pipe movements (except size 24 inch OD and larger with walls 3/4
inch and over) 30,000 pounds or more shall be priced under provisions of tubular
goods pricing in Paragraph A.(1)(a) as provided above. Freight charges shall be
calculated from Lorain, Ohio.
(b) Line pipe movements (except size 24 inch OD and larger with walls 3/4
inch and over) less than 30,000 pounds shall be priced at Eastern mill published
carload base prices effective as of date of shipment, plus 20 percent, plus
transportation costs based on freight rates as set forth under provisions of
tubular goods pricing in Paragraph A.(1)(a) as provided above. Freight charges
shall be calculated front Lorain, Ohio.
(c) Line pipe 24 inch OD and over and 3/4 inch wall and larger shall be
priced f.o.b. the point of manufacture at current new published prices plus
transportation cost to the railway receiving point nearest the Joint Property.
(d) Line pipe, including; fabricated line pipe, drive pipe and conduit not
listed on published price lists shall be priced at quoted prices plus freight to
the railway receiving point nearest the Joint Property or at prices agreed to by
the Parties.
(3) Other Material shall be priced at the current new price, in effect at
date of movement, as listed by a reliable supply store nearest the Joint
Property, or point of manufacture, plus transportation costs, if applicable, to
the railway receiving point nearest the Joint Property.
(4) Unused new Material, except tubular goods, moved from the Joint Property
shall be priced at the current new price, in effect on date of movement, as
listed by a reliable supply store nearest the Joint Property, or point of
manufacture, plus transportation costs, if applicable, to the railway receiving
point nearest the Joint Property. Unused new tubulars will be priced as provided
above in Paragraph 2.A.(1) and (2).
B. Good Used Material (Condition B)
Material in sound and serviceable condition and suitable for reuse without
reconditioning.
(1) Material moved to the Joint Property
At seventy-five percent (75%) of current new price, as determined by
Paragraph A.
(2) Material used on and moved from the Joint Property
(a) At seventy-five percent (75%) of current new price, as determined
by Paragraph A, if Material was originally charged to the Joint Account as new
Material or
(b) At sixty-five percent (65%) of current new price, as determined by
Paragraph A, if Material was originally charged to the Joint Account as used
Material.
(3) Material not used on and moved from the Joint Property
At seventy-five (75%) of current new price as determined by Paragraph A.
The cost of reconditioning, if any, shall be absorbed by the transferring
property.
C. Other Used Material
(1) Condition C
Material with is not in sound and serviceable condition and not suitable for its
original function until after reconditioning shall be priced at fifty percent
(50%) of current new price as determined by Paragraph A. The cost of
reconditioning shall be charged to the receiving property, provided Condition C
value plus cost of reconditioning does not exceed Condition B value.
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
(2) Condition D
Material, excluding junk, no longer suitable for its original purpose, but
usable for some other purpose shall be priced on a basis commensurate with its
use. Operator may dispose of Condition D Material under procedures normally used
by Operator without prior approval of Non-Operators.
(a) Casing, tubing, or drill pipe used as line pipe shall be priced as Grade
A and B seamless line pipe of comparable size and weight. Used casing, tubing or
drill pipe utilized as line pipe shall be priced at used line pipe prices.
(b) Casing, tubing or drill pipe used as higher pressure service lines than
standard line pipe. e.g. power oil lines, shall be priced under normal pricing
procedures for casing, tubing, or drill pipe. Upset tubular goods shall be
priced on a non upset basis.
(3) Condition E
Junk shall be priced at prevailing prices. Operator may dispose or condition E
Material under procedures normally utilized by Operator without prior approval
of Non-Operators
D. Obsolete Material
Material which is serviceable and usable for its original function but condition
and/or value of such Material is not equivalent to that which would justify a
price as provided above may be specially priced as agreed to by the Parties.
Such price should result in the Joint Account being charged with the value of
the service rendered by such Material.
E. Pricing Conditions
(1) Loading or unloading costs may be charged to the Joint Account at the
rate of twenty-five cents per hundred weight on all tubular goods movements in
lieu of actual loading or unloading costs sustained at the stocking point. The
above rate shall be adjusted as of the first day of April each year following
January 1, 1985 by the same percentage increase or decrease used to adjust
overhead rates in Section III, Paragraph 1.A.(3). Each year. the rate calculated
shall be rounded to the nearest cent and shall be the rate in effect until the
first day of April next year. Such rate shall be published each year by the
Council of Petroleum Accountants Societies.
(2) Material involving erection costs shall be charged at applicable
percentage of the current knocked-down price of new Material.
3. Premium Prices
Whenever Material is not readily obtainable at published or listed prices
because of national emergencies, strikes or other unusual causes over which the
Operator has no control, the Operator may charge the Joint Account for the
required Material at the Operators actual cost incurred in providing such
Material, in making it suitable for use, and in moving it to the Joint Property;
provided notice in writing is furnished to Non-Operators of the proposed charge
prior to billing Non-Operators for such Material. Each Non-Operator shall have
the right, by so electing and notifying Operator within
ten days after receiving notice from Operator, to furnish in kind all or part of
his share of such Material suitable for use and acceptable to Operator.
4. Warranty of Material Furnished By Operator
Operator does not warrant tile Material furnished. In case of defective
Material, credit shall not be passed to the Joint Account until adjustment has
been received by Operator from the manufacturers or their agents.
V. INVENTORIES
The Operator shall maintain detailed records of Controllable Material.
1. Periodic Inventories, Notice and Representation
At reasonable intervals, inventories shall be taken by Operator of the Joint
Account Controllable Material. Written notice of intention to take inventory
shall be given by Operator at least thirty (30) days before any inventory is to
begin so that Non-Operators may be represented when any inventory is taken.
Failure of Non-Operators to be represented at an inventory shall bind
Non-Operators to accept the inventory taken by Operator.
2. Reconciliation and Adjustment of Inventories
Adjustments to the Joint Account resulting from the reconciliation of a physical
inventory shall be made within six months following the taking of the inventory.
Inventory adjustments shall be made by Operator to the Joint Account for
<PAGE>
COPAS - 1984 - ONSHORE
Recommended by the Council of Petroleum Accountants Societies
overages and shortages, but, Operator shall be held accountable only for
shortages due to lack of reasonable diligence.
3. Special Inventories
Special inventories may be taken whenever there is any sale, change of interest,
or change of Operator in the Joint Property. It shall be the duty of the party
selling to notify all other Parties as quickly as possible after the transfer of
Interest takes place. In such cases, both the seller and the purchaser shall be
governed by such inventory. In cases involving a change of Operator, all shall
be governed by such Inventory.
4. Expense of Conducting Inventories
A. The expense of conducting periodic inventories shall not be charged to
the Joint Account unless agreed to by the Parties.
B. The expense of conducting special inventories shall be charged to the
Parties requesting such inventories, except inventories required due to change
of Operator shall be charged to the Joint Account.
<PAGE>
EXHIBIT "D"
Attached to and made a part of that certain Operating Agreement dated May 17,
1999, covering acreage in Colorado County, Texas.
INSURANCE AND INDEMNITY
At all times while operations are conducted under this Agreement, Operator shall
maintain, for the benefit of all parties hereto, insurance of the types and in
the maximum amounts as follows. Premiums for such insurance shall be charged to
the Joint Account.
Non-Operating working interest owners shall be named as Additional Insureds on
the liability insurance policies, but only with respect to the performance of
all work hereunder.
Operator and Non-Operating working interest owners agree to mutually waive
subrogation in favor of each other on all insurance carried by each party and/or
to obtain such waiver from the insurance carrier if so required by the insurance
contract. If such a waiver is not obtained, the party failing to do so shall
indemnify the other party for any claim by an insurance carrier arising out of
subrogation.
Operator reserves the sole right to select the insurance carrier and to select
and purchase from such insurance carrier the types and kinds of coverage
available under the below described policy forms, subject to whatever exclusions
Operator agrees to be included in such policy forms. Non-Operating working
interest owners agree that the limits and coverage carried by Operator are
adequate and shall hold Operator harmless if any claim exceeds such limit or is
not covered by such policy. Under no circumstances shall Operator be held liable
to Non-Operators on account of the failure of the herein described policies
cover any loss that may occur, or on account of the insolvency of the insurance
carrier selected by the Operator. Non-Operating working interest owners shall
have the right to inspect such policies at the office of the Operator at Corpus
Christi, Texas. Operator shall select an insurance carrier with a minimum rating
of A+ as per A.M. Best. Any Non-Operator wishing to carry his own insurance may
do so as long as his insurance carrier and policy meet the same standards as the
carrier of the Operator. Such election must be made yearly and prior to the
Operator acquiring coverage for the Joint Account.
A. Workers' Compensation Insurance in full compliance with all applicable
state and federal laws and regulations.
B. Employer's Liability Insurance in the limits of $1,000,000.00 per
accident covering injury or death to any employee who may be outside the scope
of the Worker's Compensation statute of the state in which the work is
performed.
C. Comprehensive General Liability Insurance with Limits per occurrence of
$1,000,000.00 for Bodily Injury and $1,000,000.00 for Property Damage, including
Property Damage by Blowout and Cratering, Completed Operations, and Broad Form
Contractual Liability as respects any contract into which the Operator may enter
under the terms of this Agreement.
<PAGE>
EXHIBIT E
GAS BALANCING AGREEMENT
1. The parties to the Operating Agreement referred to above own working
interests in the gas rights underlying the lands and leases covered by such
agreement ("Contract Area") in accordance with the percentages of participation
("Working Interest") set forth therein.
2. Each party has the right to take, market, or otherwise dispose of its Working
Interest share of gas produced from the Contract Area. Each party's Working
Interest share shall be calculated on an MMBtu basis as determined at least
semiannually by Operator through testing a sample of each gas stream following
primary separation at the lease under standard conditions by means of
chromatography or another accepted method used in the industry. All references
in this agreement to quantity or volume shall refer to the number of MMBtu
contained in such volume or quantity of gas. In the event any party at any time
does not take in kind or market its Working Interest share of gas from a well,
or has contracted to sell its Working Interest share of gas to a purchaser which
fails to take all of such gas, the other parties shall be entitled, in
proportion to their Working Interest, to produce, take and deliver each month up
to one hundred percent (100%) of the anticipated allowable gas production to be
assigned to such well by the governmental entity having jurisdiction (if
applicable). The purpose of this provision is to permit any party not taking or
marketing all of its Working Interest share of current gas production to defer
its production and the other parties to pass clear title to quantities of gas in
excess of their Working Interest.
3. Each party which fails to take or market its full Working Interest share of
gas from any well at any time shall be credited with gas in an imbalance account
for such well equal to that volume of gas taken or marketed by the other parties
hereto in excess of their Working Interest share.
4. Each party shall endeavor to take or market its full Working Interest share
of gas production from each well. Further, each party shall give Operator
reasonable notice and sufficient data either to nominate such party's Working
Interest share of gas to the transporting pipeline(s) or, if Operator is not
nominating such party's gas, to inform Operator of the manner in which to
dispatch such party's gas. Except as and to the extent caused by Operator's
gross negligence or willful misconduct, Operator shall not be responsible for
any fees and/or penalties associated with imbalances charged by any pipeline to
any Non-Operator.
5. To allow for the recovery of gas from an imbalance account and to balance the
gas account of the parties, a party which has taken less than its full Working
Interest share of gas at any time ("negative balance"), shall be entitled to
produce, take and deliver each month upon reasonable notice to the Operator and
to the other affected parties, its Working Interest share of the anticipated
allowable gas production to be assigned to such well by the governmental entity
having jurisdiction (if applicable) plus an amount up to an additional
twenty-five percent (25%) ("Make-up Gas") of the Working Interest share of each
party which has taken more than its full share of gas at such time ("positive
balance"). However, a party with a negative balance shall never be allowed to
take more than its Working Interest share of such allowable gas (if applicable)
during the months of November, December, January and February. If more than one
party has a negative balance and elects to take Make-up Gas, they shall divide
the Make-up Gas to be taken from any party with a positive balance in proportion
to the respective Working interest participation or each such party with a
negative balance in such well.
6. This Agreement shall apply separately to each well, proration unit,
conservation unit, and to each producing formation within such well, proration
unit or conservation unit (unless such formations are accounted for all purposes
as commingled production), and as to instances where any price controls apply to
Make-up Gas, to each regulated price category; all uncontrolled gas is in a
single price category for this purpose. The term "well" is used throughout the
other paragraphs of this Agreement for convenience only and shall be deemed to
include the other delineations herein set forth to the extent relevant.
Imbalances in one well, proration unit, conservation unit, producing formation
or category shall not be used for balancing any other well, proration unit,
conservation unit, producing formation or category, as the case may be.
7. If, at the permanent termination of production of gas from a well, an
imbalance exists between the parties; statements or invoices for a monetary
settlement of the imbalance between any of the parties relative to such well
shall be issued within one hundred eighty (180) days. Operator shall promptly
provide all parties with a final cumulative balance for each party upon receipt
of all relevant data from all other parties after permanent termination of
production from each well. For the purposes hereof, the value per unit in
calculating a monetary settlement shall be defined as the weighted average of
the actual values received by a party with a positive balance on all of its gas
sales under an arms-length contract in excess of its Working Interest share
("Extra Gas"), beginning when
<PAGE>
such party was last in balance. If such party did not sell all or part of such
Extra Gas under an armslength contract, such Extra Gas not sold will be valued
in the same manner used for production and severance taxes when produced. The
amount of the monetary settlement due each party with a negative balance for any
well shall be determined by: (a) multiplying the value per unit (as defined
above) received by each party with a positive balance for each well by the
volume of gas (same unit basis) such party has produced; (b) subtracting
production and severance taxes (and royalties if paid on a gas taken rather than
on a working interest basis) paid on such Extra Gas; (c) totaling the figures
computed in (a) and (b) for all parties with a positive balance; and (d)
allocating to each party with a negative balance its pro rata share of the total
reached in (c) above on the basis of the ratio of each party's negative balance
volume to the total negative balance volumes for all parties. Each party with a
positive balance shall provide a settlement schedule to each party with a
positive balance which is or may be subject to refund or other dispute by
order(s) of the FERC, the Minerals Management Service, the courts or other
authorities may be withheld by such party until such prices or disputes are
fully resolved, unless the relevant parties with a negative balance furnish
satisfactory undertakings agreeing to hold the relevant parties with a positive
balance harmless from any financial loss due to the orders or disputes.
