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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-KSB
[ X ] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended May 31, 1997
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from _____________ to ____________
Commission file number 2-73871
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ADAIR INTERNATIONAL OIL AND GAS, INC.
(Name of Small Business Issuer in Its Charter)
Texas 74-2142545
State or other jurisdiction of (I.R.S. Employer
incorporation or organization Identification No.)
P.O. Box 22658
Houston, TX 77227-2658
(Address of principal executive offices) (Zip Code)
ISSUER'S TELEPHONE NUMBER (713) 621-8241
Securities registered under Section 12(b) of the Exchange Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
[ ] Yes [ X ] No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-B is not contained herein, and will not be contained, to the
best of Registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB
[ ]
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The Registrant's revenues for its fiscal year ended May 31, 1997 were $928,450
which included forgiveness of debt income of $722,530.
State the aggregate market value of the voting and non-voting common equity
held by non-affiliates computed by reference to the price at which the common
equity was sold, or the average bid and asked prices of such common equity, as
of a specified date within the past 60 days.
$879,379 as of May 31, 1997. There was no active trading market for
the shares. To calculate market value, the Company used the value utilized in
a recent acquisition of assets. To arrive at shares held by non-affiliates,
the Company excluded shares held of record by executive officers, directors and
holders of more than 5% of the outstanding shares.
Indicate the number of shares outstanding of each of the Registrant's class of
common stock, as of the latest practicable date. 21,200,000 shares as of
July 31, 1997
Documents incorporated by reference: Not applicable
Transitional Small Business Disclosure Format
[ ] Yes [ X ] No
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This 10-KSB report contains forward looking statements that involve
risks and uncertainties. The Company's actual results could differ materially
from those discussed herein. Factors that could cause or contribute to such
differences include, but are not limited to, the factors set forth in the
section entitled "Description of Business-Risk Factors", those discussed in
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and those discussed elsewhere in this report.
Item 1. Description of Business
Adair International Oil and Gas, Inc. (the "Company") was originally
incorporated in the state of Texas on November 7, 1980, as Roberts Oil and Gas,
Inc. The name of the Company was changed to its present title pursuant to an
amendment to its articles of incorporation effective July 25, 1997. The
Company generally engages in the holding of interests in oil and gas
properties. Until 1997 the Company's activities were limited to the United
States.
The Company began to acquire interests in oil and gas properties in
1981 and, following a registration of its shares of common stock with the
Securities and Exchange Commission (the "SEC"), to file reports under the
Securities Exchange Act of 1934 (the "Exchange Act"). However, by the
mid-1980's the oil and gas market was in a downturn, the Company was
experiencing financial difficulties and it did not have sufficient resources to
continue the exploration and development of oil and gas properties. While the
Company continued to hold interests in wells, it had become essentially
dormant. One of the consequences of that situation was that, beginning in
1989, the Company filed its annual report on Form 10-K under the Exchange Act
without including audited financial statements as required by the Exchange Act.
In addition, the Company may not have fully complied with other formalities
required under the Exchange Act and the filings due thereunder.
During 1997 the Company has made numerous changes in its operations
and the focus of its business. The Company's business expanded to, and became
highly dependent upon, foreign operations when it acquired interests in
contracts pertaining to oil and/or gas properties in Colombia, Yemen and
Paraguay. In connection with the transactions relating to those acquisitions,
the controlling interest in the Company's common stock was issued to persons
not previously affiliated with the Company. In June, following the resignation
of members of the board then in office, three new members of the board were
elected. The new board then selected a new chief executive officer and a new
chief financial officer.
The oil and gas wells which the Company holds in the United States
have experienced normal declines in production during past
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years and the Company does not expect that it will be able to generate any
substantial increases in revenue from those interests in the future than is
currently being derived. The Company's future prospects will be dependent upon
its ability to benefit from the interests which it holds in properties and
contracts in foreign countries. However, as described hereafter, it will be
necessary to find a source of funds or form joint venture partners in order for
the Company to develop its interests in the foreign properties.
Management of the Company has been concentrating efforts on financing
the exploration and development of its foreign properties.
Transactions pertaining to properties in Colombia.
On February 27, 1997, the Company entered into an agreement with
Geopozos, S.A. ("Geopozos") pursuant to which it agreed to issue shares of its
common stock to Geopozos (the "Geopozos Agreement"), subject to approval of the
agreement by the Company's board of directors, in connection with the
acquisition of specified assets. As part of the Geopozos Agreement the
Company agreed to issue to Geopozos two million (2,000,000) shares of its
common stock and a promissory note in the principal amount of six hundred
thousand dollars ($600,000). The promissory note does not bear any interest
and does not have a maturity date but instead provides that it is due and
payable from the first proceeds of any funds raised in order to fund the
exploration of the relevant properties. However, if Ecopetrol, the national
oil company of Colombia, grants commercialization of a specified property the
Company may be due a like amount from recovered expenses.
In connection with the acquisition of those assets, on March 14, 1997,
the Company also entered into an agreement with ROGI International, a company
incorporated under the laws of Panama, (the "ROGI International Agreement")
pursuant to which the Company agreed to issue, as required by the Geopozos
Agreement, the two million (2,000,000) shares of its common stock to persons or
entities as directed by Geopozos and four million (4,000,000) shares of its
common stock to persons or entities as directed by ROGI International in
exchange for the assets being acquired. Thus, a total of six million
(6,000,000) shares were issued in exchange for the assets. The Geopozos
Agreement also provides that Geopozos may, at its election, nominate a person
to serve on the board of directors of the Company. Geopozos has not nominated
any person to serve on the Company's board.
The shares issued pursuant to the Geopozos and ROGI International
Agreements were authorized but unissued shares of the Company. On behalf of
Geopozos the two million (2,000,000) shares were issued to two corporations and
ROGI International directed that the four million (4,000,000) shares be issued
to seven corporations and one individual. The Company has not been
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informed of the relationship or affiliation, if any, among those entities.
Assuming that none of the entities acquiring shares are affiliated, following
the completion of the transaction with Adair Oil International Canada, Inc., as
hereafter described, the only entity which acquired as a holder of record five
percent (5%) or more of the then- outstanding shares of the Company's common
stock in connection with the aforesaid transaction was Petroleum Exploration
Services, Inc. which acquired one million six hundred thousand (1,600,000)
shares of common stock, representing 7.5% of the Company's outstanding common
stock as of July 31, 1997.
The assets which were transferred to the Company in exchange for the
promissory note and the issuance of shares consist of a one hundred percent
(100%) interest in the Chimichagua Association Contract in Colombia. For a
description of the assets acquired, see "Item 2. Description of Property"
herein.
Transaction with Adair Oil International Canada, Inc.
On June 16, 1997, the Company closed on an agreement with Adair Oil
International Canada, Inc. ("Adair Oil"), a Bahamas corporation, pursuant to
which the Company transferred to Adair Oil a fifty-one percent (51%)
controlling interest in the outstanding common stock of the Company. As a
result of that agreement 10,200,000 shares of the Company's common stock were
issued to Adair Oil in exchange for a portion of Adair Oil's rights with
respect to certain contracts. The shares issued to Adair Oil consisted of
10,000,000 shares of the Company's authorized but unissued shares and, in order
to complete the transaction with Adair Oil, 200,000 shares which were loaned
and returned to the Company by two of the entities which received shares as
part of the ROGI International Agreement.
In connection with the Adair Oil transaction all of the former
directors of the Company, except Earl Roberts, agreed to resign and Earl
Roberts agreed to elect persons designated by Adair Oil to the Company's board
of directors. Immediately following the closing of the Adair Oil transaction
and the resignation of members of the Company's board of directors, Earl
Roberts caused John Adair, Jalal Alghani and Abdul Aziz M. Al-Abdulkader, the
designees of Adair Oil, to be elected to the Company's board of directors.
As part of the Company's agreement with Adair Oil certain stockholders
of the Company also entered into a voting agreement, effective until December
31, 1997, with each other with respect to certain matters which might be voted
upon by the shareholders of the Company. Certain shareholders also each
individually granted to John Adair, the president of Adair Oil, irrevocable
proxies until December 31, 1997, to vote on their behalf shares of the
Company's common stock owned by the grantors of the proxies with respect to
those same matters. The matters covered by the voting agreement and the
proxies include the increase in
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the number of shares which the Company is authorized to issue and the
determination of the rights and privileges of each class of the Company's
stock. The shareholders entering into the voting trust agreement included
Adair Oil and those entities which acquired shares pursuant to the Geopozos and
ROGI International Agreements. Thus, at the time the voting agreement was
entered into the parties to the voting agreement controlled fourteen million
(14,000,000) shares of the Company's outstanding common stock. The entities
which executed the proxies held four million (4,000,000) shares of the
Company's common stock.
In exchange for the issuance of shares of its stock to Adair Oil, the
Company acquired five percent (5%) of the net profits in Adair Oil's interest
in each of the contracts pertaining to properties in Yemen and Paraguay. The
Company did not acquire the right or obligation to participate in the
management or operation of any of the properties. For a description of the
assets acquired, see "Item 2. Description of Property" herein.
The Interests in Yemen.
The Yemen contracts (the "Yemen Contracts") were initially acquired in
1993 by Adair Oil International, Inc. ("AOI"), a Bahamas corporation, from the
Republic of Yemen and relate to two different areas, one of which is off the
coast of Yemen. AOI assigned its rights to the Yemen Contracts to Adair Oil on
June 16, 1997. The Yemen Contracts grant to AOI the rights and obligations to
explore for oil, gas and/or related extractable resources and to develop the
areas covered by the contracts if AOI deems the areas to be worthy of
commercial development. The contracts reserve a royalty interest of ten
percent (10%) to the Republic of Yemen, after which AOI and its assignees have
the right, after payment of specified production costs, to share in the
revenues with the Ministry of Oil and Mineral Resources of Yemen. This revenue
sharing arrangement provides that AOI shall receive revenues ranging from ten
percent (10%) to thirty percent (30%), depending upon the amount of production.
Under the Yemen Contracts AOI was required to expend at least eighteen
million dollars ($18,000,000) on the exploration of one of the areas within
thirty (30) months, and fifteen million dollars ($15,000,000) on the
exploration of the other area within thirty-six (36) months, after the
effective date of the contracts. The effective date of each of the contracts
was June 20, 1993. The terms of the contracts also imposed certain financial
conditions on AOI. AOI has indicated that it is of the opinion that it
provided evidence of financial capability with respect to its exploration
obligations in accordance with the terms of the contracts.
The Yemen Contracts also imposed certain obligations on AOI with
respect to the exploration of the properties. Under those obligations AOI was
required to acquire and process seismic data and mobilize, drill and evaluate
two exploration wells during the
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relevant exploration time. AOI did not perform each of the obligations with
respect to the exploration of the areas. However, under the terms of the
contracts, if AOI is prevented from doing so because of "force majeure", the
time for compliance with that portion of each of the contracts is extended for
such period of time as the force majeure continues. One of the conditions
defined as being force majeure is the order, regulation or direction of the
government of Yemen which prevents AOI from performing its obligations under
the contract. During a portion of the time since AOI executed the Yemen
Contracts Yemen was in civil war and the government in political upheaval. AOI
believes that those factors prevented AOI from performing under the Yemen
Contracts and that such prevention constitutes force majeure as that term is
defined in the Yemen Contracts. AOI therefore believes that, it continues to
have rights with respect to the Yemen Contracts. AOI's representative in Yemen
has discussed these issues with the Minister of Oil of Yemen and has indicated
to AOI that he believes that AOI continues to have the rights specified under
the contracts. The representative has also indicated that he believes that AOI
has the right to renegotiate the terms of its Yemen Contracts and that it may
be possible to obtain terms which are more favorable to the holder of the
rights. Adair Oil has indicated that it intends to pursue such negotiation.
The Interests in Paraguay.
Adair Oil International Co. Canada, Inc., a Canadian corporation
("Adair-Canada") acquired, subject to the fulfillment of certain obligations,
on May 30, 1997, from Guarani Petroleum Exploration, S.A. ("Guapex"), a
Paraguay corporation, as representative of a consortium of entities, including
Guapex, a portion of a concession contract relating to 3,292,900 hectares
located in Paraguay (the "Alto Parana Contract"). A portion of the interests
in second concession contract respecting 2,400,000 hectares located in Paraguay
(the "San Pedro Contract") was obtained, subject to the fulfillment of certain
obligations, by Adair-Canada from Guapex on May 31, 1997. Adair-Canada
assigned all of its interests in the San Pedro Contract and the Alto Parana
Contract to Adair Oil on June 16, 1997, and Adair Oil succeeded to the rights
and obligations of Adair-Canada. Thus, in describing the aforesaid contracts,
Adair Oil is used hereafter to describe the rights and obligations initially
held by Adair-Canada.
Adair Oil acquired ninety nine percent (99%) of Guapex's interest in
the concession (the "San Pedro Concession") which is the subject of the San
Pedro Contract, with Guapex retaining the remaining one percent (1%). The
expenses and revenues of the wells, after payment by Adair Oil of certain
expense obligations as hereafter described, are shared pro rata by Adair Oil
and Guapex in those same ratios. Guapex also retained a ten percent (10%)
overriding royalty interest in the hydrocarbons which are recovered from any
wells drilled on the San Pedro Concession.
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Under the terms of the San Pedro Contract, the interests being acquired by
Adair Oil are being held in escrow until Adair Oil has met certain conditions,
referred to as "Earning Obligations." After complying with those Earning
Obligations Adair Oil will be entitled to receive the assignment of 99% of
Guapex's interests in the San Pedro Concession contract.
The Earning Obligations of Adair Oil with respect to the San Pedro
Contract require that (i) Adair Oil pay an aggregate of three million dollars
($3,000,000) to Guapex for the San Pedro Concession and the Alto Parana
Concession on or before July 31, 1997, (ii) Adair Oil drill and complete, at
Adair Oil's expense, two wells on the San Pedro Concession no later than
December 1, 1998, and (iii) Adair Oil pay all of the costs, up to a maximum of
$2,272,000, of the seismic work required with respect to the exploration of the
San Pedro Concession. The seismic work must begin before October 1, 1997.
Adair Oil did not pay the three million dollars ($3,000,000) prior to July 31,
1997. However, Adair Oil has been given an extension of time by Guapex to meet
that obligation.
Adair Oil and Guapex have agreed to enter into a Joint Operating
Agreement with respect to the development of the San Pedro Concession. The
terms of such operating agreement are to be determined through negotiations
between the parties.
The Alto Parana Concession was initially acquired from the government
of Paraguay in 1989 by Texaco Exploration Paraguay and subsequently assigned to
Guapex, which assignment was approved by the government of Paraguay. Adair Oil
is acquiring sixty percent (60%) of Guapex's interest in the Alto Parana
Concession. The assignment to Adair Oil has been made by Guapex and been
placed in escrow. Adair Oil has the right to receive the interest assigned
upon timely completion of the Earning Obligations imposed on Adair Oil in the
Alto Parana Contract.