Settlement as provided herein shall also be made by any party with a positive
balance prior to any sale, assignment or other disposition of all or any part of
its interest in any well in which such party has a positive balance. If the
provisions of this Agreement are breached by the transferring party, any party
receiving any part of the transferred interest shall be jointly and severally
liable for its pro rate share of such positive balance upon the demand of any
party with a negative balance.
8. Balancing payments from parties with a positive balance to parties with a
negative balance under this Agreement shall be paid not later than sixty (60)
days (l) after the amount of the monetary settlement due such party has been
determined and a statement or invoice issued, or (2) after the date when the
period for calculation of amounts due has passed, whichever is the earlier,
pursuant to the provisions of Paragraph 7 above. No interest shall accrue or be
due among the parties as to the period prior to this payment date. Interest on
late payments (including payments rightfully made on a late basis because
amounts are subject to potential refund or other dispute as stated in Paragraph
7 above or which are delayed because computations are not timely completed)
shall accrue at the prime rate in effect at Chemical Banking Corp., New York,
New York, at noon on the first day of the month in which the payment due date
occurs plus two percent (2%) or the maximum contract rate permitted by
applicable law, whichever is less. Attorneys' fees, court costs and other
reasonable costs of collection of amounts owing due to breach of this Agreement
shall also be payable to the affected party(ies).
9. Each party taking gas from a well shall promptly furnish or cause to be
furnished to Operator a monthly statement of gas taken. Operator shall regularly
furnish to each party a statement of the gas balancing among the parties,
including the total quantity of gas produced from each well, the portion thereof
used in operations, vented or lost, and the total quantity delivered for each
party's account. Each party shall retain records of volumes or gas taken or
marketed from each well and revenues or values accruing thereto for the full
term of the Operating Agreement and two (2) years thereafter. Any party with
either a positive or negative balance shall have the right during the two (2)
years following each statement/invoice due date under Paragraph 7 above to audit
the records of the other parties with positive or negative balances as to
volumes, revenues, values and other relevant information concerning such well.
No party will use any of the information obtained pursuant to the provisions of
this paragraph for any other purpose than implementing the terms of this
Agreement and enforcing rights thereunder.
10. In addition to any rights granted in the Operating Agreement, if any well
produces casinghead gas and any party is not selling all of its Working Interest
share, Operator shall have the right but not the obligation to sell the
non-selling party's share of casinghead gas for the account of such party.
11. Each Party hereto shall share in and own the condensate recovered from each
well by primary separation at the least in accordance with its Working Interest
in such well as provided in the Operating Agreement.
12. Gas used in lease operations, vented or-lost shall not be considered
taken by any party for purposes of the balancing hereunder. Nothing herein
shall change or affect each party's obligation to pay its Working Interest share
of all costs and liabilities incurred in accordance with such party's Working
Interest.
13. At all times while gas is produced from the Contract Area, unless otherwise
required by the laws, rules and regulations, each party shall make appropriate
settlement of all royalties, overriding royalties and other payments out of or
in lieu of production for which it is responsible ("royalty payments") as if
each party were taking or delivering to a purchaser its Working Interest share
and its Working Interest share only, of such gas production. Each party hereto
agrees to defend, indemnify and hold each other party harmless from all claims
for royalty payments asserted by third parties to whom any party hereto is
accountable.
<PAGE>
14. Each party taking or marketing gas hereunder shall pay or cause to be paid,
all production and severance taxes due on all volumes of gas actually taken or
marketed by such party, unless otherwise required by any laws, rules or
regulations.
15. Nothing contained herein shall be construed to deny any party the right,
from time to time, to produce and take or deliver to its purchaser the entire
well stream, if necessary, to meet such deliverability tests as may be
reasonably required by its gas sales contract.
16. The parties shall communicate, as necessary, the contents of this Agreement
to any of their respective gas purchasers or transporters and monitor their
respective deliveries so as to ensure to the extent reasonably practicable that
such third parties do not take gas in excess of the quantities provided herein.
17. This Agreement shall remain in force and effect as long as the Operating
Agreement is in effect and thereafter until the gas balance accounts of the
parties are settled ill full or the audit period provided in Paragraph 9 has
expired, whichever shall be longer. The obligations of the parties shall survive
the termination of this Agreement.
<PAGE>
A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1989
IN WITNESS WHEREOF, this agreement shall be effective as of the 17 day of May,
1999.
ATTEST OR WITNESS: OPERATOR
Cummins & Walker Oil Company, Inc.
By_______/s/______________________
Type or print name
M. L. Walker, II
Title President
Date 5-21-99
Tax ID or S.S. No._______________
NON-OPERATORS
LaKota Energy, Inc.
_____________________________________
By________/s/_________________________________
Ken Honeyman
Type or print name
Title ______President_________________________
Date _______6-14-99___________________________
Tax ID or S.S. No.____58-1891761____________
______________________________________________
_____________________________________
By____________________________________________
______________________________________________
Type or print name
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Contract Number: C 11494
VOICE SOLUTIONS RESELLER AGREEMENT
UNITED STATES AND CANADA
between
3Com Corporation
and
Air Nexus Inc
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("Reseller)
This Reseller Agreement ("Agreement") is made effective as of Nov. 23, 1999(the
"Effective Date"), by and between 3Com Corporation, a Delaware corporation with
lit principal place of business at 5400 Bayfront Plaza, P.O. Box 58145, Santa
Clara, CA 95052-8145 ("3Com") and Air Nexus Inc, a Texas corporation with its
principal place of business at 333 N. Sam Houston Pkwy East, Suite 870, Houston,
TX 77060.
Whereas, 3Com develops, manufactures and markets Voice Solutions products,
including selected telephony hardware, related networking equipment and software
as listed on the Reseller Price List set forth in Appendix Aattached hereto (the
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"Products"); and whereas, the Reseller acts as value added reseller for
telecommunications hardware, telephony-related hardware and software products
and/or other related networking and computer products; and whereas, 3Com and the
Reseller desire the Reseller to act as an independent, non-exclusive Reseller of
the Products on the terms and conditions set forth in this agreement.
NOW, THEREFORE, in consideration of the covenants and agreements herein, 3Com
and Reseller agree as follows:
1. Minimum Purchase
Reseller intends to purchase from 3Com at least two hundred thousand dollars
($200,000) of Products per year (at the price invoiced to Reseller) during the
term of this Agreement, and to use its best efforts to promote the sale of the
Products to the satisfaction of 3Com. Reseller's failure to meet the minimum
purchase commitment level may result in termination of this Agreement.
2. Appointment as Authorized 3Com Reseller
2.1 Grant of Rights. 3Com hereby grants to Reseller, and Reseller
hereby accepts from 3Com, a nonexclusive right and license to distribute the
Products solely to end-users in the territory set forth on Appendix B.For
-----------
purposes of this Agreement, the term "end-user" means any person or entity who
obtains a 3Com Product solely to fulfill its own internal needs and not for
distribution or resale.
2.2 Reserved Rights. All rights not specifically granted to Reseller
hereunder are reserved by 3Com. Except as expressly provided hereunder in
connection with the distribution of the Products, 3Com does not convey any
intellectual property rights to Reseller hereunder. 3Com reserves the right to
discontinue developing, producing, licensing, or distributing any of the 3Com
Products and to modify, replace or add to the 3Com Products in its discretion at
any time. 3Com further reserves the right to modify the Product pricing set
forth on the Reseller Price List in Appendixat any time. The appointment of
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Reseller hereunder does not transfer or create a franchise, equity interest or
any other similar right, title or interest in any 3Com Product to Reseller.
3. Obligations of Reseller
3.1 Promotional Efforts, Sales, Service and Related Activities.
Reseller agrees to use commercially reasonable efforts to promote, sell and
service the Products in accordance with this Agreement and 3Com's distribution
policies as announced from time to time. Reseller agrees to provide a suitable
place of business with adequate and efficient sales and service personnel as is
appropriate to maximize the sale and support of the Products to Reseller's
customers. 3Com, Reseller will comply with the obligations applicable to "3Com
dealers" in the Terms and Conditions attached hereto as Appendix C(the "End-User
----------
Agreement"). Without limiting the generality of the foregoing, Reseller agrees
to honor all requests for repair or replacement made by end-users pursuant to
the terms of the End-User Agreement pertaining to the defective units.
3.2 Compliance with Laws. Reseller will comply with all applicable laws
and regulations in performing its duties hereunder and in any of its dealings
with respect to 3Com Products.
3.3 3Com Packaging. The Products will be packaged in accordance with
standard commercial practices for domestic shipment. Except as otherwise agreed
by the parties in writing, Reseller will distribute 3Com Products with the
End-User Agreement and all other packaging, warranties, manuals, disclaimers and
license agreements intact as shipped from 3Com.
4. Obligations of 3Com
4.1 Documentation. At no additional charge, 3Com will provide to
Reseller complete documentation for each Product and any additional materials
relating to Products made available directly by 3Com to resellers and end-users.
In the event Reseller desires additional documentation, 3Com. will provide such
documentation at prices to be mutually agreed upon by 3Com. and Reseller.
4.2 Assistance. 3Com will make available by telephone, 24 hours, 7 days
a week, a support representative to answer questions regarding 3Com Products,
clarify Product data, and make recommendations concerning operating 3Com
Products.
5. Order Procedure; Returns
5.1 Orders. Reseller may place orders for Products by faxing purchase
orders to the appropriate order entry location as specified by 3Com from time to
time in writing and stating the 3Com. Product number, quantity, applicable
price, requested delivery date, bill to and ship to addresses, special shipping
instructions (if any), partial/no partials allowed, and any special order
handling instructions. The minimum order amount is U.S. $250.00, except in the
case of Spares. 3Com may decline to make shipments to Reseller if Reseller is
delinquent in making payments to 3Com or is otherwise in breach of this
Agreement.
Purchase orders for Products should be submitted to the following location.
Ordering locations may change to best fit Reseller's needs. Reseller should
check with its 3Com Territory Manager to insure orders are sent to the correct
location.
3Com Corporation
Attn.: Order Management
3Com Drive
Marlborough, Massachusetts 01752
U.S.A.
FAX: (508) 323-6058
Toll-Free phone (888)3STATUS [(888)378-2887]
5.2 Booking Window. The standard booking window is sixty (60) days from
the date of order entry. This may be extended to one hundred twenty (120) days
with prior approval in writing from 3Com's Area Sales Manager and beyond 120
days with the approval of the Distribution Services Group ("DSG") Director or if
required due to product availability.
5.3 Rescheduling. Reseller may reschedule shipping within the booking
window. Shipments, delayed beyond the booking window will be cancelled and five
percent (5 %) cancellation charge will be assessed.
5.4 3Com Acceptance. Orders shall be subject to written acceptance by
3Com and delivery schedules established in accordance with Product availability
and Reseller's credit status. Requested delivery dates may be no less than five
(5) business days after 3Com's receipt of Reseller's purchase order. 3Com will
use commercially reasonable efforts to ship on the scheduled dates but will not
be liable for failure to do so. All delivery dates are contingent upon receipt
of any necessary credit documents or export licenses. If 3Com fails to make
Product available on the scheduled ship date, Reseller may reschedule or cancel
without charge.
5.5 CONTROLLING TERMS. Although Reseller may use its standard purchase
order and other forms, the terms and conditions of this Agreement will prevail
over Reseller's forms and any inconsistent, conflicting or different terms in
such form will be of no effect.
5.6 3COM CANCELLATION. 3Com reserves the right to cancel or suspend any
orders placed by Reseller and accepted by 3Com, or refuse or delay shipment
thereof, if Reseller fails (1) to make any payment as provided herein or in any
invoice; (2) to meet credit or financial requirements established by 3Com; or
(3) otherwise to comply with the terms and conditions of this Agreement.
5.7 RESELLER CANCELLATION. Once an order has been accepted by 3Com, it
may not be cancelled by Reseller unless (1) 3Com has failed to ship the order,
or any portion thereof, within thirty (30) days of the date of 3Com's
confirmation of such order; and (2) Reseller provides written notice of such
cancellation, and 3Com acknowledges such cancellation in writing; and (3) 3Com
has not yet shipped the order or portion thereof which Reseller desires to
cancel.
5.8 Returns. Return of Product to 3Com falls into two categories:
(a) Credit Return Authorizations (CRA) for the return of new/unused Product
under the discontinued products and limited product return (where available)
provisions of this Agreement, or necessitated by incorrect shipments. Only
credit is available for such returns. No refunds will be made. Reseller must
obtain a CRA number by contacting 3Com Order Management with all required
information.
(b) Return Material Authorizations (RMA) for the return of Product
under warranty or for non-warranty repair. No credit or refunds are allowed
except as otherwise provided for in the warranty.
(c) Shipping cartons that are not marked with a CRA or RMA number will
be rejected by 3Com. Materials must be packed securely to avoid physical damage
and electrostatic discharge. Products must be shipped to 3Com F.O.B.
Destination, within five (5) days of issuance of CRA or RMA number. 3Com accepts
no responsibility for damage to goods that are being returned to 3Com. Reseller
shall be responsible for insuring the Products and parts while in transit to
3Com.
No Product may be returned to 3Com other than as stated above.
6. PAYMENT TERMS, DELIVERY AND RISK OF LOSS
6.1 PURCHASE AGREEMENT. Reseller agrees to purchase and to pay for all
Products ordered from 3Com, at the purchase prices listed in the Reseller Price
List set forth in Appendix Aand on the payment terms set forth in this Section
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6. Prices are subject to change in accordance with Section 7. 1.
6.2 Delivery. 3Com Products will be shipped Ex Works (1990 Incoterms),
3Com's shipping docks, freight collect. Title and risk of loss shall pass to
Reseller upon delivery to the first common carrier, except that shipments to
destinations outside of the United States are subject to Section 6.7 -
Reservation of Title. Reseller will pay all costs relating to transportation,
delivery, duties and insurance. Reseller will be responsible for filing claims
relating to any lost or damaged goods. Any additional charges incurred due to
expediting will be borne by Reseller.
6.3 EXPEDITED ORDERS. 3Com will make reasonable efforts to expedite
delivery of an "ASAP order" subject to Product availability, but is not
obligated to make such delivery on an expedited basis.
6.4 PAYMENT. Payment terms are net thirty (30) days from the date of
invoice. Reseller must give 3Com written notice of any discrepancies among the
purchase order, the invoice, and the Products received, within thirty (30) days
after receipt of the Products or the invoice, whichever occurs later. Payment is
not conditioned upon the Products meeting any acceptance testing procedures
Reseller may have. If there is any dispute as to a part of a shipment, Reseller
will pay for the undisputed part of that shipment. All payments to 3Com shall be
in United States dollars, free of any restrictions and less any Withholding Tax
(pursuant to Section 6.8 - Taxes). Reseller may not deduct any debit memos from
payment(s) made to 3Com on outstanding invoice(s), unless 3Com is forty-five
(45) days late in issuing a credit associated with such debit memo on a complete
and accurate claim submitted by Reseller. The forty-five (45) day period shall
commence upon 3Com's receipt of a complete and accurate claim from Reseller.
Anticipation of a credit due to Reseller from 3Com does not allow Reseller to
extend the agreed upon payment terms in order to apply such anticipated credit
to an outstanding invoice.
6.5 Credit. Credit limits and payment terms decisions are made, at
3Com's sole discretion, by an analysis of Reseller's current and historical
financial information, bank references, trade references, payment practices,
Reseller's business plan, etc. To facilitate 3Com's determination of credit
limits and payment terms, Reseller must provide current financial information to
3Com on an annual basis, or more frequently if so requested, unless such
information is readily available from public sources. 3Com may withdraw credit
upon notice to Reseller in the event 3Com determines, in its sole discretion,
that such credit would create an unreasonable credit risk. In the event an
adequate credit limit cannot be granted, is withdrawn or is pending initial
credit approval, deliveries will be available by negotiating alternative payment
terms such as cash in advance, irrevocable letter of credit with a bank of
3Com's choice, etc.
6.6 Interest. 3Com reserves the right to charge Reseller interest on
any delinquent balance . This interest is computed on a daily basis for each
day that the payment is delinquent, at the lesser of (i) eighteen percent (18%)
per annum or (ii) the maximum rate permitted by law.
6.7 RESERVATION OF TITLE (For Products Delivered Outside of United
States). In order to ensure that 3Com is paid for the Products sold or licensed
to Reseller, 3Com reserves title in the Products until paid for in full by
Reseller. 3Com hereby authorizes Reseller to transfer title to the Products in
the ordinary course of its business (except for Software, in which case only
title to the media shall pass), provided that in such case, any proceeds from
the disposition of such Products shall belong to 3Com to the extent of the sums
due by Reseller.
6.8 TAXES. Reseller is responsible for payment of all taxes of every
kind imposed in connection with the sale to Reseller of Products or services or
which 3Com may incur in respect of this Agreement (except for taxes imposed on
3Com's income), including all import duties, customs fees, levies or imposts,
and all sales, use, value added, gross receipts or other taxes of any nature,
and any penalties, interest and collection or withholding costs associated with
any of the foregoing items. All such amounts are in addition to other amounts
payable hereunder and this obligation shall survive termination or expiration of
this Agreement.
If applicable law requires Reseller to withhold any income taxes levied by the
authorities in Reseller's country of residence on payments to be made pursuant
to this Agreement ("Withholding Tax"), Reseller shall take advantage of the
reduced Withholding Tax provided for by the tax treaty then in force between
Reseller's country of residence and 3Coms country of residence, and shall be
entitled to deduct such Withholding TAX FROM THE PAYMENTS due to 3Com hereunder.
Reseller shall promptly effect payment of the Withholding Tax to the appropriate
tax authorities and shall transmit to 3Com within thirty (30) business days of
such payment official tax receipts or other evidence issued by the appropriate
tax authorities sufficient to enable 3Com to support a claim for income tax
credits in 3Com's country of residence. Reseller further agrees to assist 3Com,
upon request, if 3Com contests, by appropriate legal or administrative
proceedings, the validity or amount of the Withholding Tax. In the event 3Com
does not receive official tax receipts or other evidence within thirty (30)
days, 3Com shall have the right to invoice Reseller for such Withholding Tax and
Reseller agrees, to pay such amounts upon receipt of invoice.
Reseller may provide 3Com with a tax exemption certificate acceptable to the
taxing authorities in lieu of paying such taxes; however, Reseller shall
reimburse 3Com for any fines, penalties, taxes and other charges, including
expenses incurred by 3Com, due to Reseller's submission of invalid information.
6.9 DUTIES AND RELATED IMPORT Fees. Reseller is responsible for
fulfilling quota terms, obtaining import licenses, paying import license or
permit fees, duties and customs fees (including without limitation government,
import, excise, sales, use value-added and other taxes or fees), and preparing
and submitting all required documentation in connection with importing the
Products.
7. Price Changes; Product Changes; and Discontinued Products
7.1 Price Changes. 3Com may increase its published list prices on
thirty (30) days' notice. The increased prices will apply to all orders issued
after the effective date of the price increase as specified in the notice.
Orders issued after the notice date and before the effective date will be at the
old lower price provided they are scheduled for shipment within sixty (60) days
of the effective date. 3Com may decrease its published list prices at any time
with immediate effect and will attempt to provide notice of planned decreases
thirty (30) days in advance of such decrease. Price decreases will apply to all
orders in the 3Com backlog as of the notice date. Price changes in this Section
refer to actual list price changes and are not intended to include any changes
in price which occur as a result of exchange rate fluctuations or temporary
price changes pursuant to a promotion or 'other special offer.
7.2 PRODUCT CHANGES. 3Com reserves the right to change, improve or add
any new Product at any time. 3Com shall provide written notice of any major
changes to Products purchased under this Agreement that affect form, fit or
function prior to their implementation.
7.3 DISCONTINUED HARDWARE PRODUCTS. . 3Com. may discontinue Products at
any time on sixty (60) days' written notice of their discontinuance or their
removal from the 3Com Price List. In such event, Reseller may exchange
discontinued Products shipped to Reseller within ninety (90) days prior to the
notice date for the same number of units of the replacement Product if all of
the following conditions are met:
(a) the discontinued Products to be exchanged are new, unused and in
factory-sealed boxes;
(b) the discontinued Products are in Reseller's stock on the date of
the notice;
(c) the exchange takes place within one hundred eighty (180) days of
the effective date of the discontinuation;
(d) a non-cancellable order for an equal or greater quantity of the
replacement Product is submitted at the time of the exchange; and
(e) Reseller bears all shipping and other charges in connection with
the exchange and follows 3Com's instructions for disposal or return of the
discontinued Products.
If the new Product has a different list price than the discontinued
Product, Reseller will be invoiced or credited with the price difference, less
the applicable discount. Within seven (7) days after discontinuation notice,
Reseller may cancel all backlogged orders for the discontinued Product without
penalty.
If a Product is discontinued and not replaced with another Product, the
discontinued Products shipped to Reseller within ninety (90) days prior to the
notice of discontinuation may be returned to 3Com for up to one hundred eighty
(180) days after the effective date of the discontinuation, provided that:
(a) the discontinued Products are new, unused and in factory-sealed
boxes;
(b) the discontinued Products are in Reseller's stock on the date of
the notice; and
(c) Reseller bears all shipping and other charges in connection with
the return.
A credit memo for returned Products will be issued in the amount of the lesser
of (i) current list price less current discount, or (ii) the price invoiced to
and actually paid by Reseller.
7.4 DISCONTINUED SOFTWARE PRODUCTS. 3Com may discontinue software
Products at any time on sixty (60) days' written notice of their discontinuance
or their removal from the 3Com Price List. 3Com will give thirty (30) days'
notice of the First Customer Shipment ("FCS") of any new software version.
Orders for the old version placed prior to FCS will be filled for sixty
(60) days after FCS. Old software versions may be exchanged for the same number
of units of the replacement versions if all of the following conditions are met:
(a) the old version was shipped to Reseller within ninety (90) days
prior to the FCS of the new version;
(b) the old version is new, unused and in -factory-sealed boxes;
(c) the discontinued Products are in Reseller's stock on the date of
the notice;
(d) the exchange takes place within one hundred eighty (180) days of the
effective date of the discontinuation;
(e) a non-cancellable order for an equal or greater quantity of the new
version is submitted at the time of the exchange; and
(f) Reseller bears all shipping charges in connection with the exchange
and follows 3Com's instructions for disposal or return of the old version.
If the new software Product has a different price than the discontinued Product,
Reseller will be invoiced or credited with the price difference, less the
applicable discount. Within seven (7) days after discontinuation notice,
Reseller may cancel all backlogged orders for the discontinued Product without
penalty.
If a software Product is discontinued and not replaced with a new version, the
discontinued version shipped to Reseller within ninety (90) days prior to notice
of discontinuation may be returned to 3Com for up to one hundred eighty (180)
days after the effective date of the discontinuation, provided that:
(a) the software to be returned is new, unused and in factory-sealed boxes;
(b) the Products are in Reseller's stock on the date of the notice; and
(c) Reseller bears all shipping and other charges in connection with the
return.
A credit for returned software Products will be issued in the amount of the
lesser of (i) current list price less current discount, or (ii) the price
invoiced to and actually paid by Reseller.
7.5 BUNDLED PRODUCTS. If any Product includes both hardware and
software components, discontinuation will be treated based on the predominant
character of the components, as determined in 3Com's sole discretion.
8. Trademarks, Trade Names and Copyrights
8.1 "3Com Trademarks" means those trademarks, trade names, service
marks, slogans, designs, distinctive advertising, labels, logos, and other
trade-identifying symbols as are or have been developed and used by 3Com or any
of its subsidiaries or affiliate companies anywhere in the world.
8.2 Reseller acknowledges that all 3Com Trademarks are vested in 3Com
absolutely. 3Com authorizes Reseller to use the 3Com name or 3Com Trademarks
associated with the Products and services which Reseller is authorized to sell
or license within the Territory in the normal course of business during the term
of this Agreement for the sole purpose of the sale and distribution of Products
and services hereunder. Reseller shall comply with 3Com's then current trademark
usage and style guidelines when using the 3Com Trademarks. Reseller shall not
use 3Com Trademarks for any other purpose and only in such manner as to preserve
all rights of 3Com. When using 3Com Trademarks, Reseller must indicate that 3Com
is the owner of the 3Com Trademark(s) and that Reseller is using the 3Com
Trademarks with permission from and on behalf of 3Com. Reseller acquires no
right to 3Com Trademarks by its use.
8.3 Reseller shall not remove, alter or modify the serial or
identification numbers, labels, 3Com Trademarks or other trade-identifying
symbols from Products sold or licensed by 3Com under this Agreement. Reseller
shall provide all reasonable assistance, including execution of documents as
'requested by 3Com to protect its trademark rights in the Territory.
8.4 3COM SHALL HAVE THE SOLE AND EXCLUSIVE RIGHT TO bring legal action
in the Territory for infringement with respect to 3Com Trademarks. Reseller
shall assist 3Com in such legal proceedings. Reseller shall notify 3Com promptly
of any known infringements of 3Com Trademarks.
9. ASSIGNMENT
This Agreement shall not be assigned by either party without the prior written
consent of the other, except that 3Com may assign its rights and obligations
hereunder to any subsidiary or affiliate or in connection with a merger or other
business combination in which it is not the surviving entity. Any attempted
assignment in violation of this provision shall be null and void.
10. DURATION AND TERMINATION OF AGREEMENT
10.1 TERM. The Term of this Agreement shall be one (1) year,
commencing on the Effective Date and expiring on the Expiration Date unless
otherwise terminated as stated herein. If no Effective Date is stated, this
Agreement shall become effective on the date it is executed by the second party.
This Agreement may be extended for additional one (1) year terms if agreed to in
writing by both parties thirty (30) days prior to the end of its current term.
If, prior to the commencement of a subsequent one-year term, 3Com wishes to
change any provisions of this Agreement to conform to its then-current
practices, 3Com shall give written notice to Reseller at least sixty (60) days
prior to an annual anniversary. If Customer objects in writing to the changed
provisions, this Agreement will terminate on the upcoming anniversary, unless
the parties are still engaging in good faith negotiations regarding any changed
provisions, in which case the Agreement will be automatically extended for up to
ninety (90) days or until the parties reach agreement or determine that
agreement is unattainable. The new provisions will
be incorporated into an addendum which will be executed by both parties and will
become effective on the anniversary and remain in effect until changed at a
subsequent anniversary using the same procedure.
10.2 TERMINATION FOR CAUSE. Either party may terminate this
Agreement at any time upon written notice if the other party (i) is in material
breach of its obligations hereunder and fails to cure such breach within thirty
(30) days following written notice of such breach, or (ii) becomes insolvent or
files or has filed against it a petition under bankruptcy or insolvency law
which remains undismissed after ninety (90) days, makes an assignment for the
benefit of creditors or takes any similar action under applicable bankruptcy or
insolvency law.
10.3 TERMINATION FOR CONVENIENCE. Either party may terminate this
Agreement, without cause, on thirty (30) days' written notice.