The Earning Obligations of Adair Oil with respect to the Alto Parana
Contract require that (i) Adair Oil pay an aggregate of three million dollars
($3,000,000) to Guapex for the San Pedro Concession and the Alto Parana
Concession, with one million dollars ($1,000,000) attributable to the Alto
Parana Concession to be paid on or before May 31, 1997, (ii) Adair Oil drill
and complete, at Adair Oil's expense, two wells on the Alto Parana Concession
no later than January 1, 1999, with the first well to be completed no later
than March 31, 1997, and (iii) Adair Oil pay all of the costs, up to a maximum
of $2,272,000, of the seismic work required with respect to the exploration of
the Alto Parana Concession. The seismic work was to begin before July 31,
1997. Adair Oil did not pay the one million dollars ($1,000,000) prior to May
31, 1997, nor has it begun the seismic work. However, Adair Oil has been given
an extension of time by Guapex to meet those obligations. Adair Oil also
believes that the contract provision which required the drilling of a well by
March 31, 1997, was one of mutual mistake and will not be considered by
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Guapex as a default. Adair Oil and Guapex have agreed, if Adair Oil meets its
Earning Obligations, to share the revenues and expenses of the Alto Parana
Concession on a pro rata basis.
Risk Factors.
The prospects of the Company are subject to a number of risks. The
risk factors which management considers to be the highest are set forth
hereafter. There may exist, however, other factors which constitute additional
risks but which are not currently foreseen or fully appreciated by management.
Reliance on efforts of others.
The Company intends to form joint ventures or sell part of its
interests in order to explore on the prospects. At this time it will depend on
other operating companies to operate its wells and properties. Thus, the
prospects of the Company will be highly dependent upon its ability to engage
the services of competent parties to perform those functions with respect to
the Company's properties.
With respect to the Yemen and Paraguay interests, the Company did not,
however, acquire the right to develop the properties, such responsibilities
remaining those of Adair Oil. The Company has no rights to require Adair Oil
to perform any particular functions at any specified times.
The Company has not yet received from Ecopetrol and the government of
Colombia their consents to the assignments of the Chimichagua Association
contract to the Company. Accordingly, the Company has entered into a joint
operating agreement with Geopozos with respect to that property. For a
description of the agreement, see Description of Property-The Interest in
Colombia" herein.
Ability to obtain additional capital.
The Company anticipates that its future revenues will be derived
substantially from the Yemen, Paraguay and Colombia properties. To explore
those properties and, if warranted, develop them, significant funding will be
required.
In order to complete development of the properties in Colombia, the
Company could require approximately six million dollars ($6,000,000) during the
next twelve months.
The Company acquired only a five percent (5%) net profits interest in
Adair Oil's interest in the Yemen and Paraguay contracts and did not acquire
any right to manage or develop either of those properties, such rights
remaining with Adair Oil. The Company is therefore unable to determine the
extent of funding which Adair Oil will require under either of those contracts.
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In order to obtain the funds the Company and Adair Oil are reviewing a
number of options. Some of the options which may be pursued include the
formation of a joint venture; the investment by another party in equity
capital; the issuance of debt by the Company or Adair Oil, as applicable; or
borrowing from a lending institution. The parties are limited in their ability
to borrow from banks in the United States with respect to the Yemen and
Paraguay properties and, therefore, if the borrowing from a lending institution
alternative is utilized, the parties expect to seek such borrowing from foreign
institutions.
Factors Relating to Colombia Operations.
Colombia has indicated an intent to play a growing role in
international oil markets while expanding and privatizing its domestic gas and
electricity industries. Officials have a stated objective of curbing the
government's spending on energy development while increasing its energy
revenues. The plans imply growing participation in energy prospects by private
companies.
Colombia has been beset, however, by violence and political unrest in
recent years. These factors have had an impact on the energy infrastructure
and driven up the costs of operating in that country due to security reasons
alone. The government responded by, among other things, providing additional
security forces to guard pipeline, production and exploration sites. The
Company's interests in Colombia could also be affected by the policies of the
United States toward Colombia and the responses of the Colombia government to
those policies.
Despite its political uncertainties, Colombia has strong sovereign
credit and one of South America's most stable economies. Its economy in 1995
grew by 5.5% and has shown sustained strength in this decade. Colombian
officials have stated they believe the country's financial reputation and range
of opportunities will attract the estimated $27 billion needed through 2000 for
new infrastructure, including big expansions oil, gas and power facilities.
Despite its laudable economic stability and improving oil and gas
prospectivity, political impediments could interfere with progress toward the
lofty energy goals.
Ability to retain Yemen and Paraguay Contracts.
The Company anticipates that future revenues may be derived from its
net profits interests in the Yemen and Paraguay contracts. Adair Oil has
indicated to the Company that it believes that a provision in each of the Yemen
contracts which extends the time for compliance by Adair Oil in the event of a
force majeure is applicable to the present situation. Adair Oil has also
informed the Company that
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it has received assurances from the current government of Yemen that it agrees
with Adair Oil's position and that the government of Yemen will honor the
contracts.
The contracts with respect to the property in Paraguay required the
holder to pay one million dollars ($1,000,000) by May 31, 1997, and another two
million dollars ($2,000,000) by July 31, 1997, to Guapex, the holder of the
applicable concessions. Adair Oil has informed the Company that it has received
assurances from Guapex that the contract will not be considered in default as a
result of the failure to make the required payment if the payment is made by
November 1, 1997.
International Operations.
The Company anticipates that a significant portion, if not
substantially all, of its future revenues will be derived from its interests in
properties located in Colombia, Yemen and Paraguay. The Company may also
acquire interests in other foreign countries in the future. Currency controls
and fluctuations, royalty and tax rates, import and export regulations and
other foreign laws or policies governing the operations of foreign companies in
the applicable countries, as well as the policies and regulations of the United
States with respect to companies operating in the applicable countries, could
all have an adverse impact on the operations of the Company.
The Company's interests could also be adversely affected by changes in
the contracts applicable to the Company's interest, including the renegotiation
of terms by the government of the country or the expropriation of interests. In
addition, the contracts are governed by foreign laws and subject to
interpretation by the courts in the applicable foreign countries. Foreign
properties, operations and investments may also be adversely affected by the
political and social developments of the applicable countries.
Price volatility.
The revenues generated by the Company are highly dependent upon the
prices of crude oil and natural gas. Fluctuations in the energy market make it
difficult to estimate future prices of crude oil and natural gas. Such
fluctuations are caused by a number of factors beyond the control of the
Company, including regional and international demand, energy legislation of
various countries, taxes imposed by applicable countries and the abundance of
alternative fuels. International political and economic conditions may also
have a significant impact on prices of oil and gas.
Imprecise nature of reserve estimates.
The estimations of possible and/or probable reserves of oil and gas
are imprecise. While such estimations are based upon
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engineering and other data, the process is a subjective one consisting of
estimating underground accumulations of oil and gas that can not be measured in
an exact way. The accuracy of an estimate is a function of the quality of
available data and of engineering and geological interpretation and judgement.
Accordingly, such estimates often change as more data becomes available and
there can be no assurances that the information regarding reserves set forth
herein will ultimately be produced.
Environmental regulation.
The oil and gas industry is subject to substantial regulation with
respect to the discharge of materials into the environment or otherwise
relating to the protection of the environment. The exploration, development
and production of oil and gas are regulated by various governmental agencies
with respect to the storage and transportation of the hydrocarbons, the use of
facilities for processing, recovering and treating the hydrocarbons and the
clean up of the sites of the wells. Many of these activities require
governmental approvals before they can be undertaken. The costs associated
with compliance with the applicable laws and regulations have increased the
costs associated with the planning, designing, drilling, installing, operating
and plugging or abandoning of wells. To the extent that the Company owns an
interest in a well it may be responsible for costs of environmental regulation
compliance even well after the plugging or abandonment of that well.
Operating hazards and uninsured risks.
The operation of an oil or gas well are subject to risks such as
blowouts, cratering, pollution and fires, any of which could result in damage
or destruction of the well or production facility or persons working. The
operator of the well may be unable to purchase adequate insurance against each
of these risks. The occurrence of a significant event could have a material
adverse affect on the Company.
General risks of the oil and gas industry.
The Company's operations will be subject to those risks generally
associated with the oil and gas industry. Such risks include title problems
associated with wells, weather conditions at well sites, shortages or delays in
delivery of equipment and the stability of operators and well servicing
companies. The Company's prospects will also be impacted by the proximity of
its wells to pipelines for the distribution of any oil or gas produced.
Failure to file reports under the Exchange Act.
The Company had filed a registration statement with the Commission
under the Securities Act of 1933 in November, 1981, and therefore became
subject to the requirement that it file
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reports thereafter under the Securities Exchange Act of 1934 (the "Exchange
Act"). The Company filed reports under the Exchange Act, including annual
reports on Form 10-K, during a portion of the 1980's. However, the Company
experienced financial difficulties during the mid-1980's due to a downturn in
the market for oil and gas and by the late 1980's had become essentially a
dormant company. It continued to hold interests in oil and gas wells but was
generating very little revenue. Consequently, by 1989 the Company could no
longer afford the costs associated with audited financial statements. The
Company filed its Form 10-K under the Exchange Act in 1989 without including
audited financial statements and has continued to make 10-K filings under the
Exchange Act without audited financial statements. The Company may also not
have complied with certain other formalities required by the Exchange Act with
respect to the 10-Ks and other reports due thereunder.
ITEM 2. Description of Property.
The Company holds interests in existing oil and gas wells in the
United States, has interests in proved producing properties in Colombia and
holds interests in contracts relating to properties in Yemen and Paraguay. The
Colombia, Yemen and Paraguay properties are intended to be explored and, if
warranted, developed as oil and gas properties.
The United States Properties.
The Company holds working interests in oil and gas wells located
throughout the United States. The Company holds an interest in seventy-nine
(79) oil and gas wells, with a net interest of 1.68 oil wells and 7.91 gas
wells. The Company has received a report from a petroleum engineer which
indicates that as of May 31, 1997, there were proved reserves of 778 barrels
attributable to the Company's net interest in the oil wells and proved reserves
of 124.8 million cubic feet attributable to the Company's net interest in the
gas wells.
Yemen Property Interests.
The Company holds interests in two properties, one located in the
country of Yemen and the other located off the coast of Yemen. The Company
acquired five percent (5%) of the interests of Adair Oil in the profits to
which Adair Oil is entitled from the production of oil from those properties.
Adair Oil, through an affiliated company, acquired the interests from the
government of Yemen pursuant to contracts dated June 20, 1993. One contract
relates to an area generally described as Block 24 offshore of the Hodeidah
Province (the "Hodeidah Contract"), covering an area of approximately two
million five hundred thousand (2,500,000) acres and the second contract relates
to an area generally described as Block 28 in the Shabwa Province (the "Shabwa
Contract") and covers approximately one million (1,000,000) acres. Other than
the geographical locations to which they
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apply, the Hodeidah Contract and the Shabwa Contract each contains
substantially identical terms, except as to the initial exploration periods, as
defined in the contracts, and the funds required to be expended by the holder
for exploration. Collectively, the Hodeidah and Shabwa contracts are referred
to as the "Yemen Contracts."
The Yemen Contracts assign to the holder the exclusive right to
explore for oil in the designated areas and to conduct petroleum operations if
warranted. The government of Yemen has retained a ten percent (10%) royalty
interest and has retained the rights to all gas which might be discovered in
the area. The initial exploration period for the Hodeidah Contract was thirty
months from the effective date of the contract, during which time the holder
was required to expend eighteen million dollars ($18,000,000) toward the
acquisition and processing of seismic data relating to the area and the
drilling and evaluation of at least two wells. The initial exploration period
for the Shabwa Contract was thirty-six months from the effective date of the
contract, during which time the holder was required to expend fifteen million
dollars ($15,000,000) toward the acquisition and processing of seismic data
relating to the area and the drilling and evaluation of at least two wells.
Adair Oil believes that the holder was prevented from doing the before
mentioned work program as a result of force majeure, as defined in the
contracts, and that it has until December 31, 1998, to perform its obligations
under the Hodeidah Contract and until December 31, 1998, to perform its
obligations under the Shabwa Contract. The current government of Yemen has
indicated to the representative of Adair Oil that it is in agreement with the
position taken by Adair Oil.
Following the initial exploration period, the holder has the option to
enter into a second exploration period which would extend its rights to further
explore the designated area for, in the case of the Hodeidah Contract, thirty
(30) months and, in the case of the Shabwa Contract, thirty-six (36) months.
After completion of the exploration period, twenty-five percent (25%) of the
area covered by each of the Yemen Contracts is then relinquished back to the
Yemen government, except any area which has been converted into a development
area.
If Adair Oil determines that sufficient quantities of oil exist to
warrant development of an area it must apply to the Ministry of Oil and Natural
Resources of Yemen for designation of that area for development. The Ministry
is to grant such designation if the holder is in compliance with the terms of
its contract.
The Company has received a report from an independent petroleum
engineer which indicates that from the information which was made available to
the engineer, the proved or probable reserves could not be quantified and the
project should be considered as strictly exploratory.
<PAGE> 15
Paraguay Property Interests.
The Company holds a five percent (5%) net profits interest in Adair
Oil's interest in a Farmout Agreement relating to the Alto Parana Concession in
the Republic of Paraguay. Adair Oil acquired the interests of an affiliated
company in that agreement in June, 1997. The affiliate acquired a sixty
percent (60%) participating interest in the Alto Parana Concession on May 31,
1997, from Guapex. The Alto Parana Concession relates to approximately
3,292,900 hectares.
The Company also holds a five percent (5%) net profits interest in
Adair Oil's interest in a Farmout Agreement relating to the San Pedro
Concession in the Republic of Paraguay. Adair Oil acquired the interests of an
affiliated company in that agreement in June, 1997. The affiliate acquired a
ninety-nine percent (99%) participating interest in the San Pedro Concession on
May 30, 1997, from Guapex. The Alto Parana Concession relates to approximately
2,400,000 hectares.
Each of the interests in the Paraguay contracts are to be assigned
when the holder has complied with the Earning Obligations specified in the
relevant contracts. For a description of those obligations, see "Business-The
Interests in Paraguay" herein.
The Company has received a report from an independent petroleum
engineer which indicates that from the information which was made available to
the engineer, the proved or probable reserves could not be quantified and the
project should be considered as strictly exploratory.
The Colombia Properties.
In 1997, the Company acquired, subject to certain consents as
hereafter described, rights with respect to a contract relating to the
exploration, drilling and development of oil and gas property in Colombia. The
asset consists of the rights and obligations of Geopozos with respect to a
contract, known as the Chimichagua Association contract (the "Association
Contract"). The Association Contract grants the right to explore, drill and
extract hydrocarbons from a specified area in Colombia. The Association
Contract relates to an area of approximately 164,900 hectares (a hectare is
2.47 acres) in the Magdalena valley of Colombia, approximately 500 miles north
of Bogota. The Association Contract was originally acquired by Esso Colombia
in 1988 and, following an intervening assignment, was acquired by Geopozos on
September 14, 1996.
The Association Contract, between Ecopetrol, the national oil company
of Colombia, and the holder, provides that the parties shall share equally the
hydrocarbons produced from the relevant properties, subject to an overriding
royalty interest of twenty percent (20%) which is reserved for Ecopetrol, and
the
<PAGE> 16
expenses of development of the properties. The holder is responsible for the
exploration of the properties but has the right to receive reimbursement of
those costs with respect to fields which are commercially developed by the
parties. The effective date of the Association Contract was January 20, 1989,
and the contract terminates for all purposes twenty-eight (28) years
thereafter. The contract provides for an exploration period of six (6) years,
subject to certain extensions, and an exploitation period of twenty-two (22)
years. Under the terms of the contract a portion of the property which has not
been commercially developed is reduced over a period of years, beginning in the
sixth year. In a letter to the Company dated August 4, 1997, Geopozos
indicated that fifty percent (50%) of the original area covered by the
Association Contract had been returned to Ecopetrol and that Ecopetrol had not
issued any declarations of commerciality with respect to the remaining area.
In connection with the agreement between Geopozos and the Company,
Geopozos retained a two percent (2%) overriding royalty interest in
hydrocarbons produced from the properties developed under the Association
Contract. Geopozos also agreed to act as the operator under the Association
Contract for a period of up to twelve (12) months until the Company or its
assignee has been approved by Ecopetrol and the Ministry of Mines and Energy of
Colombia. The parties also agreed to enter into joint operating agreement
covering those operations. The agreement is to provide, among other things,
that Geopozos will be allowed to mark up expenditures which it incurs, and
which have been agreed to in advance, by ten percent (10%).
The Association Contract provides, among other things, that Geopozos
was required to perform certain exploration of the properties prior by December
18, 1996, and that the consents of Ecopetrol and the Colombian Ministry of
Mines and Energy are required in order for the assignment to the Company from
Geopozos to be effective. On August 4, 1997, the Company received a letter
from Geopozos which indicated that (i) Geopozos has fulfilled all of its
obligations to Ecopetrol, (ii) Geopozos has provided Ecopetrol with all
necessary and requested technical information and data and (iii) the
Association Contract is valid.
The Company has received a report from a petroleum engineer which
indicates that the information provided to him by the Company with respect to
the properties in Colombia indicates that there are 22.150 billion cubic feet
of gas which would be classified as proved reserves.
Geopozos and the Company entered into a Joint Operating Agreement
("JOA") effective March 5, 1997, and terminating upon termination of the
Association Contract. The JOA provides, among other things, that Geopozos will
remain as Operator, for the purpose of the Association Contract and the JOA,
for a period of time ending no sooner than twelve months from the effective
date
<PAGE> 17
of the JOA, or until the Company is approved as Operator by Ecopetrol,
whichever occurs first. Under the JOA, the Company owns 100% of the benefits
of the Association Contract and is responsible for 100% of the costs and
expenses of exploration and exploitation incurred by Geopozos, as Operator.
These costs and expenses are payable by the Company on a quarterly basis,
either in advance or at the end of the quarterly period, at the election of
Geopozos. As security against the Company's obligation to pay these costs and
expenses, Geopozos retains an interest in the Company's rights in the
Association Contract as well as an interest in and a lien against any
production to which the Company has a right under the Association Contract.
Item 3. Legal Proceedings.
In July, 1985, the Company entered into a revolving credit agreement
with a lending bank. This note was collateralized by mortgage, deed of trust
and assignment of production on the majority of the Company's oil and gas
properties, causing the majority of the revenues of these properties to be paid
directly to the lender. The Company became delinquent in the payment of
principal and interest on the note during 1987. In January, 1988, the lender
was placed in receivership, and in May, 1989, the FDIC sold this note to a
third party. The third party holder failed to collect on this note. In the
meantime, the Company held in suspense the revenues which otherwise might be
payable to the third party holder under the terms of this note. Eventually,
the Company filed an Action for Declaratory Judgment against the third party
holder in the 281st Judicial District Court of Harris County, Texas. In this
litigation, the Company requested the court to determine the rights of the
third party holder with regard to this note and the security instruments
collateralizing this note. On March 21, 1997, the court in this proceeding
entered a default judgment against the third party holder. This default
judgment declared the third party holder's interest in the note and the
security instruments given as collateral thereunder to be null and void and of
no force and effect, being barred by statute of limitation. Further, the court
declared that the $252,476 previously held in suspense in lieu of payment to
the third party holder to be the property of the Company, free and clear of any
claims of the third party holder.
Item 4. Submission of Matters to a Vote of Security Holders.
A special meeting of shareholders of the Company was held on July 8,
1997. Proxies with respect to the matters to be acted upon at the meeting were
not solicited by management. At the meeting shareholders approved an amendment
to the Company's articles of incorporation to change the name to Adair
International Oil and Gas, Inc., to increase the number of authorized shares of
common stock from 20,000,000 shares to 100,000,000 shares and to change the par
value of the shares of common stock from thirty cents ($.30) to no par value.
<PAGE> 18
Shareholders were also requested to ratify the transaction with Adair Oil. A
total of 16,502,480 shares were voted on each of the issues voted on at the
meeting, with all shares voting in favor of each of the issues and no shares
voting against any of the proposals.
Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.
The Company's stock has been traded very infrequently during the past
two years and, to the best of the Company's knowledge, no broker made a market
or regularly submitted quotations for the Company's stock during that time. In
the last two fiscal years less than one thousand shares were traded in any
year.
As of July 31, 1997, there were approximately 800 holders of the
Company's common stock. The Company has not paid any cash dividends on its
common stock during the past two fiscal years. The Company may only pay
dividends from surplus.
Recent Sales of Unregistered Securities.
The Company issued shares of its common stock to directors as
compensation for acting as directors of the Company and to one employee without
the shares being registered under the Securities Act of 1933 (the "Securities
Act") in reliance upon the exemption contained in Section 4(2) promulgated
under the Securities Act. The directors of the Company had not received any
compensation for serving as directors for a number of years. In recognition of
the many years of service by the various directors without the payment of
compensation, the Company issued as aggregate of nine hundred ninety thousand
(990,000) shares to four directors. For a description of the transaction, see
"Item 10. Executive Compensation" herein. At the same time that the shares
were issued to the directors, the Company also issued ten thousand (10,000)
shares to a long time employee of the Company in recognition of the employee's
many years of service to the Company.
The Company sold an aggregate of six million (6,000,000) shares of its
common stock in exchange for assets consisting of rights with respect to
properties located in Colombia. For a description of the transaction, see
"Item 1. Description of Business" and "Item 2. Description of Properties"
herein. The shares were sold in reliance upon the exemption contained in
Section 4(2) under the Securities Act.
The Company sold an aggregate of ten million two hundred thousand
(10,200,000) shares of common stock on June 16, 1997, in exchange for certain
assets consisting of a portion of the rights to contracts respecting properties
in Yemen and Paraguay. For a description of the transaction, see "Item 1.
Description of Business" and "Item 2. Description of Properties" herein. The
shares were sold in reliance upon the exemption contained in
<PAGE> 19
Section 4(2) under the Securities Act.
In July, 1997, the Company sold one million (1,000,000) shares of its
restricted common stock for a price of twenty cents ($.20) per share to two
individuals. The shares were sold in reliance upon the exemption contained in
Section 4(2) under the Securities Act.
Item 6. Management's Discussion and Analysis or Plan of Operation.
The following summary of the Company's financial position and results
of operations should be read in conjunction with the Financial Statements,
Notes to Financial Statements, contained elsewhere in this report. Audits of
the financial statements have been completed through the year ended May 31,
1997 and prior year financial information have been restated and reclassified
in connection with the audit.
Results of Operations-1996 vs. 1997.
The following summarizes oil and gas revenues and operating expenses
for the years 1996 and 1997.
<TABLE>
<CAPTION>
Years ended May 31
1997 1996
<S> <C> <C>
Oil and gas sales $205,920 $118,705
Lease operating expenses 298,948 134,815
-------- --------
Operating (loss) $(93,028) $(16,110)
</TABLE>
- - --------------------------------------------------------------------------------
The following table reflects the Company's cumulative costs incurred
in oil and gas properties.
<TABLE>
<CAPTION>
Years Ended May 31
Oil and gas properties at full cost 1997 1996
<S> <C> <C>
Proved properties being amortized $7,858,674 $4,312,380
Less accumulated depletion
and depreciation 4,118,979 4,091,519
---------- ----------
$3,739,695 $ 220,861
</TABLE>
The increase in oil and gas property costs includes $3,600,000 from
the acquisition of foreign oil and gas property in Colombia described in Note 2
to the financial statements.
Oil and Gas Sales- The increase from $118,705 to $204,633 reflects
approximately $100,000 of revenues which were received in May 1997 by the
Company from release of suspended production revenues held in connection with
the promissory note described in Note 3 to the financial statements. The
release of revenues results from the cancellation of such indebtedness.
<PAGE> 20
Operating Expenses-Lease operating expenses increased from $15,479 to
$51,249 due to the inclusion of additional production expenses on the revenues
which had been suspended. General and administrative costs increased from
$44,214 to $155,355 due to last quarter business activity and the inclusion of
approximately $23,000 of legal expenses in connection with the Colombia
acquisition described in Note 2. Payroll expenses increased by approximately
$35,000 attributable to personnel associated with the acquisition.
The oil and gas production which the Company holds in the United
States continued to decline during 1997. Further declines in domestic
productions are anticipated and the Company intends to focus future plans on
exploring and developing foreign reserves acquired in the acquisition described
in Notes 2 and 12. Future revenues from the Company's domestic production at
May 31, 1997 is expected to be minimal.
Net income for the fourth quarter ended May 31, 1997 was $672,172 or
$.10 per share on revenues of $873,314 versus a net income at $4,977 or $.00
per share on revenues of $95,683 for the quarter May 31, 1996. The fourth
quarter of fiscal year ended May 31, 1997 benefitted from non-recurring
forgiveness of debt income aggregating $722,530 or $.07 per share from the
cancellation of a promissory note which had been outstanding since January 1,
1987.
In 1995 and prior the financial results of the Company were
insignificant because the Company has not conducted any oil and gas exploration
or development activities since May 31, 1989. Activity from May 31, 1989
through May 31, 1997 focused on production from the Company's domestic oil and
gas reserves and cost cutting.
Inflation's Impact-Inflation was not a significant factor in 1997
operations and is not expected to be a major factor in 1998 operations.
Liquidity and Capital Resources
Cash provided by operating activities increased by $124,618 during the
year ended May 31, 1997. Such cash flow is not sufficient to finance the
future exploration and development of the Company's foreign oil and gas
properties. Therefore the Company will continue efforts to farm out high risk
prospects from inventory to oil companies with greater resources thereby
avoiding the risk and cash drain of exploratory drilling activities. Given the
present economic conditions in the industry , no assurances can be made that
the Company will be successful in its efforts. The Company is also pursuing
bank lines of credit to supplement future working capital requirements.
<PAGE> 21
Item 7. Financial Statements.
The financial statements of the Company are included as part of this
Form 10-KSB following the signature page.
Item 8. Changes to and Disagreements With Accountants on Accounting and
Financial Disclosures.
On July 15, 1997, the Company engaged the services of Braden, Bennink,
Goldstein, Gazaway & Company, PLLC, Houston, Texas, to conduct an independent
audit of the Company's financial statements through the year ended May 31,
1997. The Company had not engaged any firm to conduct an independent audit of
the Company's financial statements since 1989.
PART III
Item 9. Directors, Executive Officers, Promoters, and Control Persons;
Compliance With Section 16(a) of the Exchange Act.
The following persons serve as directors and/or executive officers of
the Company:
<TABLE>
<CAPTION>
Age Position with Company
<S> <C> <C>
John W. Adair 55 Chairman of Board, Chief
Executive Officer and Director
(Since June, 1997)
Earl Roberts 61 President and Director (Since
1981)
Jalal Alghani 38 Chief Financial Officer and
Director (Since June, 1997)
Abdul Aziz M. Al-Abdulkader 46 Director (Since June, 1997)
</TABLE>
Directors of the Company are elected annually. Officers of the
Company are selected by the board of directors and serve at the pleasure of the
board. No director of the Company serves on the board of directors of any
other company which is a reporting company under the Securities Exchange Act of
1934. No person serving as a director or executive officer of the Company is
related to any other director or executive officer of the Company.
During the past five (5) years no director or executive officer of the
Company (i) has been involved as a general partner or executive officer of any
business which has filed a bankruptcy petition; (ii) has been convicted in any
criminal proceeding nor
<PAGE> 22
is subject to any pending criminal proceeding; (iii) has been subjected to any
order, judgment or decree of any court permanently or temporarily enjoining,
barring, suspending or otherwise limiting his involvement in any type of
business, securities or banking activities; and (iv) has been found by a court,
the Commission or the Commodities Futures Trading Commission to have violated a
federal or state securities or commodities law.
John Adair served as the president and chief executive officer of
Dresser Engineering Co., a company which specializes in oil and gas engineering
services, from 1995 to 1997. Since 1990 Mr. Adair has served as president of
Adair Oil International.
Earl Roberts has served as the president of the Company since its
inception and was the chief executive officer of the Company until June, 1997.
Jalal Alghani served as vice president of sales and marketing of
Dresser Engineering Co. from 1995 to 1997. Since 1990 Mr. Alghani has served
as an executive officer of Adair Oil International.
Abdul Aziz M. Al-Abdulkader has been involved with a number of
companies during the past five years as an officer, director and investor, the
majority of which are located in the Middle East. His primary employment has
been the management of AMA group of companies located in Saudi Arabia, whose
activities include furniture manufacturing and retailing, maintenance
operations of residential compounds, ownership of restaurants and metal
insulation production.
Section 16(a) Beneficial Ownership Reporting Compliance.
No reports were filed on Forms 3, 4 or 5 under the Exchange Act during
the last fiscal year. Earl Roberts, a current officer and director of the
Company, and former directors, Robert Steelhammer, Jim Shindler and Raymond
Kerr, should each have filed two Form 4s with respect to shares which they
acquired during the year. Current directors, John Adair, Jalal Alghani and
Abdul Aziz M. Al-Abdulkader should each have filed a Form 3 after becoming
directors. Petroleum Exploration Services, Inc. should have filed a Form 3
when it became the beneficial owner of more than ten percent (10%) of the
Company's common stock. Adair International Oil Canada, Inc. should have filed
a Form 3 when it became the holder of more than ten percent (10%) of the
Company's common stock.
Item 10. Executive Compensation.
During the past three fiscal years the Company has employed only one
person as an executive officer. No executive officer received any compensation
from the Company during the past three
<PAGE> 23
fiscal years. Mr. Earl Roberts, the president and chief executive officer of
the Company during each of those years, received shares of common stock of the
Company as a director during the fiscal year ended May 31, 1997, as hereafter
described.
The directors of the Company did not receive any compensation for
serving as directors for a number of years. On August 1, 1996, the directors
determined that, in recognition of the many years of service by the various
directors without the payment of compensation, the Company should issue shares
of its common stock to the directors. The issuance of the shares was
contingent upon the completion of the transactions pursuant to which the
Company was to acquire the interests in Colombia. See "Item 1. Description of
Business." Thus, on March 14, 1997, the Company issued 321,750 shares of its
common stock to Earl Roberts for service as a director and 222,750 shares of
its common stock to each of the remaining directors, Robert Steelhammer, Jim
Shindler and Raymond Kerr. In 1997 the Company incurred legal fees of $25,373
which were payable to a law firm of which Raymond Kerr, a director of the
Company was a partner.