10.4 Upon expiration or termination, each party shall return to
the other any materials of the other, including, without limitation, all
Confidential Information.
10.5 OBLIGATIONS UPON TERMINATION. Termination or expiration shall
not relieve either party of the obligation to pay any sums due hereunder. Other
obligations which shall survive for a period of five(5) years from the
termination of expiration of this Agreement include: security interest,
retention of title, indemnities and limitation of liability. Obligations
regarding export control regulations and U.S. governmental end users shall
survive indefinitely. The warranty and confidentiality provisions shall remain
in effect for their stated durations. Regarding warranty provisions, 3Com shall,
at its sole discretion, either provide Assistance to Reseller under Section 3.2
for the duration of any end-user warranties from End-User Agreements in effect
at the time of termination or upon notice from 3Com to do so, Reseller shall
refer, in the manner specified, all requests for warranty support under said
End-User Agreements directly to 3Com. Reseller shall cooperate with 3Com in
providing records evidencing end-user's entitlement to warranty coverage under
the End-User Agreement. Neither party shall be liable to the other for any
damages, expenditures, loss of profits or prospective profits or goodwill on
account of the termination or expiration of this Agreement pursuant to its
terms. Reseller expressly waives any and all rights provided by law or statute
for. any indemnity or compensation from 3Com by reason of termination or
non-renewal of this Agreement.
<PAGE>
10.6 Cancellation of Pending Orders. All orders or portions
thereof remaining unshipped as of the effective date of termination shall
automatically be cancelled.
10.7 Use of Trademarks, etc. Reseller shall cease using any 3Com
trademark, logo or trade name.
10.8 Acceleration of Invoices. All outstanding invoices for the
Products shall automatically be accelerated and all such invoices shall become
due and payable.
11. RELATIONSHIP OF THE PARTIES
The parties' relationship is that of independent contractors. Reseller will not
have, and will not represent that it has any power, right or authority to bind
3Com, or to assume or create any obligation or responsibility, express or
implied, on behalf of 3Com or in 3Com's name, except as expressly provided.
Nothing stated in this Agreement shall be construed as constituting Reseller and
3Com as creating the relationships of employer/employee, franchiser/franchisee,
or principal/agent between the parties. Neither Reseller nor its employees or
agents are, or shall act as, employees of 3Com.
12. MARKETING DEVELOPMENT FUNDS (MDF) PROGRAM.
Reseller may be eligible to participate in 3Com's Marketing Development Funds
(MDF) program, as may be in effect from time to time. This is a separate program
and document from this Letter, and is not incorporated herein. This program may
be modified or terminated by 3Com upon fifteen (15) days notice to Reseller.
13. LIMITED PRODUCT WARRANTY
3Com warrants to Reseller that each product ordered by Reseller under the terms
of this Agreement will be packaged with a copy of the End-User Agreement
(Appendix C).The End-User Agreement accompanying each Product is 3Com's sole
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warranty for such Product.
Reseller shall pay to 3Com the discounted price of each replacement Product
shipped by 3Com pursuant to the End-User Agreement if 3Com does not receive the
defective Product being replaced within fourteen (14) days of the date of
shipment by 3Com. 3Com shall only be responsible for freight-out charges
relating to the shipment of replaced Products.
14. DISCLAIMER AND LIMITATIONS OF LIABILITY; INDEMNIFICATION BY THE RESELLER
14.1 DISCLAIMER OF WARRANTIES. AS SET FORTH IN THE END-USER
AGREEMENT, THE WARRANTY SET FORTH IN SECTION 13, DOES NOT EXTEND TO ANY PRODUCT,
WHICH HAS BEEN DAMAGED AS A RESULT OF (1) ACCIDENT, MISUSE OR ABUSE; (2) FAILURE
TO FOLLOW 3COM'S INSTALLATION, OPERATION OR MAINTENANCE INSTRUCTIONS; OR (3)
UNAUTHORIZED SERVICE OR PARTS.
EXCEPT AS STATED IN SECTION 13 HEREOF, 3COM AND ITS AFFILIATES,
DISTRIBUTORS AND SUPPLIERS, MAKE NO WARRANTIES, EXPRESS OR IMPLIED, AND TO THE
EXTENT PERMITTED BY APPLICABLE LAW, 3COM DISCLAIMS ALL OTHER WARRANTIES WHETHER
EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF MERCHANTABILITY, TITLE,
FITNESS FOR A PARTICULAR PURPOSE AND NON-INFRINGEMENT. IF IMPLIED WARRANTIES MAY
NOT BE DISCLAIMED UNDER APPLICABLE LAW, THEN ANY IMPLIED WARRANTIES ARE LIMITED
IN DURATION TO 90 DAYS AFTER DELIVERY OF THE PRODUCT TO RESELLER. SOME STATES DO
NOT ALLOW LIMITATIONS ON HOW LONG AN IMPLIED WARRANTY LASTS SO THE ABOVE
LIMITATION MAY NOT APPLY. THIS WARRANTY GIVES THE RESELLER SPECIFIC LEGAL
RIGHTS, AND THE RESELLER MAY HAVE OTHER RIGHTS WHICH VARY FROM STATE TO STATE.
14.2 EXCLUSIVE REMEDIES AND LIMITATIONS OF LIABILITY. The entire
liability of 3Com and its subsidiaries, affiliates and distributors (and the
directors, officers, employees, agents and representatives, distributors and
suppliers of all of them) and the exclusive remedy of Reseller and, insofar as
the End-User Agreement so provides, any End-User, for any damages shall be (1)
for failure of products during the Warranty Period, the remedies as set forth in
Section 2 of the End-User Agreement, (2) for infringement, the remedies stated
in section 14 hereof or, in the case of End-Users, as set forth in Section 5 of
the End-User Agreement, and (3) for claims other than set forth above, 3Com's
liability shall be limited to proven direct damages in an amount not to exceed
the total amount of payments previously made by Reseller to 3Com under this
Agreement. In the event that, notwithstanding this Section 14.2, 3Com is found
liable for damages based on failure of the Products during the Warranty Period,
3Com's total liability for each defective Product shall not exceed the
discounted price of such defective Product.
IN NO EVENT, REGARDLESS OF THEORY, SHALL 3COM BE LIABLE FOR INCIDENTAL,
CONSEQUENTIAL, INDIRECT, SPECIAL OR PUNITIVE DAMAGES OF ANY KIND, OR FOR LOSS OF
REVENUE, LOSS OF BUSINESS, LOSS OF DATA OR OTHER FINANCIAL LOSS ARISING OUT OF
OR IN CONNECTION WITH THE SALE, INSTALLATION, USE, PERFORMANCE, FAILURE OR
INTERRUPTION OF ITS PRODUCTS OR SERVICES. NOTWITHSTANDING ANY OTHER PROVISION OF
THIS AGREEMENT, 3COM'S MAXIMUM LIABILITY HEREUNDER SHALL NOT EXCEED THE PURCHASE
PRICE OF THE PRODUCTS OR SERVICES PURCHASED OR LICENSED DURING THE TERM OF THIS
AGREEMENT. RESELLER HAS ACCEPTED THE DISCLAIMER OF LIABILITY AS PART OF A
BARGAIN TO LOWER THE PRICE OF THE PRODUCTS OR SERVICES AND UNDERSTANDS THAT THE
PRICE OF THE PRODUCTS OR SERVICES WOULD BE HIGHER IF 3COM WERE REQUIRED TO BEAR
ADDITIONAL LIABILITY. THIS DISCLAIMER. OF LIABILITY WILL NOT BE AFFECTED IF ANY
REMEDY PROVIDED HEREIN FAILS OF ITS ESSENTIAL PURPOSE.
14.3 INDEMNIFICATION BY THE RESELLER. Reseller shall indemnify and
defend 3Com against all claims, suits, losses, expenses, and liabilities
(including 3Com's reasonable attorney's fees) for personal injury, death, and
tangible property damage made against 3Com as a result of the negligence,
intentional wrongful acts, omissions where there is a duty to act, or
misrepresentations of Reseller or any person for whose actions Reseller is
legally liable. Reseller shall be solely responsible for any claims, warranties
or representations made by Reseller or its employees or agents which differ from
the warranty provided by 3Com in the limited warranty included in the packaging
of each Product sold or licensed hereunder, or which differ from written
documentation provided by 3Com.
15. PATENT AND COPYRIGHT INDEMNITY
15.1 Reseller acknowledges 3Com's representation that all
Intellectual Property Rights throughout the world are vested in 3Com absolutely,
and acknowledges that Reseller has no right, title or interest in any
Intellectual Property Rights.
15.2 3Com shall, at its own expense, defend or settle any suit or
proceeding that is instituted against Reseller to the extent such suit or
proceeding alleges that any Product sold by 3Com hereunder infringes any duly
issued patent or copyright of the United States or the Territory and shall pay
all damages awarded therein against Reseller or agreed upon in settlement by
3Com; provided that Reseller (i) gives 3Com immediate notice in writing of any
such suit, proceeding or threat thereof, (ii) permits 3Com sole control, through
counsel of 3Com's choice, to defend and/or settle such suit and (iii) gives 3Com
all the needed information, assistance and authority, at 3Com's expense, to
enable 3Com to defend or settle such suit.
15.3 The above provision shall not apply to and 3Com shall have no
liability or obligation for any infringement arising from: (i) any modification,
servicing or addition made to the Product by anyone other than 3Com, (ii) the
use of such Product as a part of or in combination with any devices, parts or
software not provided by 3Com, (iii) compliance with Reseller's design
requirements or specifications, (iv) the use of other than the then current
unaltered release of the software Product available from 3Com or (v) the use of
such Product to practice any method or process which does not occur wholly
within the Product. The above exclusions apply to the extent that the
infringement would have been avoided but for such modifications, combinations,
compliance with specifications, use of other than the current release or
practice of such method or process.
15.4 In the event the use or sale of any Product purchased from
3Com is enjoined, or in the event 3Com wishes to minimize its potential
liability hereunder, 3Com may, at its sole option and expense: (i) procure for
Reseller the right to use or sell such Product; (ii) substitute a functionally
equivalent, non-infringing unit of the Product; (iii) modify such Product so
that it no longer infringes but is substantially equivalent in functionality; or
(iv) if none of the foregoing are commercially feasible, take back such Product
and refund the purchase price paid by Reseller for such Product depreciated over
a five (5) year period using the straight line method. 3Com shall in no event be
obligated to accept new orders for Products which are subject to a claim of
infringement covered under this Section.
15.5 THIS SECTION STATES 3COM'S TOTAL RESPONSIBILITY AND
LIABILITY, AND THE RESELLER'S SOLE REMEDY, FOR ANY ACTUAL OR ALLEGED
INFRINGEMENT OF ANY INTELLECTUAL PROPERTY RIGHT FOR ANY PRODUCTS DELIVERED
HEREUNDER OR ANY PART THEREOF AND IS IN LIEU OF AND REPLACES ANY AND ALL OTHER
EXPRESS, IMPLIED OR STATUTORY WARRANTIES OR CONDITIONS REGARDING INFRINGEMENT.
16. License to Software; Protection of 3Com's Proprietary Rights
16.1 Reseller acknowledges and agrees that the Product includes
certain software developed by or licensed to 3Com and that, from time to time,
3Com will furnish certain additional software to Reseller in connection with the
performance by Reseller of its obligations under this Agreement (such software
being referred to herein as the "Software"). Subject to the terms and conditions
contained herein and in Sections I (b) through I (f) of the End-User Agreement,
3Com grants Reseller a personal, non-transferable and non-exclusive license (i)
to distribute the Software, in object code form only, to end-users solely as an
integral component of the Products and (ii) to use the Software, in object code
form only, to configure the Products for end-users solely in accordance with the
system documentation accompanying the Software. Reseller agrees that all right,
title and interest to such Software shall at all times remain vested in 3Com.
Reseller shall have no right whatsoever to receive, review, or otherwise use or
have access to the source code of the Software, which Software is permitted to
be distributed by Reseller only in object code form as part of the Product. The
Software is the exclusive property of 3Com and 3Com licensors and contains
valuable proprietary information and trade secrets of 3Com and 3Com's licensors
developed at a great cost and expense. Except as expressly authorized by this
Agreement or under applicable law, Reseller is not permitted to copy or use the
Software in any manner. Without limiting the generality of the foregoing,
Reseller agrees that it will not do any of the following: (i) decompile, reverse
engineer, disassemble, or otherwise reduce the Software to a human-perceivable
form; (ii) transfer the Software from one computer to another, including other
servers and/or other storage devices; (iii) transfer the Software to any other
party, except when transferring it with the Product in accordance with the terms
of this Agreement; or (iv) modify, adapt, translate, rent, sublicense, lease,
loan, resell for profit, distribute, network or create derivative works based
upon the Software or any part thereof. Reseller shall include on all copies of
the documentation for the Software the copyright, trademark and the proprietary
rights notices of 3Com and take reasonable steps to ensure that Reseller's
employees, consultants or agents who are permitted access to the Software comply
with provisions of this Section 15. Reseller shall be liable and Reseller shall
indemnify 3Com for all damages, costs, expenses (including attorney's fees and
court costs), claims and other expenses in connection with any unauthorized
transfer, copying, duplication, reverse engineering, recompilation,
reproduction, or other form of unauthorized use or misappropriation (whether
directly or indirectly) by the Reseller or any of its employees, agents or
representatives of any Software or microprocessor component of the Product.
16.2 No rights to manufacture, duplicate or otherwise copy or reproduce
- -any Products are granted by this Agreement.
16.3 3Com has the right to license any company, within or outside the
Territory, to manufacture Products.
16.3.1 3COM HEREBY GRANTS RESELLER A NON-EXCLUSIVE LICENSE DURING the
term and in the Territory of this Agreement to sub-license to eventual End Users
the object code of software Products listed in Appendix A in accordance with the
terms of 3Com's software license agreement that accompanies such software.