The Company has no employment contracts with any of its executive
officers. Beginning in June, 1997, the Company agreed to pay John Adair, Earl
Roberts and Jalal Alghani a salary of five thousand dollars ($5,000) per month
each.
Item 11. Security Ownership of Certain Beneficial Owners and Management.
The following sets forth information with respect to all persons known
by the Company to beneficially own five percent (5%) of the outstanding common
stock of the Company as of July 31, 1997:
<TABLE>
<CAPTION>
Title of Class Name and Address of Amount and Nature of Percent of
Beneficial Owner Beneficial Ownership Class
<S> <C> <C> <C>
Common Stock Adair International 10,200,000-Direct(1) 48.1%
Oil Canada, Inc.,
Tulsa, Oklahoma
Common Stock Petroleum 1,600,000 7.5%
Exploration
Services, Inc.
</TABLE>
(1) In addition to the shares which it owns directly, Adair Oil
indirectly through John Adair holds proxies to vote 4,000,000 shares of common
stock on certain matters which could come before
<PAGE> 24
the shareholders. The proxy expires on December 31, 1997. Thus, with respect
to the matters to which the proxy relates, Adair Oil is entitled to vote 66% of
the outstanding shares. The same shareholders which have granted the proxies
to Adair Oil have entered into a voting agreement with Adair Oil respecting
those matters covered by the proxies. For a description of the matters to
which the proxies relate, see "Item 1. Description of Business" herein.
The following sets forth information with respect to shares of the
outstanding common stock owned by the directors and executive officers of the
Company as of July 31, 1997:
<TABLE>
<CAPTION>
Title of Class Name and Address of Amount and Nature of Percent of Class
Beneficial Owner Beneficial Ownership
<S> <C> <C> <C>
Common stock John Adair 10,200,000-Indirect (1) 48.1%(1)
Tulsa, Oklahoma
Common stock Earl Roberts 1,050,950 4.96%
Houston, Texas
Common stock Jalal Alghani 10,200,000-Indirect (1) 48.1%(1)
Houston, Texas
Common stock Abdul Aziz M. Al- 500,000-Direct 2.4%
Abdulkader
All directors and 11,750,950-Direct and 55.4%
executive officers as a Indirect
group (4 persons)
</TABLE>
(1) The shares owned by Messrs. Adair and Alghani are owned
indirectly through Adair Oil. Adair and Alghani each own a one-third interest
in the voting stock of Adair Oil. For a description of the other rights which
Adair Oil has with respect to voting on certain matters, see the footnotes to
the table above.
Item 12. Certain Relationships and Related transactions.
On June 16, 1997, the Company entered into an agreement with Adair Oil
International Canada, Inc. ("Adair Oil") pursuant to which the Company issued
to Adair Oil a controlling interest in its common stock, consisting of ten
million two hundred thousand (10,200,000) shares, in exchange for certain
assets held by Adair Oil. In connection with that same transaction, three
members of the Company's board of directors agreed to resign and three persons
designated by Adair
<PAGE> 25
Oil were elected to the Company's board. John Adair and Jalal Alghani, each of
whom is an executive officer of the Company and a member of its board of
directors, each own one-third (1/3) of the stock of Adair Oil. For a further
description of the transaction, see "Item 1. Description of Business" herein.
Item 13. Exhibits and Reports on Form 8-K.
The following exhibits are included with this report:
2.1. Purchase and Sales Agreement dated February 27, 1997, between the
Company and Geopozos, S.A. relating to the acquisition of assets by
the Company.
2.2. Letter of Agreement dated March 14, 1997, between the Company and ROGI
International, S.A. relating to the issuance of shares of stock by the
Company and the acquisition of assets by the Company.
2.3. Agreement dated May 30, 1997, between the Company and Adair Oil
International Canada, Inc. pertaining to the acquisition of assets by
the Company and the issuance of shares by the Company.
3.1. A copy of the Company's articles of incorporation, as amended.
3.2. A copy of the Company's by laws, as amended.
4.1. Articles V and VI of the Company's Articles of Incorporation pertain
to certain rights of the holders of the Company's common stock and are
included with Exhibit 3.1.
4.2. Provisions of the Company's by laws which pertain to certain rights of
the holders of the Company's common stock are included with Exhibit
3.2.
9. Voting agreement effective June 16, 1997, entered into between holders
of the Company's common stock.
10.1. A copy of the agreement between the Company and Geopozos dated
February 27, 1997, is filed as Exhibit 2.1 hereto.
10.2 A copy of the letter agreement between the Company and Geopozos and
ROGI International dated March 14, 1997, is filed as Exhibit 2.2
hereto.
10.3. A copy of the agreement between the Company and Adair Oil
International Canada, Inc. dated May 30, 1997, is filed as Exhibit 2.3
hereto.
<PAGE> 26
10.4. A copy of the Joint Operating Agreement effective March 5, 1997,
between the Company and Geopozos.
23. The consent of Braden, Bennink, Goldstein, Gazaway & Company, PLLC.
Reports on Form 8-K.
The Company filed a report on Form 8-K dated July 28, 1997, relating
to the Item 4, Changes in Registrant's Certifying Accountants.
The Company filed another Form 8-K dated August 1, 1997, relating to
Items 1, 2 and 5. These items pertain to changes in control of the registrant,
the acquisition of assets and other events.
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the
registrant caused this report to be signed on its behalf by the undersigned,
thereunto duly authorized.
Adair International Oil and Gas, Inc.
DATED August 14, 1997 By /s/ Earl Roberts
President
SIGNATURES TITLE
/s/ John W. Adair Chairman of the Board and Chief
John W. Adair Executive Officer
(Principal Executive Officer)
/s/ Earl Roberts President and Director
Earl Roberts
/s/ Jalal Alghani Vice President and Chief Financial Officer
Jalal Alghani (Principal Financial and Accounting Officer)
<PAGE> 27
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors
Adair International Oil and Gas, Inc.
We have audited the accompanying balance sheet of Adair International
Oil and Gas, Inc. as of May 31, 1997, and the related statements of operations,
changes in stockholders' equity and cash flows for each of the two years ended
May 31, 1997 and 1996. 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 audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide 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 Adair International
Oil and Gas, Inc. as of May 31, 1997, and the results of their operations,
changes in stockholders' equity and their cash flows for each of the two years
ended May 31, 1997 and 1996, in conformity with generally accepted accounting
principles.
As discussed in Note 2 to the financial statements, the realization of
significant assets is contingent upon obtaining financing sufficient to fund
the necessary development costs. Final arrangements for such financing has not
yet been obtained. As described in Notes 2 and 6, in connection with the asset
acquisition described in Note 2, shares have been issued to foreign
corporations whose ownership is unknown to the company and we were unable to
verify management's representations that these entities are not related parties.
See also, Note 11 for subsequent events which have occurred since May 31, 1997.
Braden, Bennink, Goldstein, Gazaway & Company, P.L.L.C.
August 8, 1997
<PAGE> 28
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ADAIR INTERNATIONAL OIL AND GAS, INC.
BALANCE SHEET
MAY 31, 1997
<TABLE>
<CAPTION>
ASSETS 1997
-----------
<S> <C>
Current Assets
Cash $ 130,175
Accounts receivable, net of an allowance of -0- 21,809
-----------
Total Current Assets 151,984
-----------
Property and Equipment
Oil and gas properties and equipment, using the full
cost method of accounting (Notes 1, 3 & 9) net of accumulated
writedowns of the domestic full cost pool of $3,087,908 7,858,674
Office and other property and equipment, at cost 4,210
-----------
7,862,884
Less accumulated depreciation, depletion and amortization (4,119,767)
-----------
Total Property and Equipment 3,743,117
-----------
TOTAL ASSETS $ 3,895,101
===========
1997
-----------
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Note payable (Note 3) $ -0-
Accounts payable to related party 50,830
Accounts payable and accrued liabilities 94,491
-----------
Current Liabilities 145,321
Long-term debt (Note 3) 600,000
-----------
Total Liabilities 745,321
-----------
Commitments and Contingencies (Note 7)
Redeemable cumulative convertible preferred stock, stated value
$100 per share; 5,000,000 shares authorized; issued and
outstanding shares - 600 (Note 4) 60,000
Common Stockholders' Equity
Common stock, $.30 par value per share, 20,000,000 authorized,
10,000,000 issued and outstanding 3,000,000
Additional paid-in capital 5,896,728
Accumulated deficit (5,806,948)
-----------
Total Common Stockholders' Equity 3,089,780
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 3,895,101
===========
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 29
ADAIR INTERNATIONAL OIL AND GAS, INC.
STATEMENTS OF OPERATIONS
For the years ended May 31, 1997
<TABLE>
<CAPTION>
1997 1996
--------- ---------
<S> <C> <C>
Revenue
Oil and gas sales $ 205,920 $ 118,705
--------- ---------
Costs and expenses
Lease operating expenses 51,249 15,479
Depreciation, depletion and amortization 92,344 75,122
General and administrative 155,355 44,214
--------- ---------
Total costs and expenses 298,948 134,815
Operating loss (93,028) (16,110)
Other income - forgiveness of indebtedness (Note 3) 722,530 --
--------- ---------
Net income (loss) before taxes 629,502 (16,110)
Federal income tax expense -0- -0-
--------- ---------
Net income (loss) before dividends 629,502 -0-
Redeemable preferred stock dividends and accretion -0- -0-
--------- ---------
Net income (loss) applicable to common stock $ 629,502 $ (16,110)
========= =========
Net income (loss) per common share:
Primary $ 0.06 $ (0.01)
--------- ---------
Fully-diluted $ 0.06 $ (0.01)
--------- ---------
</TABLE>
The accompanying notes are an integral part of the financial statements
<PAGE> 30
ADAIR INTERNATIONAL OIL AND GAS, INC.
STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
For the years ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
Retained
Common Additional Earnings
Shares Stock Paid-in Capital (Deficit)
---------- ---------- --------------- -----------
<S> <C> <C> <C> <C>
Balance May 31, 1995 2,000,000 $ 600,000 $ 4,696,728 $(5,820,340)
---------- ---------- ----------- -----------
Net loss for the year (16,110)
Balance, May 31, 1996 2,000,000 600,000 4,696,728 (5,836,450)
Stock dividend, May, 1997 2,000,000 600,000 (600,000)
Issuance of common stock
In connection with foreign
acquisitions 6,000,000 1,800,000 1,200,000
Net income for the year 629,502
---------- ---------- ----------- -----------
Balance May 31, 1997 10,000,000 $3,000,000 $ 5,896,728 $(5,806,948)
========== ========== =========== ===========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 31
ADAIR INTERNATIONAL OIL AND GAS, INC.
STATEMENTS OF CASH FLOWS
For the years ended May 31, 1997 and 1996
<TABLE>
<CAPTION>
1997 1996
----------- --------
<S> <C> <C>
Cash flows from operating activities
Net income $ 629,502 $(16,110)
Adjustments to reconcile net income (loss) to net cash
provided by operating activities:
(Increase) decrease in accounts receivable 152,715 (30,916)
Writedown of full cost pool 81,954 75,134
Increase (decrease) in accounts payable (27,949) (39,921)
Increase (decrease) in accrued expenses 15,136 16,173
Forgiveness of indebtedness (Note 3) (722,530) --
----------- --------
Net cash provided by operating activities 128,828 4,360
Cash flows from investing activities
Purchase of fixed assets (4,210) --
----------- --------
Net cash provided by investing activities (4,210) --
Net increase in cash and cash equivalents 124,618 4,360
Cash and cash equivalents at beginning of year 5,557 1,197
----------- --------
Cash and cash equivalents at end of year $ 130,175 $ 5,557
=========== ========
Supplemental Disclosures:
Interest paid $ 0 $ 0
=========== ========
Income taxes paid $ 0 $ 0
=========== ========
Schedule of non-cash investing and financing activities
Issuance of common stock
for foreign oil and gas property (Note 2) $ 3,000,000 $ 0
=========== ========
Issuance of promissory note for foreign oil and gas
property (Note 2) $ 600,000 $ 0
=========== ========
Forgiveness of short-term indebtedness $ 722,530 $ 0
=========== ========
Common stock dividend $ 600,000 $ 0
=========== ========
</TABLE>
The accompanying notes are an integral part of the financial statements.
<PAGE> 32
ADAIR INTERNATIONAL OIL AND GAS, INC.
NOTES TO FINANCIAL STATEMENTS
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Adair International Oil and Gas, Inc. (Formerly Roberts Oil
and Gas, Inc.)("the Company") was incorporated under the laws of the
state of Texas on November 7, 1980. Since inception the Company's
primary purpose has been the exploration, development and production
of oil and gas properties in the United States. During the year ended
May 31, 1997, as described in Note 2, the Company acquired proven
properties located in Colombia. After May 31, 1997 as described in
Note 11, a 51% interest in the Company's outstanding Common Stock was
acquired by Adair Oil and Gas International of Canada, Bahama
Corporation, and the Company name was changed to Adair International
Oil and Gas, Inc.
ACCOUNTS RECEIVABLE
Accounts receivable result from revenues attributable to
non-operating interests in domestic oil and gas properties. No reserve
for bad debts exists because they are all deemed to be fully
collectible.
CASH AND CASH EQUIVALENTS
For purposes of the statement of cash flows, the Company
considers all highly liquid debt instruments purchased with a maturity
of three months or less to be cash equivalents. The carrying amount
approximates fair value because of the short maturities of those
instruments.
<PAGE> 33
PROPERTY AND EQUIPMENT
The Company follows the full-cost method of accounting for
its oil and gas properties and, accordingly, capitalizes all costs
associated with property acquisition, exploration and development in
separate cost centers for each country. Such costs do not exceed the
sum of the present value of estimated proved reserves and the value of
unproved properties including consideration for income tax benefits.
Depreciation and depletion of oil and gas properties is
computed using all capitalized costs and estimated future development
and abandonment costs, exclusive of oil and gas properties not yet
evaluated, on a unit of production method based on estimated proved
reserves.
The cost of other categories of property and equipment are
depreciated on a straight-line basis over the estimated useful lives
of the assets for financial statement purposes and accelerated methods
for federal income tax purposes.
Gains and losses on dispositions of oil and gas properties
are recognized only when there is a significant change in the
relationship between costs and proved reserves. Gains or losses on
dispositions of assets other that oil and gas properties are credited
or charged to operations. Expenditures for repairs and minor
replacements are charged to expense.
In accordance with the full cost method of accounting, the
net capitalized costs of oil and gas properties are not to exceed
their related estimated future net revenues discounted at 10 percent,
net of tax considerations, plus the lower of cost or estimated fair
market value of unproved properties.
Substantially all of the Company's exploration, development
and production activities are conducted jointly with others and,
accordingly, the financial statements reflect only the Company's
proportionate interest in such activities.
INCOME TAXES
The Company accounts for income taxes pursuant to the asset
and liability method of computing deferred income taxes. Deferred tax
assets and liabilities are established for the temporary differences
between the financial reporting bases and the tax bases of the
Company's assets and liabilities at enacted tax rates expected to be
in effect when such amounts are realized or settled. Valuation
allowances are established, when necessary, to reduce deferred tax
assets to the amount expected to be realized.
SIGNIFICANT ACCOUNTING ADJUSTMENTS
The full cost pool was written down by $55,785 and $75,122 in
1997 and 1996 respectively. The write-down primarily reflects a
decrease in the valuation of proved reserves. Future write-downs of
the full cost pool may be required if (i) declining prices and other
unfavorable industry trends continue, (ii) production is not replaced
by reserve additions and (iii) further impairments of unevaluated
properties or downward revisions to proved reserves are required.
EARNINGS PER SHARE INFORMATION
Earnings per share are computed by dividing earnings (loss)
by the weighted average number of common shares outstanding adjusted
for conversion of common stock equivalents, where applicable
outstanding during the period. The calculation of fully diluted
earnings per common share additionally assumes the conversion of the
cumulative convertible preferred stock.
<PAGE> 34
USE OF ESTIMATES
The preparation of financial statements in conformity with
generally accepted accounting principles requires management to make
estimates and assumptions that effect 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 reporting period. Actual results
could differ from those estimates.
RECLASSIFICATIONS
Certain previously reported financial information has been
reclassified and prior unaudited results have been restated to conform
to the current year's presentation and to give effect to adjustments
resulting from the audit.
2. ACQUISITION
On February 27, 1997, Roberts Oil and Gas, Inc. (The
"Company") entered into an agreement with Geopozos, S.A. ("Geopozos")
pursuant to which it agreed to issue shares of its common stock to
Geopozos (the "Geopozos Agreement"), subject to approval by the
Company's board of directors and to be implemented on May 20, 1997. As
part of the Geopozos Agreement the Company agreed to issue to Geopozos
two million (2,000,000) shares of its common stock and a promissory
note in the principal amount of six hundred thousand dollars
($600,000) in exchange for certain assets. In connection with the
acquisition of those assets, on March 14, 1997, the Company was
directed by ROGI International S.A., (a party to the Geopozos
agreement and an unrelated company incorporated under the laws of
Panama), to issue the aforementioned two million (2,000,000) shares of
its common stock to two entities and four million (4,000,000) shares
of its common stock to seven foreign corporations and one individual
in exchange for the assets being acquired.
The assets which were transferred to the Company in exchange
for the promissory note and the issuance of shares consisted of a
contract, known as the "Chimichaqua Association" contract relating to
a 100% working interest covering rights to explore and drill for
hydrocarbons in specified locations in Colombia. The assignment of the
interest from Geopozos to the Company is subject to the approval of
the Colombian Ministry of Mines and Ecopetrol (the Colombian
government owned oil company).
The shares issued in connection with this acquisition were
authorized but unissued shares of the Company. To date, the Company
has not been informed of the relationship or affiliation, if any,
among the entities to whom these shares were issued.
At May 31, 1997 the property acquired contained proven
non-producing gas reserves, as described in Note 9, " Supplemental Oil
and Gas Disclosures", which was recorded at a cost basis of
$3,600,000, and issued 6,000,000 common shares valued at $0.50 per
share. On March 5, 1997 the parties to this acquisition executed a
joint operating agreement which requires Geopozos to operate the
property for an initial period of twelve months.
Pursuant to the purchase agreement, Geopozos may nominate one
individual to serve on the Board of Directors and will receive a 2%
overriding royalty in all hydrocarbons produced from the properties.
At May 31, 1997
<PAGE> 35
the Company was in process of determining a development plan for the
acquired property. Realization of the value of these reserves is
contingent upon the Company obtaining financing sufficient to fund the
development costs. Firm commitments for such financing have not yet
been obtained.
3. NOTES PAYABLE AND LONG-TERM DEBT
Notes payable at May 31, consisted of the following:
<TABLE>
<CAPTION>
1997
--------
<S> <C>
Promissory note payable, as described below $600,000
Less:
Current maturities -0-
--------
Long term debt $600,000
========
</TABLE>
The Company issued a $600,000 unsecured promissory note to
Geopozos in connection with the acquisition of the Colombia properties
described in Note 2. The note bears no interest and is due and payable
in full from first funds raised for the Chimichaqua Association
Development Project, if Ecopetrol (the Colombia National Oil Company)
grants commercialization on the first well in the project. The Company
may be able to recover a like amount from recovered expenses paid by
Ecopetrol. At May 31, 1997 the note was not classified as current
because events which must occur to make the note due and payable are
not expected to occur within the next twelve months. The note has not
been discounted because it has no maturity date and the ultimate date
of payment cannot be determined.
In October , 1986, the Company renewed, rearranged and
extended a revolving credit agreement and related promissory note
dated July 1, 1985 in the original principal sum of $900,000. The note
was payable on or before December 31, 1991. As no demand for full
payment of outstanding principal and interest was made prior to the
maturity date, monthly installments of principal and interest of
$19,631 were due and payable commencing January 1, 1987 through
maturity. The note was collateralized by a mortgage, deed of trust and
assignment of production on the majority of the Company's oil and gas
properties. The majority of revenues from the Company's oil and gas
production were received directly by the lender. Payments including
this note and preferred stock dividends and redemptions were
administered by the lender. In January of 1988, the lending bank was
placed into receivership and the note began to be administered by the
Federal Deposit Insurance Corporation (FDIC). In May 1989, the FDIC
sold the note to a third party individual. There were no revisions or
modifications to the original note agreement after the FDIC or the
third party individual
assumed administration of the note. The majority of revenue from the
Company's oil and gas production were forwarded to the new third party
and subsequently, placed in suspense. Preferred stock dividends, note
payments and payments of operating and general and administrative
expenses of the Company were administered by the new third party.
On March 21, 1997 in a Houston District Court, the Company
received a declaratory judgement ruling that the holder was barred
from collection by the statute of limitations which canceled the note.
Production revenues which had been held in suspense since 1989,
aggregating $ 252,476 were released and deposited by the company in
May 1997. The promissory note was removed from the balance sheet and
forgiveness of debt income of $ 722,530 was included in the results of
operations during the year ended May 31, 1997.
The Company had no long term leases at May 31, 1997 and May
31, 1996. Rental expense for 1997 and 1996 was $6,897 and
$9,218,respectively.
<PAGE> 36
4. REDEEMABLE CUMULATIVE CONVERTIBLE PREFERRED STOCK
During the fiscal year 1986 the shareholders of the Company
authorized 5,000,000 shares of redeemable cumulative convertible
preferred stock (preferred stock) for $100 per share. The preferred
stock is non-voting and was convertible to 166.67 shares of common
stock for each share of preferred stock at any time at the
shareholders option within five years from the date of issuance.
The preferred stock was to accrue dividends at the rate of
12% per annum to be funded by a sinking fund account at a bank, to the
extent, and only to the extent, that revenues from certain oil and gas
properties being deposited with the bank exceeded operating expenses
and agreed bank debt repayment. Dividends were accumulated and the
first quarterly dividend payment was made on January 5, 1987.
Thereafter, the amount initially paid for the preferred shares were
scheduled for repayment of $100 per share plus accrued dividends in
twenty equal quarterly installments beginning April 5, 1987. The
Company was unable to make any of the scheduled principal and interest
payments on its preferred stock.
The preferred stock contained a conversion feature allowing
the holders to convert the preferred shares to common stock. At the
earlier of five years from the stock issuance date or at liquidation
of related shareholder notes, if any, the preferred shareholder could
elect one on the following redemption options:
a. To convert each share of preferred stock to 166.67 share
of common stock;
b. To have the Company redeem the preferred stock at $150
per share; or
c. To redeem the preferred stock utilizing a combination
of (a) and (b).
The premium over issue price of $50 per share was accreted
over twenty quarters using the interest method.
Prior to May 31, 1997 all preferred shares were converted to
common stock, except for 600 shares held by three shareholders. Legal
counsel for the Company determined that, pursuant to the preferred
stock agreement, the preferred shareholders who failed to convert no
longer retained their redemption rights because the statute of
limitations on such rights expired prior to May 31, 1997. The
preferred stock purchase agreement provides that, in such
circumstances, the Company may convert all remaining preferred shares
to common stock at the rate of 166.67 shares of common, subject to
adjustment for a 30:1 reverse stock split and the stock dividend on
May 12, 1997 described in Note 10. It is anticipated that in August,
1997 the Company will issue approximately 6,666 common shares in
redemption of the remaining preferred stock outstanding at May 31,
1997. Such shares are considered common stock equivalents in computing
fully diluted earnings per share.
5. INCOME TAXES
The company adopted Statement on Financial Accounting
Standards Opinion No. 109, "Accounting for Income Taxes" effective
June 1, 1994. The effect of this change did not have significant
impact on the Company's financial statements.
The difference between the approximate effective rates
presented for federal income taxes and the amounts which would be
determined by applying the statutory federal rates for fiscal 1997,
and fiscal 1996, to earnings before provision for federal income taxes
are presented below:
<TABLE>
<CAPTION>
Years ended May 31,
------------------------------------------
1997 1996
------------------------------------------
% of % of
Pretax Pretax
Amount Income Amount Income
------------------------------------------
<S> <C> <C> <C> <C>
Federal income tax at statutory rate $ 233,758 34% $ -0- 0%
Benefit from net operating loss (233,758) 34% -0- 0%
--------- --- ----- --
Income tax expense $ -0- 0% $ -0- 0%
========= === ===== ==
</TABLE>
<PAGE> 37
The sources of deferred income taxes are as follows:
<TABLE>
<CAPTION>
Years ended May 31,
----------------------------
1997 1966
----------------------------
<S> <C> <C>
Difference between book and tax depreciation,
depletion and amortization, oil and gas properties $ (19) $ 0
Effect of net operating losses 4,356,433 5,034,957
Effect of write-down of full cost pool (154,400) (68,121)
Valuation allowance for ownership changes (4,202,006) (4,966,836)
----------- -----------
$ 0 $ 0
=========== ===========
</TABLE>
Deferred taxes result primarily from the writedown of the
domestic full cost pool for book purposes which was not deductible for
tax purposes. At May 31, a valuation allowance was established to
reduce the deferred tax asset resulting from the benefit of net
operating loss carryforwards. Such allowance was established because
Section 382 of the Internal Revenue Code limits the use of operating
loss carry forwards and other tax attributes in the event of a greater
than 50% change in ownership as described in Notes 2 and 11. Because
of the ownership changes explained in Notes 2 and 11, all net
operating loss carryforwards at May 31, 1997, no longer exist.
6. RELATED PARTY TRANSACTIONS
During the years ended May 31, 1996 and 1997, the Company
incurred approximately $25,373 and $7,692 , respectively, in legal
costs paid to a Director. At May 31, 1997, $50,830 was owed.
As described in Note 2, the Company has not been informed of
the relationship or affiliation, if any, of the entities who obtained
stock in connection with that acquisition.
7. COMMITMENTS AND CONTINGENCIES
The Company is subject to extensive Federal, state, and local
environmental laws and regulations. These requirements, which change
frequently, regulate the discharge of materials into the environment.
The Company believes that it is in compliance with existing laws and
regulations.
ENVIRONMENTAL CONTINGENCIES
The oil and gas industry is subject to substantial regulation
with respect to the discharge of materials into the environment or
otherwise relating to the protection of the environment. The
exploration, development and production of oil and gas are regulated
by various governmental agencies with respect to the storage and
transportation of the hydrocarbons, the use of facilities for
processing, recovering and treating the hydrocarbons and the clean up
of the sites of the wells. Many of these activities require
governmental approvals before they can be undertaken. The costs
associated with compliance with the applicable laws and regulations
have increased the costs associated with the planning, designing,
drilling, installing, operating and plugging or abandoning of wells. To
the extent that the Company owns an interest in a well it may be
responsible for costs of environmental regulation compliance even well
after the plugging or abandonment of that well.
8. MAJOR CUSTOMERS
The respective percentages of those customers comprising 10%
or greater of the Company's sales over the past three years are as
follows:
<TABLE>
<CAPTION>
Years ended May 31
------------------
<S> <C>
1997 12%
1996 5%
</TABLE>
<PAGE> 38
9. SUPPLEMENTARY OIL AND GAS INFORMATION
Costs Incurred and Capitalized Costs in Oil and Gas Producing
Activities Costs incurred in oil and gas producing activities are as
follow:
<TABLE>
<CAPTION>
United States Colombia Total
- - -----------------------------------------------------------------------------------------------
MAY 31, 1997
OIL AND GAS PROPERTIES
<S> <C> <C> <C>
Unevaluated oil and gas properties $ -0- $ -0- $ -0-
Proved oil and gas properties 4,258,674 3,600,000 7,858,674
----------- ----------- -----------
Total capitalized costs 4,258,674 3,600,000 7,858,674
----------- ----------- -----------
Less accumulated depletion and depreciation (4,118,979) -0- (4,118,979)
----------- ----------- -----------
Capitalized costs, net $ 139,695 $ 3,600,000 $ 3,739,695
=========== =========== ===========
OTHER PROPERTY AND EQUIPMENT
Plant and equipment $ 4,210 $ -0- $ 4,210
----------- ----------- -----------
Total 4,210 -0- 4,210
Less accumulated depreciation (788) (-0-) (788)
----------- ----------- -----------
Net $ 3,422 $ -0- $ 3,422
=========== =========== ===========
Total net property and equipment $ 143,117 $ 3,600,000 $ 3,743,117
=========== =========== ===========
</TABLE>
Costs incurred in oil and gas property acquisition, exploration, and
development activities are as follows:
<TABLE>
<CAPTION>
United States Colombia Total
- - -------------------------------------------------------------------------
<S> <C> <C> <C>
1997
Exploration $ 0 $ 0 $ 0
------ ---------- ----------
Development 0 0 0
------ ---------- ----------
Acquisition of proved properties 0 3,600,000 3,600,000
------ ---------- ----------
Total costs incurred $ 0 $3,600,000 $3,600,000
====== ========== ==========
</TABLE>
Oil and gas depletion expense in 1997 and 1996 was $ 33,534 and $ 45,277,
respectively.
Presented below is a summary of proved reserves of the Company's oil and gas
properties:
Year ended May 31, 1997
<TABLE>
<CAPTION>
United States Colombia Total
- - -----------------------------------------------------------------------------------------------
OIL (BARRELS)
Proved reserves:
<S> <C> <C> <C>
Beginning of year 989 0 989
------- ---------- ----------
Acquisition, exploration and
development of minerals in place 0 0 0
------- ---------- ----------
Revisions of previous estimates 0 0 0
------- ---------- ----------
Production (211) 0 (211)
------- ---------- ----------
Sales of minerals in place 0 0 0
------- ---------- ----------
End of year 778 0 778
------- ---------- ----------
GAS (THOUSANDS OF CUBIC FEET) Proved reserves:
Beginning of year 161,960 0 161,960
------- ---------- ----------
Acquisition, exploration and
development of minerals in place 0 22,150,000 22,150,000
------- ---------- ----------
Revisions of previous estimates 0 0 0
------- ---------- ----------
Production (37,157) 0 (37,157)
------- ---------- ----------
Sales of minerals in place 0 0 0
------- ---------- ----------
End of year 124,803 22,150,000 22,274,803
======= ========== ==========
</TABLE>
<PAGE> 39
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS AND CHANGES THEREIN
RELATING TO PROVED OIL AND GAS RESERVES
The following information has been prepared in accordance with Statement of
Financial Accounting Standards No. 69, which requires the standardized measure
of discounted future net cash flows to be based on sales prices, costs and
statutory income tax rates in effect at the time the projections are made and a
10 percent per year discount rate. The projections should not be viewed as
estimates of future cash flows nor should the "standardized measure" be
interpreted as representing current value to the Company.