17. CONFIDENTIAL INFORMATION
During the course of this Agreement, each party may disclose to the other
certain proprietary information (both patentable and unpatentable, including but
not limited to, trade secrets, know how, software, source codes, techniques,
future product plans, marketing plans, customers, inventions, discoveries,
improvements, and research and development data) ("Confidential Information") of
a character regarded by the disclosing party as confidential.
Each party and each of its employees or consultants to whom disclosure is made
shall hold all Confidential Information and the terms of this Agreement in
confidence and shall not disclose such information to any third party or apply
it to uses other than the recipient's performance of this Agreement.
Such Confidential Information, if disclosed in writing shall be marked or
identified as confidential or a similar designation, or if orally or visually
disclosed, shall be identified as the confidential information of the disclosing
party at the time of disclosure and then summarized in writing and provided to
the recipient in such written form within thirty (30) days after such oral or
visual disclosure.
17.1 Obligation of Confidentiality. Each party agrees that for a
period of three (3) years from receipt of Confidential Information from the
other party hereunder, it shall use the same degree of care that it utilizes to
protect its own information of a similar nature, but in any event not less than
reasonable care, to prevent the unauthorized use or the disclosure of such
Confidential Information to third parties. The Confidential Information shall be
disclosed only to employees and consultants of a recipient with a "need to know"
who are instructed to and agree in writing to not disclose third party
Confidential Information, and who shall use the Confidential Information only
for the purpose set forth above. A recipient may not alter, decompile,
disassemble, reverse engineer, or otherwise modify any Confidential Information
received hereunder and the mingling of the Confidential Information with
information of the recipient shall not affect the confidential nature or
ownership of the same as stated hereunder.
17.2 OWNERSHIP OF CONFIDENTIAL INFORMATION. All Confidential
Information is, and shall remain, the property of the disclosing party. Nothing
herein shall be construed as granting or conferring any rights by license or
otherwise in the Confidential Information except as expressly provided herein. A
recipient hereunder acquires only a limited right to use the Confidential
Information solely for the purpose of performing its obligations under this
Agreement.
17.3 RETURN OF CONFIDENTIAL INFORMATION. Upon the written request
of the disclosing party, or upon the expiration or termination of this
Agreement, the recipient shall promptly return all copies of the Confidential
Information, in whatever form or media, to the disclosing party. or, at the
direction of such party, destroy the same. The recipient shall certify in
writing to the other such return or destruction within ten (10) days thereafter.
17.4 EXCEPTIONS TO OBLIGATION OF CONFIDENTIALITY. This Agreement
shall impose no obligation of confidentiality upon a recipient with respect to
any portion of the Confidential Information received hereunder which is:
(a) now or hereafter, through no unauthorized act or failure to act on
recipient's part, generally known or available;
(b) lawfully known to the recipient without an obligation of confidentiality
at the time recipient receives the same from the disclosing party, as evidenced
by written records;
(c) hereafter lawfully furnished to the recipient by a third party without
restriction on disclosure;
(d) furnished to others by the disclosing party without restriction on
disclosure; or
(e) independently developed by the recipient without use of the disclosing
party's Confidential Information.
Nothing in this Agreement shall prevent the receiving party from disclosing
Confidential Information to the extent the receiving party is legally compelled
to do so by any governmental investigation or judicial agency pursuant to
proceedings over which such agency has jurisdiction; provided, however, that
prior to any such disclosure, the receiving party shall (i) assert the
confidential nature of the Confidential Information to the agency, (ii)
immediately notify the disclosing party in writing of the agency's order or
request to disclose and (iii) cooperate fully with the disclosing party in
protecting against any such disclosure and/or obtaining a protective order
narrowing the scope of the compelled disclosure and protecting its
confidentiality.
17.5 Reseller shall not disclose, advertise or publish the terms
or conditions of this Agreement without the prior written consent of 3Com.
18. GENERAL
18.1 WAIVER. Any waiver of a default in performance hereunder
shall be deemed a waiver of the particular instance only and shall not be deemed
a consent to any continuing default. The exercise of any right or remedy
provided in the Agreement shall be without prejudice to the fight to exercise
any other fight or remedy provided by law or equity. If any provision of this
Agreement is found to be invalid, illegal or unenforceable, a modified provision
shall be substituted which carries out as nearly as possible the original intent
of the parties and the remaining provisions shall in no way be affected thereby.
18.2 NOTICES. Notices shall be given in writing to the addresses
on the first page of this Agreement, or to such other address as shall be given
by either party to the other in writing. Notices regarding price changes,
product discontinuance, product changes, and logistics center changes may be
made via email to the person(s) specified by Reseller from time to time. Any
notice. involving non-performance, termination, or renewal shall be sent by
recognized overnight courier or within the United States, via certified mail,
return receipt requested. All other-notices may be sent by (i) recognized
overnight courier or (ii) by fax or email and confirmed by first class mail. All
notices shall be deemed to have been given and received on the earlier of actual
delivery or three (3) days from the date of postmark.
18.3 ATTORNEY'S FEES. In any action to enforce this Agreement the
prevailing party shall be awarded all court costs and reasonable legal fees
incurred.
18.4 DISPUTE RESOLUTION. The parties will attempt in good faith to
promptly resolve any dispute, controversy, or claim ("Dispute") arising out of
or relating to this Agreement through negotiations between the parties before
resorting to other remedies available to them. Any such Dispute shall be
referred to appropriate senior executives (e.g. director or V.P. level) of each
party who shall have the authority to resolve the matter. Discussions and
correspondence relating to trying to resolve such Dispute shall be treated as
confidential information developed for the purpose of settlement and shall be
exempt from discovery or production and shall not be admissible in subsequent
mediation, other alternate dispute resolution ("ADR"), or litigation. If the
senior executives are unable to resolve the Dispute within thirty (30) days from
the date of the written communication requesting referral to the executives, and
either party wishes to pursue its rights relating to such Dispute, then the
Dispute will be mediated by a mutually acceptable mediator appointed pursuant to
the mediation rules of JAMS/Endispute within thirty (30) days after written
notice by one party to the other demanding non-binding mediation. Neither party
may unreasonably withhold consent to the selection of a mediator or the location
of the mediation. Both parties will share the costs of the mediation equally,
except that each party shall bear its own costs and expenses, including
attorney's fees, witness fees, travel expenses, and preparation costs. The
parties may also agree to replace mediation with some other form of nonbinding
or binding ADR. If the parties agree upon binding arbitration, the power of the
arbitrator(s) shall be limited to that possessed by a Superior Court Judge in
California and the arbitrator(s) shall be prohibited from awarding damages or
remedies in excess of those allowed by the provisions of this Agreement.
Any Dispute which the parties cannot resolve through mediation within two (2)
months of the date of the initial demand for it by one of the parties may then
be submitted to a court for resolution. The use of any ADR procedures will not
be construed under the doctrine of laches, waiver or estoppel to adversely
affect the rights of either party.
Any Dispute regarding the following is not required to be negotiated or
mediated:, non-payment or late payment; breach of any obligation of
confidentiality; infringement, misappropriation, or misuse of any intellectual
property right; any other claim where interim relief from the court is sought to
prevent serious and irreparable injury to one of the parties or to others.
18.5 GOVERNING LAW. This Agreement shall be construed in
accordance with and all disputes hereunder shall be governed by the laws of the
State of California, EXCLUDING its conflict of law rules AND THE UNITED NATIONS
CONVENTION ON CONTRACTS FOR THE INTERNATIONAL SALE OF GOODS. With the exception
of the Dispute Resolution provision, above, the Superior Court of Santa Clara
County and/or the United States District Court for the Northern District of
California shall have non-exclusive jurisdiction and venue over all
controversies in connection herewith.
18.6 SECTION HEADINGS. The section headings contained herein are
for reference only and shall not be considered substantive parts of this
Agreement.
18.7 FORCE MAJEURE. Neither party shall be liable to the other for
any alleged loss or damage resulting from any delay of performance caused by
acts of the other, acts of civil or military authority, governmental priorities,
earthquake, fire, flood, epidemic, quarantine, energy CRISIS, STRIKE, LABOR
TROUBLE, WAR, RIOT, accident, shortage, delay in transportation, or any other
causes beyond the reasonable control of the delayed party
18.8 ENTIRE AGREEMENT. This Agreement constitutes the entire
understanding of the parties with respect to the subject matter hereof, may be
modified only in a writing signed by both parties, and shall supersede any and
all other agreements between them regarding such subject matter. Amendments to
-------------
this Agreement at the time that it is executed may be made only by a document
-------------------------------------------------------------------------------
signed by both parties.
-------------------------
18.9 DUE EXECUTION. Each person executing this Agreement on behalf of a
party represents and warrants that he or she has been duly authorized to execute
this Agreement on behalf of the party.
18.10 PAYMENTS TO THIRD PARTIES. By signing this Agreement,
Reseller guarantees to 3Com that no portion of any compensation received from
the sale of 3Com Products will be paid directly or indirectly to any third
parties who are employees of or have any business or official interest in the
affairs of a customer placing an order which is the basis on which compensation
is paid. Violation of the terms of this guarantee shall be considered cause for
immediate termination (without any cure period) of this Agreement. This
provision does not preclude Reseller from participating in organized promotional
activities approved by 3Com
18.11 U.S. GOVERNMENTAL END Users. All 3Com technical data and
computer software is commercial in nature and developed solely at private
expense. Software is delivered as "Commercial Computer Software" as defined in
DFARS 252.227-7014 (June 1995) or as a commercial item as defined in FAR 2. 10 1
(a) and as such is provided with only such rights as are provided in 3Com's
standard commercial license for such software. Technical data is provided with
limited rights only as provided in DFAR 252.227-7015 (Nov. 1995) or FAR
52.227-14 (June 1987), whichever is applicable. Reseller agrees not to remove,
deface or modify any portion of any legend provided on any licensed software or
documentation delivered to it under this Agreement.
18.12 Choice of Language. The original of this Agreement is in
English and Reseller waives any right to have it written in any other language.
Section headings are for convenience only.
19. Export Restrictions
19.1 GENERAL. Reseller acknowledges that all Products, Spares,
technical data, computer software, documentation or other materials supplied
hereunder (collectively "Technical Data") and the product thereof are subject to
all pertinent import and export laws, rules and regulations of the United States
and the Territory, specifically including the provisions of the U.S. Export
Administration Regulations ('EAR'). This Agreement is also specifically subject
to U.S. Department of Commerce regulations relating to restrictive trade
practices or boycotts. In no event shall 3COM BE BOUND by any terms and
conditions that contravene such pertinent laws. Reseller agrees TO COMPLY WITH
ALL such laws and regulations applicable to the Technical Data and, without
limiting the generality of the foregoing, Reseller agrees that, unless prior
written authorization is received from the U.S. Department of Commerce, it shall
not knowingly export or re-export, directly or indirectly, any Technical Data
(or part thereof), or any process or service which is the direct product of the
Technical Data to (i) any person or firm on the "Denied Parties List" published
by the U.S. Department of Commerce, or to any person or firm on the "Specially
Designated Nationals" list published by the U.S. Department of the Treasury, or
(ii) the following nations or nationals thereof- Cuba, Iran, Iraq, Libya, North
Korea, Republic of Serbia, Sudan and Syria. All lists of countries contained in
this entire Section 12 are accurate as of May 1999. They are subject to change
by the U.S. Government and these lists shall be considered updated to be
consistent with then-current U.S. law.
19.2 NON CIVILIAN/PROLIFERATION RESTRICTIONS.
19.2.1 Reseller hereby certifies that, unless prior written
authorization is received by Reseller from the U.S. Department of Commerce, it
shall not transfer, export or re-export, directly or indirectly, any Technical
Data (or part thereof), or any process or service which is the direct product of
the Technical Data received under License Exception TSR to any of the following
nations or nationals thereof- Albania, Armenia, Azerbaijan, Belarus, Bulgaria,
Cambodia, Cuba, Estonia, Georgia, Iran, Iraq, Kazakhstan, Kyrgystan, Laos,
Latvia, Libya, Lithuania, Moldova, Mongolia, North Korea, People's Republic of
China, Republic of Serbia, Romania, Russia, Sudan, Syria, Tajikistan,
Turkmenistan, Ukraine, Uzbekistan, Vietnam.
19.2.2 Reseller acknowledges that certain Technical Data supplied
hereunder from 3Com are exported under U.S. Export Administration Regulations
license exceptions that prohibit the transfer, export or re-export of such
Technical Data to military end users for known military uses or to agents or any
intermediate entities in the chain of supply. In addition to conventional
military activities, Reseller understands that military uses include any
proliferation activities and that both uses would require export license
approval from the U.S. Government prior to such sale or export in the following
destination countries: Albania, Armenia, Azerbaijan, Belarus, Bulgaria,
Cambodia, Estonia, Georgia, Kazakhstan, Kyrgystan, Laos, Latvia, Lithuania,
Moldova, Mongolia, People's Republic of China, Romania, Russia, Tajikistan,
Turkmenistan, Ukraine, Uzbekistan, and Vietnam.
19.2.3 Reseller acknowledges that it will not transfer, export or
re-export, without U.S. Government permission, any Technical Data that (i) is
destined for any missile technology project, or (ii) will be used in the design
development, production or use of missiles, or (iii) will be used in the design
development, production, stockpiling or use of chemical or biological weapons,
if any such activities are located in any of the following proliferation risk
countries: Afghanistan, Algeria, Andorra, Angola, Armenia, Azerbaijan, Bahrain,
Belarus, Bulgaria, Burma, Cambodia, People's Republic of China, Comoros,
Djibouti, Egypt, Georgia, India, Israel, Jordan, Kazakhstan, Kuwait, Kyrgystan,
Lebanon, Micronesia, Moldova, Mongolia, Oman, Pakistan, Qatar, Russia, Saudi
Arabia, Taiwan, Tajikistan, Turkmenistan, Ukraine, United Arab Emirates,
Uzbekistan, Vanuatu, Vietnam, and Yemen.