<TABLE>
<CAPTION>
1997
- - ------------------------------------------------------------------------------------------
(In Dollars) United States Colombia Total
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Future cash inflows $ 365,056 $ 27,647,500 $ 28,012,556
--------- ------------ ------------
Future production costs (105,834) (7,865,130) (7,970,964)
--------- ------------ ------------
Future development costs 0 (7,400,000) (7,400,000)
--------- ------------ ------------
Future income tax expenses (38,883) (4,210,006) (4,248,889)
--------- ------------ ------------
Future net cash flows 220,339 8,172,364 8,392,703
--------- ------------ ------------
10 percent annual discount for
estimated timing of cash flows (80,644) (4,429,421) (4,510,065)
--------- ------------ ------------
Standardized measure of discounted
future net cash flows $ 139,695 $ 3,742,943 $ 3,882,628
--------- ------------ ------------
</TABLE>
<TABLE>
<CAPTION>
1996
- - ------------------------------------------------------------------------------------------
(In Dollars) United States Colombia Total
- - ------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Future cash inflows $ 473,188 $ 0 $ 473,188
--------- ------------ ------------
Future production costs (127,674) 0 (127,674)
--------- ------------ ------------
Future development costs 0 0 0
--------- ------------ ------------
Future income tax expenses (51,827) 0 (51,827
--------- ------------ ------------
Future net cash flows 293,687 0 293,687
--------- ------------ ------------
10 percent annual discount for
estimated timing of cash flows (106,315) 0 (106,315)
--------- ------------ ------------
Standardized measure of discounted
future net cash flows $ 187,372 0 $ 187,372
--------- ------------ ------------
</TABLE>
<PAGE> 40
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows during 1997 and 1996.
<TABLE>
<CAPTION>
1997
- - -----------------------------------------------------------------------------------------------
(In Dollars) United States Colombia Total
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 220,661 $ 0 $ 220,661
--------- ----------- -----------
Acquisitions, discoveries and extensions 0 6,796,500 6,796,500
--------- ----------- -----------
Sales and transfers of oil and gas
produced, net of production costs (56,278) 0 (56,278)
--------- ----------- -----------
Changes in estimated future development costs 0 0 0
--------- ----------- -----------
Net changes in prices, net of production costs 0 0 0
--------- ----------- -----------
Sales of reserves in place 0 0 0
--------- ----------- -----------
Development costs incurred during the period 0 0 0
--------- ----------- -----------
Changes in production rates and other 0 0 0
--------- ----------- -----------
Revisions of previous quantity estimates 0 0 0
--------- ----------- -----------
Accretion of discount 0 0 0
--------- ----------- -----------
Net change in income taxes (24,688) (3,053,557) (3,078,245)
--------- ----------- -----------
Balance at end of year $ 139,695 $ 3,742,943 $ 3,882,638
--------- ----------- -----------
</TABLE>
<TABLE>
<CAPTION>
1996
- - -----------------------------------------------------------------------------------------------
(Dollars in thousands) United States Colombia Total
- - -----------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Balance at beginning of year $ 295,995 0 $ 295,995
--------- ----------- -----------
Acquisitions, discoveries and extensions 0 0 0
--------- ----------- -----------
Sales and transfers of oil and gas
produced, net of production costs (75,334) 0 (75,334)
--------- ----------- -----------
Changes in estimated future development costs 0 0 0
--------- ----------- -----------
Net changes in prices, net of production costs 0 0 0
--------- ----------- -----------
Sales of reserves in place 0 0 0
--------- ----------- -----------
Development costs incurred during the period 0 0 0
--------- ----------- -----------
Changes in production rates and other 0 0 0
--------- ----------- -----------
Revisions of previous quantity estimates 0 0 0
--------- ----------- -----------
Accretion of discount 0 0 0
--------- ----------- -----------
Net change in income taxes (33,329) 0 (33,329)
--------- ----------- -----------
Balance at end of year $ 187,372 $ 0 $ 187,372
--------- ----------- -----------
</TABLE>
10. STOCK DIVIDEND
In May , 1997 the Board of Directors approved a stock
dividend on the basis of a one share dividend for each share owned for
all shareholders of record at May 12, 1997. In connection with this
dividend 2,000,000 shares were issued.
11. SUBSEQUENT EVENTS
On June 16, 1997, the Company acquired a five percent net
profits interests in exploration acreage totaling 14 million acres in
Paraguay, South America and 3.5 million acres in Yemen from Adair Oil
and Gas International Canada, Inc. in exchange for 10,200,000 voting
shares in common stock. The initial 10,000,000 shares were newly
issued and the additional 200,000 came from the Company treasury stock
which, together, represent 51% of the Company's issued and then
outstanding common stock. The Company will record the cost of the
acquisition at $5,100,000 using a stock valuation of $0.50 per share.
Under the purchase agreement members of the Board of Directors at May
31, 1997 resigned and were replaced by a new board headed by the
Chairman and Chief Executive Officer of Adair. The new board retained
the services of Earl K. Roberts, as
<PAGE> 41
President and Chief Operating Officer. On July 9, 1997 the company
changed its name to Adair International Oil and Gas, Inc. and
appointed three new directors. It is expected that two additional
board members will be added in the future.
The development of the Yemen and Paraguay properties are
expected to be funded by a joint venture. The Company's net profits
interest in such properties does not require it to fund any of the
cost of exploration or development of the Yemen or Paraguay
properties.
On June 27, 1997 the Bylaws provided for an increase in
Directors from four to six.
On July 25, 1997 the Board of Directors increased the number
of authorized common shares to 100,000,000 and changed those shares to
no par value.
In July 1997 the Company sold 1,000,000 restricted common
shares to one of the new directors for $200,000.
<PAGE> 42
EXHIBIT INDEX
2.1. Purchase and Sales Agreement dated February 27, 1997, between the
Company and Geopozos, S.A. relating to the acquisition of assets by the
Company.
2.2. Letter of Agreement dated March 14, 1997, between the Company and ROGI
International, S.A. relating to the issuance of shares of stock by the
Company and the acquisition of assets by the Company.
2.3 Agreement dated May 30, 1997, between the Company and Adair Oil
International Canada, Inc. pertaining to the acquisition of assets by
the Company and the issuance of shares by the Company.
3.1. A copy of the Company's articles of incorporation, as amended.
3.2. A copy of the Company's by laws, as amended.
9. Voting agreement effective June 16, 1997, entered into between holders
of the Company's common stock.
10.4. A copy of the Joint Operating Agreement effective March 5, 1997,
between the Company and Geopozos.
23. The consent of Braden, Bennink, Goldstein, Gazaway & Company, PLLC.
27. Financial Data Schedule.
<PAGE> 1
EXHIBIT 2.1
ROBERTS OIL AND GAS, INC. LETTERHEAD
PURCHASE AND SALE AGREEMENT
This Purchase and Sale Agreement is entered into this 27th day of
February, 1997 ("Effective Date"), by and among:
Geopozos S.A., a company incorporated under the laws of Colombia, represented
by Mr. Luis Clavijo Pedromo, who is acting with full capacity and legal
authority as its President, with principal offices at Carrera 14 No. 87-39 of
201 of Santafe de Bogota D.C., Colombia ("Geo") and
Roberts Oil and Gas, Inc., incorporated under the laws of the state of Texas,
U.S.A., represented by Earl K. Roberts, who is acting with full capacity and
legal authority as its President with principal office at 8556 Katy Freeway,
Suite 106, Houston, Texas 77024 ("Buyer")
ROGI International Inc., S.A., incorporated under the laws of the Republic of
Panama, represented by Harold T. Crum who is acting with full capacity and
legal authority as its authorized Agent, with principal offices at Frederico
Boyd No. 7, Panama, Panama.
WITNESSETH
WHEREAS, Geo currently holds 100% of the rights, interests and obligations
under the Chimichagua Association Contract.
WHEREAS, Buyer wishes to acquire from Geo, One hundred percent (100%) of
rights, interests and obligations in the Chimichagua Association Contract
subject to and upon the terms provided herein.
NOW, THEREFORE, in consideration of the mutual covenants and conditions herein
contained, the parties agree as follows:
1. Subject to the provisions hereof and the considerations described in
Section 2 below:
1.1 Geo shall assign and transfer to Buyer or its assignee, One
hundred percent (100%) of all of its rights, interests and
obligations in the Chimichagua Association Contract, and in
the same percentages of its rights, interests and obligations
in the Movable Property and Real Property that belongs to Geo
in such above mentioned contract.
1.2 This assignment of interest in name to Roberts Oil and Gas,
Inc., or its assignee, is subject to the final approval of
Ecopetrol and the Ministry of Mines and Energy. The Parties
shall take all such steps as may be reasonable and necessary
to expedite such approvals, supplying for such entities, for
such purposes all such information and documents as required.
Should this approval be withheld, then a transfer of ownership
to
1
<PAGE> 2
another buyer associated company will be undertaken until
transfer is approved by Ecopetrol.
1.3 Buyer shall assume one hundred percent (100%) of all
obligations and responsibilities in regards to the Chimichagua
Association Contract.
1.4 Geo or its designated entity shall be the Operator for the
Chimichagua Association Contract (scheduled not to exceed 12
months using pre-approved AFE procedures) until such time
Roberts Oil and Gas, Inc. and/or its assignee has been
approved by Ecopetrol to assume operatorship.
1.5 A detailed Joint Operating Agreement and Accounting Procedure
will be executed between the Parties before March 14, 1997.
This procedure to allow for a Geopozos mark-up of 10% for
expenditures approved and agreed to in advance.
2. In consideration of the assignment of the mentioned One hundred
percent (100%) interest referred above, Buyer shall pay to Geo or its
designated entity the following sums and undertake the following
obligations:
2.1 The purchase price for the aforementioned assignment of
interest shall be paid and accomplished as follows:
A. Roberts Oil and Gas, Inc. agrees to raise funds
through a public stock market or private placement of
debt or equity to completely develop the proven and
probable reserves of the Chimichagua Association
contract.
B. Roberts Oil and Gas, Inc. will execute a promissory
note in favor of Geo in the amount of $600,000 to be
paid from the first funds received from the money
raising effort. Roberts Oil and Gas, Inc. shall be
due the like amount from recovered expenses if
Ecopetrol grants commercialization on the Arjona-1
well. The remainder of the recovery funds will be
paid to Geo.
C. Geo or its assignee will receive from ROGI
International Inc., S.A 2,000,000 shares of Roberts
Oil and Gas, Inc. common stock free of any pledges or
encumbrances as soon as they are issued by the
authorized transfer agent.
D. Geo will be invited to nominate an individual to
serve of the Board of Directors of Roberts Oil and
Gas, Inc.
D. Geo or its assignee will receive from Roberts Oil and
Gas, Inc. a 2% overriding royalty for all
hydrocarbons produced from the Chimichagua
Association Contract within fifteen (15) calendar
days from receipt of funds from purchaser of
hydrocarbons.
2
<PAGE> 3
2.2 Payment of all stamp taxes and Notary fees associated with the
execution of this Agreement shall be borne by the Parties.
3. Geo declares that the rights, interests and obligations of this
transfer have not been previously assigned either totally or partially
to either a natural person or a legal entity, nor has it been
mortgaged or encumbered in any form.
4. This Agreement is subject to the laws and jurisdiction of the State of
Texas, U.S.A., and it is executed under full confidential basis.
Buyer or Geo shall not disclose it without the written approval of the
other party, as well as any of the technical information and data
delivered by Geo to Buyer.
5. The validity of this Agreement is subject to the Board of Directors
approval of each of the parties that must take place before March 5,
1997. If any of the Boards deny such approval, this Agreement shall
be terminated and without any legal effect.
6. In the event that Roberts Oil and Gas, Inc. desires to transfer all or
part of its interest, rights and obligations in the Chimichagua
Association Contract, Roberts Oil and Gas, Inc. shall properly protect
all the rights granted by this Agreement to Geo, especially those
related to the Royalty payments rights mentioned in Section 2.1.E
above.
7. Roberts Oil and Gas, Inc. will have the right of first refusal to
participate or promote Geopozos' Las Quinches and Cucuana Association
Contract for a period of ninety (90) days after Geo notifies Buyer
they are ready to proceed on such project.
IN WITNESS of that the Parties hereto executed this Agreement on the date first
above written
Geopozos, S.A. Roberts Oil and Gas, Inc.
- - -------------------------------- --------------------------------
Represented by: Represented by:
Luis Clavijo Perdomo Earl K. Roberts
President President, CEO
ROGI International Inc., s.A.
- - --------------------------------
Represented by:
Harold T. Crum
Agent
3
<PAGE> 1
EXHIBIT 2.2
ROBERTS OIL AND GAS, INC. LETTERHEAD
March 14, 1997
ROGI International Inc., S.A.
Frederico Boyd No. 7
Panama
Republic of Panama
Attn: Harold Crum, Agent
Reference:The purchase of the authorized and unissued shares of
Roberts Oil and Gas, Inc., ("ROGI")
Subject: Letter of Agreement
Dear Mr. Crum:
We wish to conform the acceptance of your offer to purchase 6,000,000
authorized and unissued shares of Roberts Oil and Gas, Inc. We understand the
offer is as follows:
1. CASH - None
2 ASSETS - A minimum of US $10,500,000.00 worth of hard
assets transferred to ROGI as additional paid capital,
beneficial ownership/stewardship of Colombian Chimichuaga
Association Contract.
a) The transfer is to start immediately.
b) A current audit or value opinion will be provided to
ROGI in a form acceptable to their auditors and/or
stock exchange that will verify or attest to the
value.
3. STOCK - Corporate shares will be issued in return for assets
paid to ROGI as follows:
a) Each share will be issued on an arbitrary value of US
$0.55 equals one (1) share.
b) Corporate shares of two million (2,000,000) of
authorized and unissued stock will be issued to any
entity or person as directed by Geopozos, S.A.
c) Corporate shares of four million (4,000,000) of
authorized and unissued stock will be issued to any
entity or person as directed by ROGI International,
Inc. S.A.
I hope the foregoing states the current agreement as derived from our
meeting this day.
Agreed to and accepted by ROGI Board of Directors this date.
- - ------------------------------ -------------------------
Earl Roberts Date
Chairman, CEO, President
Roberts Oil and Gas, Inc.
- - ------------------------------ -------------------------
Harold T. Crum Date
Agent for:
ROGI International Inc., S.A.
<PAGE> 1
EXHIBIT 2.3
AGREEMENT
THIS AGREEMENT made the day and year hereafter set forth by and
between ADAIR OIL INTERNATIONAL CANADA, INC., a corporation organized and
existing under the laws of the Commonwealth of the Bahamas, ("Adair") and
ROBERTS OIL AND GAS, INC. a corporation organized and existing under the laws
of the State of Texas, ("Roberts").
In consideration of the covenants set forth herein, the parties hereto
agree as follows:
ARTICLE I.
EXCHANGE OF ASSETS FOR CAPITAL STOCK
1.1. Assignment of Assets. At the closing of the transactions
contemplated hereunder, Adair will sell, convey and assign an undivided
interest in those certain contracts for the exploration and production of oil
and gas described in Exhibit A and Exhibit B attached hereto and made a part
hereof (the "Contracts"). Such interest shall entitle Roberts to a five
percent (5%) share in the net profits earned from the exploration and
production of oil and gas from the properties referred to in the Contracts (the
"Properties"), but shall not entitle Roberts to participate in the management
and operation of the Properties.
1.2. Issuance of Capital Stock. At such closing, Roberts will issue
to Adair, 10,200,000 shares of its voting stock.
1.3. Closing. The closing of the above described exchange shall take
place at the offices of Roberts Oil and Gas, Inc., West Memorial Office park,
8556 Interstate Highway 10 West, Suite 106, Houston, Texas at 10:00 A.M. on
Monday, June 16, 1997.
1.4 Officer's Certificates. At the closing, Earl K. Roberts shall
deliver to Adair his affidavit stating that to the best of his knowledge and
belief Roberts' warranties and representations hereafter set forth are true on
the closing date as though made on such day. At the closing, John w. Adair,
Jalal Alghani and William A. Petty shall each deliver his affidavit stating
that to best of his knowledge and belief Adair's warranties and representations
hereafter set forth are true on the closing date as though made on such day.
1.5 Purchase for Investment. The certificate evidencing the shares
delivered to Adair shall bear the following legend:
"The shares represented by this certificate have not been registered
under the securities Act of 1933 (the "Act") and are "restricted
securities" as that term is defined in Rule 144 under the Act. The
shares may not be offered for sale, sold or otherwise transferred
except pursuant to an effective registration statement under the Act
or pursuant to an exemption from registration under the Act, the
availability of which is to be established to the satisfaction of the
Company."
ARTICLE II
WARRANTIES AND REPRESENTATIONS
2.1 Adair's /Warranties and Representations. Adair warrants and
represents to Roberts as follows:
a. Contracts. To the best knowledge and belief of Adair's officers,
the Contracts are valid, existing and in full force and effect.
b. Assignability. To the best knowledge and belief of
1
<PAGE> 2
Adair's officers, there is no prohibition against the assignment of an interest
in the Contracts to Roberts by the terms of the Contracts or the laws and
regulations of the governments having jurisdiction over the Contracts and Adair
has the power and authority to assign such Contracts
c. Extent of Adair's Interest. Adair intends to assign the
Contracts, subject to the interest to be assigned to Roberts hereunder, to
another entity in which Adair will own a fifty percent (50%) interest for the
purpose of securing funds for the exploration and development of the Properties
and of properties owned by Roberts.
d. Organization. Adair is a corporation organized and existing under
the laws of the Commonwealth of the Bahamas and is in good standing in such
commonwealth.
e. Authority. John W. Adair, as the Chief Executive Officer of
Adair, Jalal Alghani, as its Chief Financial Officer, and William A. Petty, as
its President, have been duly authorized by its Board of Directors and
Shareholders to enter into this Agreement on behalf of Adair.
f. Financial Statements. Adair has delivered to Roberts a copy of
its balance sheet compiled on March 18, 1997 by Rahimi, Levy & Co., Certified
Public Accountants, of Santa Monica, California. To the best knowledge and
belief of the officers of Adair, such balance sheet fairly presents the
financial condition of Adair as of March 1, 1997 and was prepared on the basis
of generally acceptable accounting principles, except that the values listed
therein are based on market values and not on cost.
g. Geophysical and Geological Reports. Every fact set forth in the
documents listed below is true and correct to best knowledge and belief of
Adair's officers, such document being:
"Geophysical and Geological Report on the Alto Panama and San Pedro
Blocks in Paraguay, South America for Adair International Oil
Co.-Canada, Inc. by Byron R. Ayme, B.Sc. April 4, 1997", and
"Exploration: Block 24 and Block 28, Republic of Yemen, Adair Oil
International, Inc., a Subsidiary of Adair International, Inc."
h. Share Ownership. No person owns any of the issued and outstanding
shares of Adair except those persons listed on Exhibit C, each of whom owns the
number of shares set forth opposite his respective name:
i. Binding Effect. The execution and delivery by Adair to Roberts of
a counterpart of this Agreement in consideration of the execution and delivery
by Roberts to Adair of a counterpart of this Agreement constitutes a binding
and enforceable obligation of Adair, subject to the conditions set forth
herein.
j. Purchase of Investment. Adair's acquisition of Robert's shares is
being made for its own account for investment and with no present intention of
resale.
k. Securities Violations. No officer, director or shareholder of
Adair has been convicted for the violations of the securities laws of the
United states or is now under investigation for the violation of such
securities laws,
2.2 Robert's Warranties and Representations. Roberts warrants and
represents to Adair as follows:
a. Organization. Roberts is a corporation organized and existing
under the laws of the State of Texas and is in good
2
<PAGE> 3
standing in such and in all other states and countries in which it engages in
business. The only states or countries in which the character of the
properties it owns or the nature of its business makes a licensing authority or
qualification necessary are Texas and Oklahoma.
b. Corporate Records. All of Roberts' Articles of Incorporation and
Bylaws, amendments thereto, Minutes of Meetings of Roberts' Board of Directors,
Unanimous Consents of its Directors, Minutes of Meetings of its Shareholders,
Unanimous Consents of its Shareholders, Capital Stock Records, List of
Shareholders, Forms 10-K, and other Corporate Records have been presented to
Adair for inspection, are the originals or true and correct copies of such and,
where applicable, represent the actions of its Directors and Shareholders. To
the best knowledge and belief of Robert's officers, the facts set forth in each
Form 10-K are true and correct, except that the reserve information is not
current.
c. Subsidiaries. Roberts owns no interest in the capital stock of
another corporation.
d. Capitalization. Roberts is authorized to issue 20,000,000 shares
of common stock of which 10,000,000 shares have been issued and are outstanding
and is authorized to issue 5,000,000 shares of preferred stock of which 600
shares have been issued and are outstanding. All of such shares are validly
issued, fully paid and non-assessable. It is not authorized to issue any other
classes of shares. Roberts has no outstanding subscriptions, contracts,
options, warrants, or other obligations to issue, sell, or otherwise dispose
of, purchase, redeem or otherwise acquire any of its shares.
e. Authority. Earl K. Roberts, as the President of Roberts and
Raymond Kerr, as its Secretary, have been duly authorized by its Board of
Directors to enter into this Agreement on behalf of Roberts.
f. Share Ownership. No persons owns more than one percent (1%) of
the issued and outstanding common shares of Roberts except those persons listed
on Exhibit D, each of whom owns the number of shares set forth opposite his
respective name:
g. S.E.C. Reporting. Roberts is in compliance with the reporting
requirements of a "reporting company" pursuant to the Securities Act of 1933,
including, without limitation, forms 10-K and 10-Q, except the financial
statements included therein are unaudited.
h. Financial Statements. Roberts has delivered to Adair copies of
the financial statements included in Forms 10-K filed with the Securities and
Exchanger Commission for the years ended May 31, 1996, May 31, 1995, May 31,
1994, May 31, 19993, May 31, 1992, May 31, 1991, May 31, 1990 and May 31, 1989.
Each balance sheet fairly presents the financial condition of Roberts as of the
date of such balance sheet, each statement of income and surplus fairly
presents the results of its operations for the period ending on the date of
such statement, and all such financial statements were prepared on the basis of
generally accepted accounting principles, consistently applied.
i. Undisclosed Liabilities. As of the date of each balance sheet
referred to above, Roberts has no liabilities or obligations of any nature,
whether accrued, absolute, contingent, or other wise, not shown on such balance
sheet, Roberts is not a party to
3
<PAGE> 4
any contract not terminable by it at will. Roberts is not a party to any
litigation, and no such litigation is threatened or contemplated.
j. Subsequent Changes. Since May 31, 1996, there has been no change
in Robert's financial condition, assets, liabilities or business, except:
(i) changes occurring in the ordinary course of business, none of
which have a materially adverse effect on its financial
conditions or business; and
(ii) the issuance by Roberts of 6,000,000 shares of its common
stock in exchange for the acquisition of the right to explore
for and produce oil and gas on certain properties in Columbia.
k. Binding Effect. The execution and delivery by Roberts to
Adair of a counterpart of this Agreement in consideration of the execution and
delivery by Adair to Roberts of a counterpart of this Agreement shall
constitute a binding and enforceable obligation of Roberts, subject to the
conditions set forth herein.
l. Securities Violations. No officer or director of Roberts or
any of its shareholders owning one percent or more of its common stock has been
convicted for the violations of the securities laws of the United States or is
now under investigation for the violation of such securities laws.
ARTICLE III
CONDUCT OF BUSINESS UNTIL CLOSING
3.1 Adair. Until the closing of the transactions contemplated
hereunder, Adair will refrain from any action which would cause its warranties
and representations as set forth herein to not be true on the closing date as
though made on such day. However, specifically, without limitation, Adair is
permitted to assign to persons other than Roberts undivided interests in the
Contracts so long as they retain at least a five-percent (5%) undivided
interest therein.
3.2 Roberts. Until the closing of the transactions contemplated
hereunder, Roberts will refrain from any action which would cause its
warranties and representations as set forth to not be true on the closing date
as though made on such day, and will conduct its business only in the ordinary
course.
ARTICLE IV
CONDITIONS PRECEDENT
4.1 Adair's Obligations. Adair shall be required to perform its
obligations at closing only if:
a. Roberts' warranties and representations were true on the date
of this Agreement and are true as of the closing date as though made on such
day.
b. Roberts shall have performed all of its obligations to be
performed by it before the closing and shall contemporarily perform all
obligations to be performed by it at the closing.
c. Roberts shall have delivered to Adair the irrevocable proxies
of its shareholders in form satisfactory to Adair, which together with the
shares to be acquired by Adair pursuant to this agreement, shall entitle Adair
to vote two-thirds of the commonstock of Roberts in favor of the amendment of
its Articles of Incorporation.
d. All members of the current Board of Directors of Roberts,
except Earl K. Roberts, shall have resigned, and there have been elected new
directors approved by Adair.
4
<PAGE> 5
4.2 Roberts' Obligations. Roberts shall be required to perform
its obligations at closing only if:
a. Adair's warranties and representations were true on the date
of this Agreement and are true as of the closing date as though made on such
day.
b. Adair shall have performed all of its obligations to be
performed by it before the closing and shall contemporarily perform all
obligations to be performed by it at the closing.
c. Adair shall have furnished Roberts with evidence reasonably
satisfactory to it that Adair has strategic partners with sufficient financial
to develop the property described in the Contracts.
d. Adair shall have furnished Roberts with the original executed
documents evidencing the Contracts and Roberts shall have determined that such
contracts are reasonable satisfactory to it.
ARTICLE V
TRANSACTIONS AFTER CLOSING
5.1 Robert's Current Projects. After the closing, Adair will
furnish to Roberts funding for the purpose of developing the projects approved
by Robert's Board of Directors as constituted after the Closing.
ARTICLE VI
OTHER
6.1 Effective Date. The effective date of the closing shall be
deemed to be May 31, 1997.
6.2 Survival of Representations. All warranties and
representations of either party hereto shall survive the closing of the
transactions contemplated hereby.
6.3 Benefits. This Agreement shall be binding on and inure to the
benefit of the successors and assigns of each of the parties hereto.
6.4 Construction. This Agreement is to be delivered in the State
of Texas, is intended to be performed in the State of Texas, and shall be
construed and enforced in accordance with the laws of such state.
6.5 Notices. All notices, demands and other communications
hereunder shall be in writing, and shall be deemed to have been given if
delivered or mailed, first class, postage prepaid, certified, return receipt
requested, and addressed to a respective party at the address set forth below:
If to Adair:
Adair Oil International Canada, Inc.
Mr. John W. Adair
10810 East 45th Street
Tulsa, Oklahoma 74101
If to Roberts:
Roberts Oil and Gas, Inc.
Mr. Earl K. Roberts
P.O. Box 22659
Houston, Texas 77227-2658
5
<PAGE> 6
IN WITNESS WHEREOF the parties hereto have signed this Agreement on
the 30th day of May, 1997.
ADAIR OIL INTERNATIONAL CANADA, INC.
By
----------------------------------
John W. Adair, Chairman and
Chief Executive Officer
By
----------------------------------
Jalal Alghani, Vice Chairman
and Chief Financial Officer
By
----------------------------------
William A. Petty, President
ROBERTS OIL AND GAS, INC.
By
----------------------------------
Earl K. Roberts, President
By
----------------------------------
Raymond Kerr, Secretary
6
<PAGE> 7
ADAIR'S SHAREHOLDERS
<TABLE>
<S> <C>
John W. Adair 10,000,000 shares
Jalal Alghani 10,000,000 shares
William A. Petty 10,000,000 shares
</TABLE>
7
<PAGE> 8
<TABLE>
<CAPTION>
Roberts' Shareholders
<S> <C>
Robert M. Burr 216,000
Carmina Panamericana, S.A. 500,000
CEDE & Co. 335,666
Betty J. Crum 100,000
Inversiones Petroleras 400,000
Raymond C. Kerry 567,616
Key Paradise Designs, Inc. 100,000
Kolima Trading, Inc. 650,000
Pardo Investors, Inc. 750,000
Petroleum Exploration Services, Inc. 1,600,000
Earl K. Roberts 1,050,950
Sales Development Services, Inc. 128,744
James C. Shindler 484,658
Robert H. Steelhammer 736,018
Sun-Shine financing Development Corp. 650,000
Terra Group, Inc. 500,000
Vigilant Investments, S.A. 750,000
Total 9,519,652
</TABLE>
8
<PAGE> 1
EXHIBIT 3.1
ARTICLES OF INCORPORATION
OF
ADAIR INTERNATIONAL OIL AND GAS, INC.
I, the undersigned natural person of the age of twenty one (21) years
of age, acting as incorporator of a Texas corporation under the Texas Business
Corporation Act, do hereby adopt the following Articles of Incorporation for
such corporation:
ARTICLE I
The name of the corporation is Adair International Oil and Gas, Inc.
ARTICLE II
The period of duration is perpetual.
ARTICLE III
The purpose for which the corporation is organized is:
To engage in petroleum business in all its phases, including the
exploration for oil, gas and other minerals, the drilling of oil and gas wells
and the production, refining, processing and sale of oil and gas and oil and
gas derivative products.
To manufacture, buy, sell, and deal in personal property, real
property and services subject to Part IV of the Texas Miscellaneous Corporation
Laws Act.
ARTICLE IV
The corporation shall have the authority to issue two classes of
shares, to be designated respectively, "preferred" and "common". The total
number of shares which the corporation is authorized to issue is 105,000,000
shares. The number of preferred shares is 5,000,000 each having a par value of
$0.01. The number of common shares authorized is 100,000,000 shares without
par value.