19.2.4 RESELLER acknowledges that specific U.S. Government approval is
required prior to transfer, export or re-export of Technical Data if Reseller
knows that such Technical Data will be used for nuclear end-uses in any country
other than the following nations: Australia, Belgium, Canada, Denmark, France,
Germany, Greece, Iceland, Italy, Japan, Luxembourg, the Netherlands, New
Zealand, Norway, Portugal, Spain, Turkey, United Kingdom and the United States.
3Com may require Reseller to execute an Export/ Re-Export Letter and/or other
export paperwork on an annual basis or more frequently when required and may
require details on an End User or application when necessary to facilitate the
qualification of a transaction for the above-referenced license restrictions.
Reseller is responsible for obtaining and providing to 3Com International Import
Certificates and/or other support documentation required by 3Com in order to
apply for U.S. export licenses.
19.3 RESPONSIBILITY FOR EXPORT LICENSING. 3Com agrees to use
commercially reasonable steps to obtain, at 3Com's expense, all documentation
required by the United States Export Administration Regulations and/or other
authorities to permit the exportation of Technical Data to Reseller. 3Com shall
have no liability or obligation to Reseller if the responsible government
authorities decline to issue any such export licenses. ALL ORDERS ISSUED
PURSUANT TO THIS AGREEMENT ARE SUBJECT TO THE OBTAINING OF SAID LICENSES.
19.4 EXPORTER OF RECORD. If Reseller chooses to use a freight
forwarder or agent, other than a 3Com preferred freight forwarder to export
Technical Data from the United States, Reseller or its properly authorized agent
or forwarder must hold a properly executed power of attorney to prepare and sign
Shipper's Export Declarations as exporter of record from the United States.
19.5 ENCRYPTED PRODUCTS. Certain Technical Data provided by 3Com
under this Agreement may require that Reseller report all sales, transfers,
exports and re-exports to the Bureau of Export Administration, U.S. Department
of Commerce, Washington, D.C., USA, identifying the specific End User name,
address, country of ultimate destination and quantities shipped, before
encrypted Technical Data may be purchased or licensed under 3Com's export
licensing approval arrangements with the U.S. Government. With respect to
certain technical data that 3Com will communicate to Reseller and require
Reseller's written acceptance of additional government imposed requirements or
responsibilities prior to release and shipment of orders. These purchases or
licenses will be allowed only if they are in full compliance with U.S. law, and
if Reseller evidences compliance with all export reporting requirements.
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day and
year first above written.
3COM CORPORATION Air Nexus Inc
Signature: /s/ Emad Zureik Signature: /s/ Patrick C. Morgan
Printed Name: Emad Zureik Printed Name: Patrick C. Morgan
Title: SALES CONTROLLER Title: President
Date: 11-23-99 Date: 11-11-99
<PAGE>
APPENDIX A
See attached price list
<PAGE>
3Com Voice Solutions VAR Channel Price List
<TABLE>
<CAPTION>
3COM VOICE SOLUTIONS PRODUCTS GROUP
3Com Voice Solutions VAR Channel Price List
<S> <C> <C> <C> <C> <C>
Estimated
3Com 3C Old NBX Product Name Product Discription "Steet" Pice VAR Price
Part Part No.
No.
- ------- --------- ----------------- -------------------- ------------- ------------
3C1O110 700-0002-01 NBX Call Processor [Description] $800.00 $ 545.00
- -------- ----------- ------------------- ------------------- -------------- ----------
3C1O111 720-0001-01 NBX Chassis-APX30M/4 [Description] $700.00 $ 440.65
- --------- ----------- ------------------- ------------------ -------------- -----------
3C10112 720-0002-01 NBX Chassis-APX20H/6 [Description] $3,000.00 $ 1,500.00
3C1O113 720-0003-01 NBX Chassis-APX80H/12 [Description] $7,900.00 $ 3,900.00
3C1O114 700-0003-01 NBX Analog Line Card [Description] $1,100.00 $ 695.00
3C1O115 700-0004-01 NBX10base-T Hub Card [Description] $400.00 $ 250.00
3C1O118 730-0002-01 NBX T1 Bundle Promotion [Description] $4,500.00 $ 3,000.00
3C10121 700-0011-01 NBX Business Phone (Black) [Description] $ 349.00 $ 235.00
3C10122 700-0012-01 NBX Business Phone (White) [Description] $ 349.00 $ 235.00
3C10123 700-0006-01 NBX DSS/BLF Adjunct(Black) [Description] $ 379.00 $ 250.00
3C1O124 700-0007-01 NBX DSS/BLF ADJUNCT (White) [Description] $ 379.00 $ 250.00
3C10125 700-0027-01 NBX POWER ADAPTER [Description] $ 60.00 $ 40.00
3CIO131 700-0028-01 NBX IP Serve Site License [Description] $2,000.00 $ 1,200.00
3C10132 700-0029-01 NBX IP On-The-Fly Site [Description] $2,500.00 $ 1,500.00
License
3C10133 920-0016-01 IP On-The-Fly upgrade [Description] $ 600.00 $ 400.00
from IP Serve
3C1O134 920-0004-01 APX UPGRADE TO 20H/ 6P [Description] $2,500.00 $ 1,500.00
from 30M/ 4P
3C10135 920-0003-01 APX Upgrade to 8OW12P [Description] $7,100.00 $ 4,260.00
from 30M/4P
3C10136 920-0002-01 APX Upgrade to 80H/ [Description] $4,200.00 $ 2,520.00
12P from 20H/ 6P
3C10141 7OG-0030-01 NBX ConneXtions 2- [Description] $1,700.00 $ 1,000.00
Port License
3C1O142 700-0031-01 NBX ConneXtions 4- [Description] $3,400.00 $ 2,000.00
Port License
3C10143 700-0033-01 NBX ConneXtions 8- [Description] $6,800.00 $ 4,000.00
Port License
3C1O144 700-0037-01 NBX ConneXtions 16- [Description] $13,600.00 $ 8.000.00
Port License
3C1O151 700-0056-01 NBX pcXset 3 user [Description] $ 500.00 $ 300.00
license
3C10152 700-0057-01 NBX pcXset 10 user [Description] $1,500.00 $ 900.00
license
3C1O153 700-0058-01 NBX pcXset 25 user [Description] $3,400.00 $ 2,000.00
license
3C10154 7O0-0059-01 NBX pcXset unlimited [Description] $6,000.00 $ 3,500.00
users license
PENDING 655-0038-01 NBX R1.1 RESOURCE [Description] $ 30.00 $ 30.00
UPGRADE KIT
</TABLE>
<PAGE>
APPENDIX B
TERRITORY
Territory: Houston, TX and surrounding areas
Reseller is hereby expressly prohibited from publishing any pricing for the 3Com
Product on the World Wide Web.
<PAGE>
APPENDIX C
See Attached End User Agreement
<PAGE>
IMPORTANT: READ BEFORE USING THIS PRODUCT.
3COM END USER SOFTWARE LICENSE AGREEMENT
TERMS AND CONDITIONS AND LIMITED WARRANTY
READ THE TERMS AND CONDITIONS OF THIS AGREEMENT CAREFULLY BEFORE USING THE 3Com
PRODUCT ACCOMPANYING THIS AGREEMENT (THE "PRODUCT"). BY USING THE PRODUCT YOU
ARE ACCEPTING AND AGREEING TO BE BOUND BY THIS AGREEMENT. IF YOU ARE NOT WILLING
TO BE BOUND BY THE TERMS OF THIS AGREEMENT, YOU SHOULD PROMPTLY RETURN THE
UNUSED PRODUCT AND PACKAGING TO THE DEALER THAT SOLD THE PRODUCT TO YOU, AND YOU
WILL RECEIVE A REFUND OF THE PURCHASE PRICE. THIS AGREEMENT REPRESENTS THE
ENTIRE AGREEMENT CONCERNING THE PRODUCT BETWEEN YOU AND 3Com CORPORATION 3Com
AND IT SUPERSEDES ANY PRIOR PROPOSAL, REPRESENTATION, OR UNDERSTANDING
CONCERNING THE PRODUCT BETWEEN YOU AND 3Com.
3Com AND YOU, THE PURCHASER, AGREE THAT THE FOLLOWING TERMS AND CONDITIONS
(SOMETIMES REFERRED TO HEREIN AS THIS "AGREEMENT") SHALL GOVERN YOUR PURCHASE OF
THE PRODUCT FROM AN AUTHORIZED 3Com DEALER. THE TERM "PRODUCT" INCLUDES (I) THE
EQUIPMENT ACCOMPANYING THESE TERMS AND CONDITIONS AND (II) THE SOFTWARE INCLUDED
IN SUCH EQUIPMENT OR OTHERWISE FURNISHED TO YOU IN CONNECTION WITH YOUR PURCHASE
AND/OR USE OF SUCH EQUIPMENT (THE "SOFTWARE). THIS AGREEMENT COVERS PRODUCTS FOR
USE ONLY IN THE UNITED STATES AND CANADA.
1. Software License.
------------------
(a) License Giant.SUBJECT TO the terms and conditions contained herein, 3Com
--------------
grants you a personal, non-transferable and non-exclusive license to use the
Software, in object code form only, for your internal business needs on a single
Product in accordance with the accompanying system documentation (the
'Documentation'). This license grant shall be limited to use with the equipment
for which the Software was obtained, or, on a temporary basis, on back-up
equipment when the original equipment is inoperable. Use of the Software on
multiple processors is prohibited unless otherwise agreed to in writing by 3Com.
(b) Restrictions.Except as expressly authorized by this Agreement or under
-------------
applicable law, you are not permitted to copy or use the Software in any manner.
Without limiting the generality of the foregoing, you agree that you will riot
do any of the following: (i) decompile, reverse engineer, disassemble, or
otherwise reduce the Software to a human-perceivable form; (ii) transfer the
Software from one computer to another, including other servers and/or other
storage devices; (iii) transfer the Software to any other party, except when
transferring it with the Product in accordance with the terms of this Agreement
or (iv) modify, adapt, translate, rent, sublicense, lease, loan, resell for
profit, distribute, network or create derivative works based upon the Software
or any part thereof.
Ownership of Software.Title to and ownership of the Software shall remain
------------------------
with 3Com and its suppliers. This license is not a sale of the Software or any
copy.
(d) Third Party Applications.Any third party supplier of computer programs
---------------------------
included in the Software is a third party beneficiary of the provisions of this
Section 1. and such third party may protect its rights in the Software against
violations of this license.
(e) ConfidentialYou agree to maintain the Software in confidence and to not
------------
disclose the Software to any third party without the express written consent of
3Com. You further agree to take all reasonable precautions to preclude access of
unauthorized persons to the Software.
(f) Termination3Com may terminate this Section I and the licenses granted
-----------
hereby upon the breach by you of any the provisions of this Section 1. Upon such
termination, you agree to return the Product, including the Software and all
copies and portions thereof, to 3Com.
2. Limited Warranty.If the Product does not operate in accordance with
------------------
3Com's standard specifications or Documentation during the Warranty Period, you
must promptly notify the authorized 3Com dealer from whom you purchased the
Product. You must provide your authorized 3Com dealer with proof of purchase
price and dated invoice. During the Warranty Period, upon being contacted, your
authorized 3Com dealer (or another authorized 3Com dealer designated by 3Com)
will, at its option, either repair or replace the Product, provided it is
delivered at your expense to an authorized 3Com service facility designated by
3Com or your authorized 3Com dealer. Your authorized 3Com dealer (or another
authorized 3Com dealer designated by 3Com) will provide you with a replacement
Product if either the NCP (Network Call Processor) Card fails and/or If 25% of
the system (lines and/or stations) becomes inoperable at ANY TIME DURING THE
Warranty Period. You have the right as your exclusive remedy to return the
Product to your authorized 3Com dealer (or another authorized 3Com dealer
designated by 3Com) for a refund of the purchase price from such authorized 3Com
dealer if such authorized 3Com dealer is unable to repair or replace the Product
pursuant to the terms of this warranty. You shall bear all shipping, packing,
and insurance costs and all other costs, excluding labor and parts, necessary to
effectuate repair, replacement or refund under this warranty.
The "Warranty Period" shall commence on the date that the Product was purchased
by the authorized 3Com dealer from whom you purchased the Product and shall
expire on the second anniversary thereof. At the time of purchase, your
authorized 3Com dealer will notify you in writing of the commencement date and
the expiration date of the Warranty Period.
Purchased or replacement parts and products may be new, remanufactured or
refurbished. Any removed parts and/or Products shall become the property of
3Com.
Coverage under this warranty program shall require the authorized 3Com dealer to
contact the 3Com Customer Service Department to generate a Return Merchandise
Authorization (RMA) Number for any Product(s) the 3Com Service Representative
deems defective.
3. Warranty Exclusions.EXCEPT AS STATED IN SECTION 2 HEREOf, 3Com AND ITS
---------------------
AFFILIATES, DISTRIBUTORS, DEALERS AND SUPPLIERS, MAKE NO WARRANTIES, EXPRESS OR
IMPLIED, AND TO THE EXTENT PERM17TED BY APPLICABLE LAW. 3Com DISCLAIMS ALL OTHER
WARRANTIES WHETHER EXPRESS OR IMPLIED, INCLUDING ANY IMPLIED WARRANTIES OF
MERCHANTABILITY, TITLE, FITNESS FOR A PARTICULAR PURPOSE AND NON4NFRIINGEMENT,
IF IMPLIED WARRANTIES MAY NOT BE DISCLAIMED UNDER APPLICABLE LAW, THEN ANY
IMPLIED WARRANTIES ARE LIMITED IN DURATION TO 90 (NINETY) DAYS AFTER DELIVERY OF
THE PRODUCT TO YOU. SOME STATES DO NOT ALLOW LIMITATIONS ON HOW LONG AN IMPLIED
WARRANTY LASTS SO THE ABOVE LIMITATION MAY NOT APPLY TO YOU. THIS WARRANTY GIVES
YOU SPECIFIC LEGAL RIGHTS, AND YOU MAY HAVE OTHER RIGHTS WHICH VARY FROM STATE
TO STATE.
THE WARRANTY SET FORTH IN SECTION 2 HEREOF, DOES NOT EXTEND TO ANY PRODUCT,
WHICH HAS BEEN DAMAGED AS A RESULT OF (1) ACCIDENT, MISUSE OR ABUSE; (2) YOUR
FAILURE TO FOLLOW 3Com'S INSTALLATION, OPERATION OR MAINTENANCE INSTRUCTIONS; OR
(3) UNAUTHORIZED SERVICE OR PARTS.
4. Post-Warranty Service.3Com, highly recommends purchasing an extended
-----------------------
warranty for all 3Com Products to significantly reduce unexpected repair costs
after the Warranty Period. You can purchase a post-warranty service contract
from your authorized 3Com dealer Please contact your authorized 3Com dealer for
post-warranty service on all 3Com Products.
5. Infringement.3Com shall defend you, at 3Com's expense, from and against any
-------------
claim brought by a third party alleging that the Product infringes any: (i)
United States patent issued on or before the commencement date of the Warranty
Period; (ii) United States trademark issued on or before the commencement date
of the Warranty Period; (iii) copyright, or (iv) trade secret, and shall
indemnify you against all damages and costs assessed against you that are
payable as part of a final judgment or settlement. The indemnification
obligation of this Section 5 shall not apply to any claim arising out of (i) the
combination of the Product with other products not claimed to be owned or
developed by or on behalf of 3Com; (ii) the modification of the Product, or any
part thereof, unless such modification was made by or on behalf of 3Com; (iii)
any software or other technology not claimed to be owned by 3Com; or (iv) any
infringement caused by your action.
if you seek indemnification pursuant to this Section 5 from or against the
assertion of any claim by a third person (a *Third Person Assertion'). you shall
give prompt notice to 3Com. Within twenty (20) business days of receipt of
notice from you pursuant to this Section 5, 3Com shall have the right
exercisable by written notice to you, to assume the defense of a Third Person
Assertion. If 3Com assumes such defense, 3Com may select counsel. If 3Com
controls the defense of a Third Person Assertion, 3Com shall have the right to
consent to the entry of judgment with respect to, or otherwise settle, such
Third Person Assertion with your prior written consent, which consent shall not
be unreasonably withheld. You shall reasonably cooperate in the defense of any
Third Person Assertion.
6. Exclusive Remedies and Limitations of Liability,THE ENTIRE LIABILITY OF
--------------------------------------------------
3Com AND ITS AFFILIATES, DISTRIBUTORS, DEALERS AND SUPPLIERS (AND THE DIRECTORS,
OFFICERS, EMPLOYEES, AGENTS AND AFFILIATES OF ALL OF THEM) AND YOUR EXCLUSIVE
REMEDIES FOR ANY DAMAGES SHALL BE (1) FOR FAILURE OF PRODUCTS DURING THE
WARRANTY PERIOD, THE REMEDIES STATED IN SECTION 2 HEREOF: (2) FOR INFRINGEMENT,
THE REMEDIES STATED IN SECTION 5 HEREOF; AND (3) FOR CLAIMS OTHER THAN SET FORTH
ABOVE, 3Com LIABILITY SHALL BE LIMITED TO PROVEN DIRECT DAMAGES IN AN AMOUNT NOT
TO EXCEED THE ORIGINAL DISCOUNTED PURCHASE PRICE OF THE PRODUCT.
3Com SHALL IN NO EVENT BE LIABLE FOR THE FOLLOWING TYPES OF DAMAGES: (1)
INCIDENTAL DAMAGES; (2) SPECIAL OR CONSEQUENTIAL DAMAGES; (3) LOST PROFITS,
SAVINGS OR REVENUES OF ANY KIND, INCLUDING WITHOUT LIMITATION LOSS OF DATA,
MESSAGES, OR TELEPHONE CALLS, AND (4) CHARGES FOR COMMON CARRIER
TELECOMMUNICATIONS SERVICES OR FACILITIES ACCESSED THROUGH OR CONNECTED TO
PRODUCTS. TO THE EXTENT PERMITTED BY LAW. SUCH DAMAGES ARE HEREBY EXCLUDED BOTH
FOR PROPERTY DAMAGE, AND TO THE EXTENT NOT UNCONSCIONABLE, FOR PERSONAL INJURY
DAMAGE.
THE FOREGOING LIMITATIONS OF LIABILITY SHALL APPLY REGARDLESS OF THE CAUSE OF
ACTION UNDER WHICH SUCH DAMAGES ARE SOUGHT.
SOME STATES DO NOT ALLOW THE EXCLUSION OR LIMITATION OF INCIDENTAL OR
CONSEQUENTIAL DAMAGES, SO THE ABOVE LIMITATION OR EXCLUSION MAY NOT APPLY TO
YOU.
7. Third Party Products.The decision to acquire hardware, software (in any
-----------------------
form), supplies or service (other than the Product accompanying this Agreement)
from parties other than 3Com (*Third Party Products") is yours, even if 3Com
helps you identify~ evaluate or select them. EXCEPT AS SPECIFICALLY AGREED TO IN
WRITING, 3Com IS NOT RESPONSIBLE FOR, AND EXPRESSLY DISCLAIMS LIABILITY FOR,
PERFORMANCE OR QUALITY OF THIRD PARTY PRODUCTS OR THEIR SUPPLIERS; arty claim
that you have in connection with the Third Party Products and ANY REMEDIES FOR
such claim will be against the supplier of such Third Party Products.
8. AssignmentYou may not assign this Agreement (including the licenses
----------
granted hereby), either in whole or in part, whether by operation of law or
otherwise, without the prior written consent of 3Corn. Any attempt to assign
your rights, duties or obligations under this Agreement without such consent
shall be null and void. Subject to the foregoing, the rights and liabilities of
the parties under this Agreement will bind and inure to the benefit of the
parties' respective successors and permitted assigns.
9. General.You acknowledge that you have read this Agreement, understand it,
--------
and that by using the Product you agree to be bound by the terms and conditions
of this Agreement. You assume full responsibility for the use of the Software
and agree to use the Software legally and responsibly. This Agreement shall be
governed by the substantive laws of the State of California, without regard to
conflicts of law principles, except as to copyright matters, which are governed,
by federal law. This Agreement is deemed entered into, by both parties, in Santa
Clara, California. In the event that any provision of this Agreement shall be
held by a court or other tribunal of competent jurisdiction to be unenforceable,
such provision shall be enforced to the maximum extent permissible and the
remaining provisions of this Agreement shall remain in full force and effect.
All rights in the Software not specifically granted in this Agreement are
reserved by 3Com, and, except for the express licenses granted herein, no other
licenses are granted by 3Com by implication, estoppel or otherwise. You agree
not to export the Product, without the express written consent of 3Com.
<PAGE>
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, NOR ANY OTHER SECURITIES ACT, BY
ACCEPTING THE WARRANTS EVIDENCED BY THIS CERTIFICATE ALL SHARES OF
STOCK ARE ACQUIRED FOR INVESTMENT ONLY AND MAY NOT BE SOLD OR
TRANSFERRED FOR VALUE IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION
UNDER APPLICABLE SECURITIES LAWS AND ACTS OR AN EXEMPTION THEREOF.
BY ACCEPTING THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE THE
SHAREHOLDER HEREOF AGREES TO BE BOUND BY THE RESTRICTIONS IMPOSED
BY LAW.
"A"
WARRANT
For the Purchase of Common Stock, Par Value $.0001 per Share, of
LAKOTA ENERGY, INC.
(Incorporated Under the Laws of the State of Colorado)
Void after 5:00 P.M. October 23,1999
Warrant to Purchase 200,000 Shares
THIS IS TO CERTIFY that, for value received, Jeffrey A. Runner and Sally D.
Runner, JTWROS, ("Underwriter), or registered assigns, is
entitled, subject to the terms and conditions hereinafter set forth, at any
time before 5:00 P.M., eastern time, on October 23, 1999, but not
thereafter, to purchase the number of shares set forth above ("Shares")
of common stock, par value $1.00 per share at time Warrant
was granted and subsequently amended to $.0001 par value per share ("Common
Stock"), of Lakota Energy, Inc., a Colorado corporation ("Company" or
"Corporation"), from the Company upon payment to the Company of $.10 per
share ("Purchase Price") if and to the extent this Warrant is exercised, in
whole or in part, during, the Period this Warrant remains in force and to
receive a certificate or certificates represented (the Shares so
purchased, upon presentation and surrender to the Company of this Warrant,
with the form of subscription attached hereto duly executed, and accompanied
by payment of the Purchase price of each Share purchased
ARTICLE I
TERMS OF THE WARRANT
Section.1.01. Subject to the provisions of this agreement, this Warrant
maybe exercised at any time after 9:00 A.M., eastern time on October 23,
1998 ("Exercise Commencement Date"), but no later than 5:00 P.M., eastern
time, on October 23, 1999 ("Expiration Time"). If this Warrant is not
exercised on, or before the Expiration Time it shall become void, and
<PAGE>
all rights hereunder shall thereupon cease.
<PAGE>
Section 1.02. (1) The holder of this Warrant ("Holder") may exercise this
Warrant, in whole or in part, upon surrender of this Warrant with the form
of exercise attached hereto as Exhibit "A" duly executed to the Company at
its office in Atlanta, Georgia, together with the full Purchase Price of
$.10 for each Share to be purchased in lawful money of the United States, or
by certified check, bank draft, or postal or, express money order payable in
United States dollars to the order of the Company, and upon compliance with
and subject to the conditions set forth herein.
(2) Upon receipt of this Warrant with the Exhibit "A" form of exercise duly
executed and accompanied by payment of the aggregate Purchase Price for the
Shares for which this Warrant is then being exercised, the Company shall
cause to be issued certificates for the total number of whole Shares for
which this Warrant is being exercised in such denominations as are required
for delivery to the Holder, and the Company shall thereupon deliver such
certificates to the Holder or its nominee.
(3) In case the Holder shall exercise this Warrant with respect to less than
all of the Shares that may be purchased under this Warrant, the Company
shall execute a new Warrant for the balance of the Shares that may be
purchased upon exercise of this Warrant and deliver such new Warrant to the
Holder.
(4) The Company, covenants and agrees that it will pay when due and payable
any and all of the Company's taxes which may be payable in respect of the
issue of this Warrant or the issue of any Shares upon the exercise of this
Warrant. The Company shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issuance or
delivery of this Warrant or of the Shares in a name other than that
of the Holder at the time of surrender, and until the payment of such
tax the Company shall not be required to issue such Shares.
Section 1.03. Prior to due presentment for registration of transfer of this
Warrant the Company may deem and treat the Holder as the absolute owner of
this Warrant (notwithstanding any notation of ownership or other writing
hereon) for the purpose of any exercise hereof and for all other purposes,
and the Company shall not be affected by any notice to the contrary.
Section 1.04. Except per Article II, this Warrant may not be sold,
hypothecated, exercised, assigned oi transferred, except to individuals who
are of officers of the Company per Article II or any successor to its
business or pursuant to the laws of descent and distribution, and thereafter
<PAGE>
and until its expiration shall be assignable and transferable in accordance
with and subject to the Securities Act of 1933 and all other Federal and
State Securities laws.
Section 1.05. Nothing contained in this Warrant shall be construed as
conferring upon the Holder the right to vote or to consent or to receive
notice as a stockholder in respect of any meetings of stockholders for the
election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company.
<PAGE>
Section 1.06. If this Warrant is lost, stolen, mutilated or destroyed, the
Company shall, on such reasonable terms as to indemnity or otherwise as it
may impose (which shall, in the case of a mutilated Warrant, include the
surrender thereto, issue a new Warrant of like denomination and tenor as,
and in substitution for, this Warrant, which shall thereupon become void.
Any such new Warrant shall constitute an additional contractual obligation
of the Company.
Section 1.07, (1) The Company covenants and agrees that at all times it
shall reserve and keep available for the exercise hereof sufficient
authorized Shares to permit the exercise in full of this Warrant.
(2) Prior to the issuance of any Shares upon exercise of this Warrant, the
Company may, but not required, to secure the listing of such Shares upon any
securities exchange or automated quotation system upon which the shares of
the Company's Common Stock are listed for trading.
(3) The company covenants that all Shares when issued upon the exercise of
this Warrant will be validly issued, fully paid, and non-assessable.
ARTICLE II
COMPANY'S RIGHT TO CALL WARRANT
Section 2.01. (1) By resolution of its Board of Directors, the Corporation
may call this warrant at any time and from time to time on, or after
October 23, 1998, in whole or in part, by paying to the registered owner
or owners hereof the sum of $.0001 per share.
(2) The Corporation shall give notice of its election to call this Warrant
by mailing a copy of such notice, postage prepaid, to the registered owner
or owners hereof, not less than 30 or more than 90 days prior to the date
designated as the date for the call, addressed to their respective addresses
appearing on the books of the Corporation. Failure to give notice, or any
defect in a notice or in the mailing thereof, will not affect the validity
<PAGE>
of the call.
(3) If only a portion of the warrants of the same tenor as this Warrant then
outstanding is to be called at a given time, the Corporation shall select
the warrants to be called in whatever manner the Board of Directors of the
Corporation determines. Subject to the provisions and limitations contained
herein, the Board of Directors shall have full power and authority to
prescribe the manner in which the terms and conditions upon which this
Warrant shall from time to time be callable.
(4) On and after the date of call specified in the notice, the owner or
owners of this Warrant shall be entitled to receive the call price of $.0001
per share, upon presentation and surrender of this Warrant at the place
designated in the notice. If called the registered owners agree to execute
all documents required by the Corporation to transfer the warrants to the
Corporation.
<PAGE>
(5) From and after the date of call specified in the notice (unless the
Corporation defaults in providing money for the payment of the call price),
all rights of the holder or holders hereof as a warrant holder in the
Corporation shall cease, except for the right to receive the call price
hereof without interest and this Warrant shall be available for sale,
transfer and/or issuance of stock by the Company.
ARTICLE III
REGISTRATION UNDER THE SECURITIES ACT OF 1933
Section 3.0 1. This Warrant and the Shares of Common Stock issuable upon
exercise of this Warrant have not been registered under the Securities Act
of 1933, nor any other securities act. Upon exercise, in part of in whole,
of this Warrant, the Shares shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, NOR ANY OTHER SECURITIES ACT, BY ACCEPTING
THE WARRANTS EVIDENCED BY THIS CERTIFICATE ALL SHARES OF STOCK ARE
ACQUIRED FOR INVESTMENT ONLY AND MAY NOT BE SOLD OR TRANSFERRED FOR
VALUE IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION UNDER APPLICABLE
SECURITIES LAWS AND ACTS OR AN EXEMPTION THEREOF, BY ACCEPTING THE
SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE THE SHAREHOLDER HEREOF
AGREES TO BE BOUND BY THE RESTRICTIONS IMPOSED BY LAW.
<PAGE>
ARTICLE IV
OTHER MATTERS
Section 4.01. All the covenants and provisions of this Warrant by or for
the benefit of the Company shall bind and inure to the benefit of its
successors and assigns hereunder.
Section 4.02. The validity, interpretation and performance of this Warrant
shall be governed by the laws of the State of Colorado.
Section 4.03. Notices or demands pursuant to this Warrant to be given or
made by the Holder to or on the Company shall be sufficiently given or made
if sent by certified or registered mail, return receipt requested, postage
prepaid, and addressed, until another address is designated in writing by
the Company, as follows:
Lakota Energy, Inc.
2849 Paces Ferry Road, Suite 710
Atlanta, GA 30339
<PAGE>
Notices to the Holder provided for in this Warrant shall be deemed given or
made by the Company if sent by certified or registered mail, return receipt
requested, postage prepaid, and addressed to the Holder at his last known
address as it shall appear on the books of the Company.
Section 4.04. Nothing in this Warrant expressed and nothing that may be
implied from any of the provisions hereof is intended, or shall be
construed, to confer upon, or give to, any person or corporation other than
the Company and the Holder any right, remedy or claim under promise or
agreement hereof, and all covenants, conditions, stipulations, promises and
agreements combined in this Warrant shall be for the sole and exclusive
benefit of the Company and its successors and of the Holder, its successors
and, if permitted, its assignees.
Section 4.05. The Article headings herein are for convenience only and are
not part of this Warrant and shall not affect the interpretation thereof.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company under
its corporate seal as of the 23rd day of October, 1998.
LAKOTA ENERGY, INC.
By: /s/Howard Wilson By: /s/Ken Honeyman
Secretary President
<PAGE>
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED
UNDER THE SECURITIES ACT OF 1933, NOR ANY OTHER SECURITIES ACT, BY
ACCEPTING THE WARRANTS EVIDENCED BY THIS CERTIFICATE ALL SHARES OF
STOCK ARE ACQUIRED FOR INVESTMENT ONLY AND MAY NOT BE SOLD OR
TRANSFERRED FOR VALUE IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION
UNDER APPLICABLE SECURITIES LAWS AND ACTS OR AN EXEMPTION THEREOF.
BY ACCEPTING THE SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE THE
SHAREHOLDER HEREOF AGREES TO BE BOUND BY THE RESTRICTIONS IMPOSED
BY LAW.
"A"
WARRANT
For the Purchase of Common Stock, Par Value $.0001 per Share, of
LAKOTA ENERGY, INC.
(Incorporated Under the Laws of the State of Colorado)
Void after 5:00 P.M. October 29,1999
Warrant to Purchase 200,000 Shares
THIS IS TO CERTIFY that, for value received, Jeffrey A. Runner and Sally D.
Runner, JTWROS, ("Underwriter), or registered assigns, is
entitled, subject to the terms and conditions hereinafter set forth, at any
time before 5:00 P.M., eastern time, on October 29, 1999, but not
thereafter, to purchase the number of shares set forth above ("Shares")
of common stock, par value $1.00 per share at time Warrant
was granted and subsequently amended to $.0001 par value per share ("Common
Stock"), of Lakota Energy, Inc., a Colorado corporation ("Company" or
"Corporation"), from the Company upon payment to the Company of $.10 per
share ("Purchase Price") if and to the extent this Warrant is exercised, in
whole or in part, during, the Period this Warrant remains in force and to
receive a certificate or certificates represented (the Shares so
purchased, upon presentation and surrender to the Company of this Warrant,
with the form of subscription attached hereto duly executed, and accompanied
by payment of the Purchase price of each Share purchased
ARTICLE I
TERMS OF THE WARRANT
Section.1.01. Subject to the provisions of this agreement, this Warrant
maybe exercised at any time after 9:00 A.M., eastern time on October 29,
1998 ("Exercise Commencement Date"), but no later than 5:00 P.M., eastern
time, on October 29, 1999 ("Expiration Time"). If this Warrant is not
exercised on, or before the Expiration Time it shall become void, and
<PAGE>
all rights hereunder shall thereupon cease.
<PAGE>
Section 1.02. (1) The holder of this Warrant ("Holder") may exercise this
Warrant, in whole or in part, upon surrender of this Warrant with the form
of exercise attached hereto as Exhibit "A" duly executed to the Company at
its office in Atlanta, Georgia, together with the full Purchase Price of
$.10 for each Share to be purchased in lawful money of the United States, or
by certified check, bank draft, or postal or, express money order payable in
United States dollars to the order of the Company, and upon compliance with
and subject to the conditions set forth herein.
(2) Upon receipt of this Warrant with the Exhibit "A" form of exercise duly
executed and accompanied by payment of the aggregate Purchase Price for the
Shares for which this Warrant is then being exercised, the Company shall
cause to be issued certificates for the total number of whole Shares for
which this Warrant is being exercised in such denominations as are required
for delivery to the Holder, and the Company shall thereupon deliver such
certificates to the Holder or its nominee.
(3) In case the Holder shall exercise this Warrant with respect to less than
all of the Shares that may be purchased under this Warrant, the Company
shall execute a new Warrant for the balance of the Shares that may be
purchased upon exercise of this Warrant and deliver such new Warrant to the
Holder.
(4) The Company, covenants and agrees that it will pay when due and payable
any and all of the Company's taxes which may be payable in respect of the
issue of this Warrant or the issue of any Shares upon the exercise of this
Warrant. The Company shall not, however, be required to pay any tax which
may be payable in respect of any transfer involved in the issuance or
delivery of this Warrant or of the Shares in a name other than that
of the Holder at the time of surrender, and until the payment of such
tax the Company shall not be required to issue such Shares.
Section 1.03. Prior to due presentment for registration of transfer of this
Warrant the Company may deem and treat the Holder as the absolute owner of
this Warrant (notwithstanding any notation of ownership or other writing
hereon) for the purpose of any exercise hereof and for all other purposes,
and the Company shall not be affected by any notice to the contrary.
Section 1.04. Except per Article II, this Warrant may not be sold,
hypothecated, exercised, assigned oi transferred, except to individuals who
are of officers of the Company per Article II or any successor to its
business or pursuant to the laws of descent and distribution, and thereafter
<PAGE>
and until its expiration shall be assignable and transferable in accordance
with and subject to the Securities Act of 1933 and all other Federal and
State Securities laws.
Section 1.05. Nothing contained in this Warrant shall be construed as
conferring upon the Holder the right to vote or to consent or to receive
notice as a stockholder in respect of any meetings of stockholders for the
election of directors or any other matter, or as having any rights
whatsoever as a stockholder of the Company.
<PAGE>
Section 1.06. If this Warrant is lost, stolen, mutilated or destroyed, the
Company shall, on such reasonable terms as to indemnity or otherwise as it
may impose (which shall, in the case of a mutilated Warrant, include the
surrender thereto, issue a new Warrant of like denomination and tenor as,
and in substitution for, this Warrant, which shall thereupon become void.
Any such new Warrant shall constitute an additional contractual obligation
of the Company.
Section 1.07, (1) The Company covenants and agrees that at all times it
shall reserve and keep available for the exercise hereof sufficient
authorized Shares to permit the exercise in full of this Warrant.
(2) Prior to the issuance of any Shares upon exercise of this Warrant, the
Company may, but not required, to secure the listing of such Shares upon any
securities exchange or automated quotation system upon which the shares of
the Company's Common Stock are listed for trading.
(3) The company covenants that all Shares when issued upon the exercise of
this Warrant will be validly issued, fully paid, and non-assessable.
ARTICLE II
COMPANY'S RIGHT TO CALL WARRANT
Section 2.01. (1) By resolution of its Board of Directors, the Corporation
may call this warrant at any time and from time to time on, or after
October 29, 1998, in whole or in part, by paying to the registered owner
or owners hereof the sum of $.0001 per share.
(2) The Corporation shall give notice of its election to call this Warrant
by mailing a copy of such notice, postage prepaid, to the registered owner
or owners hereof, not less than 30 or more than 90 days prior to the date
designated as the date for the call, addressed to their respective addresses
appearing on the books of the Corporation. Failure to give notice, or any
defect in a notice or in the mailing thereof, will not affect the validity
<PAGE>
of the call.
(3) If only a portion of the warrants of the same tenor as this Warrant then
outstanding is to be called at a given time, the Corporation shall select
the warrants to be called in whatever manner the Board of Directors of the
Corporation determines. Subject to the provisions and limitations contained
herein, the Board of Directors shall have full power and authority to
prescribe the manner in which the terms and conditions upon which this
Warrant shall from time to time be callable.
(4) On and after the date of call specified in the notice, the owner or
owners of this Warrant shall be entitled to receive the call price of $.0001
per share, upon presentation and surrender of this Warrant at the place
designated in the notice. If called the registered owners agree to execute
all documents required by the Corporation to transfer the warrants to the
Corporation.
<PAGE>
(5) From and after the date of call specified in the notice (unless the
Corporation defaults in providing money for the payment of the call price),
all rights of the holder or holders hereof as a warrant holder in the
Corporation shall cease, except for the right to receive the call price
hereof without interest and this Warrant shall be available for sale,
transfer and/or issuance of stock by the Company.
ARTICLE III
REGISTRATION UNDER THE SECURITIES ACT OF 1933
Section 3.0 1. This Warrant and the Shares of Common Stock issuable upon
exercise of this Warrant have not been registered under the Securities Act
of 1933, nor any other securities act. Upon exercise, in part of in whole,
of this Warrant, the Shares shall bear the following legend:
THE SHARES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN REGISTERED UNDER
THE SECURITIES ACT OF 1933, NOR ANY OTHER SECURITIES ACT, BY ACCEPTING
THE WARRANTS EVIDENCED BY THIS CERTIFICATE ALL SHARES OF STOCK ARE
ACQUIRED FOR INVESTMENT ONLY AND MAY NOT BE SOLD OR TRANSFERRED FOR
VALUE IN THE ABSENCE OF ANY EFFECTIVE REGISTRATION UNDER APPLICABLE
SECURITIES LAWS AND ACTS OR AN EXEMPTION THEREOF, BY ACCEPTING THE
SHARES OF STOCK EVIDENCED BY THIS CERTIFICATE THE SHAREHOLDER HEREOF
AGREES TO BE BOUND BY THE RESTRICTIONS IMPOSED BY LAW.
<PAGE>
ARTICLE IV
OTHER MATTERS
Section 4.01. All the covenants and provisions of this Warrant by or for
the benefit of the Company shall bind and inure to the benefit of its
successors and assigns hereunder.
Section 4.02. The validity, interpretation and performance of this Warrant
shall be governed by the laws of the State of Colorado.
Section 4.03. Notices or demands pursuant to this Warrant to be given or
made by the Holder to or on the Company shall be sufficiently given or made
if sent by certified or registered mail, return receipt requested, postage
prepaid, and addressed, until another address is designated in writing by
the Company, as follows:
Lakota Energy, Inc.
2849 Paces Ferry Road, Suite 710
Atlanta, GA 30339
<PAGE>
Notices to the Holder provided for in this Warrant shall be deemed given or
made by the Company if sent by certified or registered mail, return receipt
requested, postage prepaid, and addressed to the Holder at his last known
address as it shall appear on the books of the Company.
Section 4.04. Nothing in this Warrant expressed and nothing that may be
implied from any of the provisions hereof is intended, or shall be
construed, to confer upon, or give to, any person or corporation other than
the Company and the Holder any right, remedy or claim under promise or
agreement hereof, and all covenants, conditions, stipulations, promises and
agreements combined in this Warrant shall be for the sole and exclusive
benefit of the Company and its successors and of the Holder, its successors
and, if permitted, its assignees.
Section 4.05. The Article headings herein are for convenience only and are
not part of this Warrant and shall not affect the interpretation thereof.
IN WITNESS WHEREOF, this Warrant has been duly executed by the Company under
its corporate seal as of the 29th day of October, 1998.
LAKOTA ENERGY, INC.
By: /s/Howard Wilson By: /s/Ken Honeyman
Secretary President
<PAGE>
CONSENT OF INDEPENDENT AUDITORS'
--------------------------------
We hereby consent to the use of our audit report dated September 15, 1999 in
this Form SB-2A of Lakota Technologies, Inc. for the year ended December 31,
1998, which is part of this Form SB-2A and all references to our firm included
in this Form SB-2A.
/s/ Jones, Jensen & Company
Jones, Jensen & Company
Salt Lake City, Utah
December 6, 1999
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