ARTICLE V
No holder of stock of the corporation shall be entitled as a matter of
right, preemptive or otherwise, to subscribe for or purchase any part of any
stock now or hereafter authorized to be issued, or shares thereof held in the
treasury of the corporation or securities convertible into stock, whether
issued for case or other consideration or by way of dividend or otherwise.
ARTICLE VI
At each election for directors every shareholder entitled to vote at
such election shall have the right to vote, in person or by proxy, the number
of shares owned by him for as many persons as there are directors to be elected
for whose election he has a right to vote. It is expressly prohibited for any
shareholder to cumulate his votes in any election of directors.
1
<PAGE> 2
ARTICLE VII
The corporation shall not commence business until it has received for
the issuance of its shares, consideration of the value of ONE THOUSAND DOLLARS
($1,000.00), consisting of money, labor done, or property actually received.
ARTICLE VIII
The post office address of its initial registered office is 4041
Richmond, Suite 200, Houston, Texas 77027, and the name of its initial
registered agent at such address is Earl K. Roberts.
ARTICLE IX
The number of Directors constituting the initial Board of Directors is
three (3); the names and addresses of the persons who are to serve as Directors
until the first annual meeting of the shareholders or until their successors
are elected and qualified are:
Name Address
Earl K. Roberts 4041 Richmond
Suite 200
Houston, Texas 77027
Raymond C. Kerr 1508 First City National
Bank Bldg.
Houston, Texas 77002
Bill Howell 711 Polk
Suite 826
Houston, Texas 77002
ARTICLE X
The name and address of the incorporator is:
Name Address
Raymond C. Kerr 1508 First City National
Bank Bldg.
Houston, Texas 77002
ARTICLE XI
Each Director and each officer or former Director or former officer of
this corporation or each person who may have served as its request as a
Director or officer of another corporation in which it owned shares of capital
stock or of which it is a creditor, shall be indemnified by the corporation
against liabilities imposed upon him and expenses reasonably incurred by him in
connection with any claim made against him, or any action, suit or proceeding
to which he may be a party by reason of his being or having been such Director
or officer, and against such sums as independent counsel selected by the Board
of Directors
2
<PAGE> 3
shall deem reasonable payment made in settlement of any such claims, action,
suit or proceeding primarily with a view of avoiding expenses of litigation;
provided, however, that no Director or officer shall be adjudged in such
action, suit or proceeding to be liable for negligence or misconduct in
performance of duty, or with respect to any matters which shall be settled by
the payment of sums which counsel selected by the Board of Directors shall not
deem reasonable payment made primarily with a view of avoiding expenses of
litigation, or with respect to matters for which such indemnification would be
against public policy. Such right of indemnification shall be in addition to
any other rights to which Directors and officers may be entitled.
ARTICLE XII
Any contract or other transaction between the corporation and one or
more of its directors, or between the corporation and any firm of which one or
more of its directors are members or employees, or in which they are
interested, or between the corporation and any corporation or association of
which one or more of its directors are shareholders, members, directors,
officers, or employees, or in which they are interested, shall be valid for all
purposes, notwithstanding the presence of the director or directors at the
meeting of the Board of Directors of the corporation that acts upon, or in
reference to, the contract or transaction, and notwithstanding his or their
participation in the action, if the fact of such interest shall be disclosed or
known to the Board of Directors and the Board of Directors shall, nevertheless,
authorize or ratify the contract or transaction, the interested director or
directors to be counted in determining whether a quorum is present and to be
entitled to vote on such authorization or ratification. This section shall not
be construed to invalidate any contract or other transaction that would
otherwise be valid under the common and statutory law applicable to it.
IN WITNESS WHEREOF, the undersigned has executed these Articles of
Incorporation on this 4th day of November 4th day of November, A.D., 1980.
/s/ Raymond C. Kerr
RAYMOND C. KERR
THE STATE OF TEXAS )
)
COUNTY OF HARRIS )
I, a Notary Public, do hereby certify that on this 4th day of
November, A.D., 1980, personally appeared before me RAYMOND C. KERR, who being
by me first duly sworn, declared that he is the person who signed the foregoing
documents as incorporator, and that the statements therein contained are true.
/s/ Jacqueline Fonda
Notary Public
3
<PAGE> 1
BYLAWS
OF
ROBERTS OIL AND GAS, INC.
ARTICLE ONE
OFFICES
Registered Office
1.01 The registered office of the corporation is located at 4041
Richmond, Suite 200, Houston, Texas 77027.
Registered Agent
1.02 The name of the registered agent of the corporation at such
address EARL K. ROBERTS.
Other Offices
1.03 The corporation may also have offices at such other places,
within or without the State of Texas, where the corporation is qualified to do
business, as the Board of Directors may from time to time designate; or the
business of corporation may require.
ARTICLE TWO
SHAREHOLDERS' MEETING
Place of Meetings
2.01 Meetings of shareholders shall be held at any place within or
without the State of Texas designated by the Board of Directors pursuant to
authority hereinafter granted to the Board, or by the written consent of all
persons entitled to vote thereat. In the absence of any such designation,
shareholders' meetings shall be held at the registered office of the
corporation. Any meeting is valid whenever held if held by the written consent
of all the persons entitled to vote thereat, given either before or after the
meeting, and filed with the Secretary of the corporation.
<PAGE> 2
Time of Annual Meeting -- Business Transacted
Notice of Meetings
20.3 (1) Notice of all meetings of shareholders shall be given in
writing to shareholders entitled to vote by the President or the Secretary, or
by the officer or person calling the meeting, or, in case of his neglect or
refusal, or if there is no person charged with the duty of giving notice, by
any Director or Shareholder. The notice shall be given to each shareholder,
either personally or by prepaid mail, addressed to the shareholder at his
address appearing on the transfer books of the corporation.
Time of Notice
(2) Notice of any meeting of shareholders shall be sent to each
shareholder entitled thereto not less than ten (10) nor more than fifty (50)
days before the meeting, except in the case of a meeting for the purpose of
approving a merger or consolidation agreement, in which cash the notice must be
given not less than twenty (20) days prior to the date of the meeting.
Contents of Notice
(3) Notice of any meeting of shareholders shall specify the
place, date, and hour of the meeting. The notice shall also specify the purpose
of the meeting if it is a special meeting, or if its purpose, or one of its
purposes, will be to consider a proposed amendment of the Articles of
Incorporation, to consider a proposed reduction of stated capital without
amendment, to consider a proposed merger or consolidation, to consider a
voluntary dissolution or the revocation of a voluntary dissolution by act of
the corporation, or to consider a proposed disposition of all, or substantially
all, of the assets of the corporation outside of the ordinary course of
business.
Notice of Adjourned Meeting
(4) When a shareholders' meeting is adjourned for thirty (30)
days or more, notice of the adjourned meeting shall be given as in the case of
an original meeting. When a meeting is adjourned for less than thirty (30)
days, it is not necessary to give any notice of the time and place of the
adjourned meeting or of the business to be transacted thereat other than by
announcement at the meeting at which the adjournment is taken.
Calling of Special Meetings
2.04 (1) Upon request in writing to the President, Vice President, or
Secretary, sent by registered mail or delivered to the officer in person, by any
<PAGE> 3
persons entitled to call a meeting of shareholders, the officer forthwith shall
cause notice to be given to the shareholders entitled to vote that a meeting
will be held at a time, fixed by the officer, not less than ten (10) days after
the receipt of the request. If the notice is not given within seven (7) days
after the date of delivery, or the date of mailing of the request, the person
calling the meeting may fix the time of meeting and give the notice in the
manner provided in these bylaws. Nothing contained in this section shall be
construed as limiting, fixing, or affecting the time or date when a meeting of
shareholders called by action of the Board of Directors may be held.
Persons Entitled to Call Special Meetings
(2) Special meetings of the shareholders, for any purpose
whatsoever, may be called at any time by any of the following: (1) the
President; (2) the Board of Directors; (3) one or more shareholders holding not
less than one tenth of all the shares entitled to vote at the meetings; (4) the
executive committee.
Quorum of Shareholders
2.05 (1) The presence in person or by proxy of the persons entitled to
vote a majority of the voting shares at any meeting constitutes a quorum for
the transaction of business.
Adjournment for Lack or Loss of Quorum
(2) In the absence of a quorum or the withdrawal of enough
shareholders to leave less than a quorum, any meeting of shareholders may be
adjourned from time to time by the vote of a majority of the shares, the
holders of which are either present in person or represented by proxy thereat,
but no other business may be transferred.
Closing Transfer Books
2.06 (1) For the purpose of determining shareholders entitled to notice
of or to vote at any meeting of shareholders or any adjournment thereof, or
entitled to receive payment of any dividend, or in order to make a
determination of shareholders for any other proper purpose, the Board of
Directors may provide that the share transfer books shall be closed for a
stated period not to exceed in any case, fifty (50) days. If the transfer books
shall be closed for the purpose of determining shareholders entitled to notice
of or to vote at a meeting of shareholders, such books shall be closed for at
least ten (10) days immediately preceding such meeting.
Record Date for Determination of Shareholders
(2) In lieu of closing the share transfer books, the Board of
Directors may fix in advance a date as the record date for any such
determination of shareholders, such date in any case to be not more than fifty
(50) days and, in case of a meeting of shareholders, not less than ten (10)
days prior to the date on which the particular action, requiring such
determination of shareholders is to be taken.
<PAGE> 4
before the day preceding the election at which such votes will be cumulated. If
any shareholder gives written notice as provided above, all shareholders may
cumulate their votes.
Voting by Voice and Ballot
2.10 Elections for Directors need not be by ballot unless a
shareholder demands election by ballot at the election and before the voting
begins.
Proxies
2.11 A shareholder may vote either in person or by proxy executed in
writing by the shareholder or by his duly authorized attorney in fact. No proxy
shall be valid after eleven (11) months from the date of its execution unless
otherwise provided in the proxy. Each proxy shall be revocable unless expressly
provided therein to be irrevocable, and in no event shall it remain irrevocable
for a period of more than eleven (11) months.
Waiver of Notice
2.12 Any notice required by law or these bylaws may be waived by the
execution by the person entitled to the notice of a written waiver of such
notice, which may be signed before or after the time stated in the notice.
Action Without Meeting
2.13 Any action which, under any provision of the Texas Business
Corporation Act, may be taken at a meeting of the shareholders, may be taken
without a meeting if authorized by a writing signed by all of the persons who
would be entitled to vote on such action at a meeting,and filed with the
Secretary of the corporation. Any such signed consent, or a signed copy
thereof, shall be placed on the minute books of the corporation.
Appointment of Inspectors of Election
2.14(1) In advance of any meeting of shareholders, the Board of
Directors may appoint any persons, other than nominees for office, as
inspectors of election to act at such meeting or any adjournment thereof. If
inspectors of election are not so appointed the chairman of any such meeting
may, and on the request of any shareholder or his proxy shall, appoint
inspectors of election at the meeting. The number of inspectors shall be either
one or three. If appointed at a meeting on the request of one or more
shareholders or proxies, the majority of shares present shall determine whether
one or three inspectors are to be appointed. In case any person appointed as
inspector fails to appear or fails or refuses to act, the vacancy may be filled
by appointment by the Board of Directors in advance of the meeting, or at the
meeting by the person acting as chairman.
Duties of Inspectors
(2) The inspectors of election shall determine the number of shares
outstanding and the voting power of each, the shares represented at the
meeting, the existence of a quorum, the authenticity, validity, and effect of
proxies, receive
<PAGE> 5
notes, ballots, or consents, hear and determine all challenges and questions in
any way arising in connection with the right to vote, count and tabulate all
votes or consents, determine the result, and do such acts as may be proper to
conduct the election or vote with fairness to all shareholders. The inspectors
of election shall perform their duties impartially, in good faith, to the best
of their ability and as expeditiously as is practical.
Vote of Inspectors
(3) If there are three inspectors of election the decision, act, or
certificate of a majority is effective in all respects as the decision, act or
certificate of all.
Report of Inspectors
(4) On request of the chairman of the meeting or of any shareholder or
his proxy, the inspectors shall make a report in writing of any challenge or
question or matter determined by them and execute a certificate of any fact
found by them. Any report or certificate made by them is prima facie evidence
of the facts stated therein.
Conduct of Meetings
2.15 At every meeting of the shareholders, the President, or in his
absence, the Vice President designated by the President, or in the absence of
such designation, a chairman (who shall be one of the Vice Presidents, if any is
present) chosen by a majority in interest of the shareholders of the corporation
present in person or by proxy and entitled to vote, shall act as chairman. The
Secretary of the corporation, or in his or her absence, an Assistant Secretary,
shall act as Secretary of all meetings of the shareholders. In the absence at
such meeting of the Secretary or Assistant Secretary, the chairman may appoint
another person to act as Secretary of the meeting.
ARTICLE THREE
DIRECTORS
Directors Defined
3.01 "Directors" when used in relation to any power or duty requiring
collective action, means "Board of Directors."
Powers
3.02 The business and affairs of the corporation and all corporate
powers shall be exercised by or under authority of the Board of Directors,
subject to limitation imposed by the Texas Business Corporation Act, the
Articles of Incorporation, or these bylaws as to action which requires
authorization or approval by the shareholders.
<PAGE> 6
Number of Directors
[TO COME]
Term of Office
3.04 The Directors named in the Articles shall hold office until the
first annual meeting of shareholders and until their successors are elected and
qualified, either at an annual or a special meeting of shareholders. Directors
other than those named in the Articles shall hold office until the next annual
meeting and until their successors are elected and qualified.
Vacancies
3.05 (1) Vacancies in the Board of Directors shall exist in the
case of the happening of any of the following events: (a) the death,
resignation, or removal of any Directors; (b) the authorized number of
Directors is increased; or (c) at any annual, regular, or special meeting of
shareholders at which any Director is elected, the shareholders fail to elect
the full authorized number of Directors to be voted for at that meeting.
Declaration of Vacancy
(2) The Board of Directors may declare vacant the office of
a Director in either of the following cases: (a) if he is adjudged incompetent
by an order of court, or finally convicted of a felony; or (b) if within sixty
(60) days after notice of his election, he does not accept the office either in
writing or by attending a meeting of the Board of Directors.
Filling Vacancies by Directors
(3) Vacancies may be filled by a majority of the remaining
Directors, though less than quorum, or by a sole remaining Director. Each
Director so elected shall hold office until his successor is elected at an
annual, regular, or special meeting of the shareholders.
Filling Vacancies by Shareholders
Reduction of Authorized Number of Directors
(4) The shareholders may elect a Director at any time to
fill any vacancy not filled by the Directors. If the Board of Directors accepts
the resignation of a Director tendered to take effect at a future time, the
Board or the shareholders may elect a successor to take office when the
resignation becomes effective. A reduction of the authorized number of
Directors does not remove any Director prior to the expiration of his term of
office.
<PAGE> 7
Removal of Directors
3.06 The entire Board of Directors or any individual Director may be removed
from office by a vote of shareholders holding a majority of the outstanding
shares entitled to vote at an election of Directors. However, unless cumulative
voting has been denied by statute or by the Articles of Incorporation, and if
less than the entire Board is to be removed, no one of the Directors may be
removed if the votes cast against his removal would be sufficient to elect him
if then cumulatively voted at an election of the entire Board of Directors. If
any or all Directors are so removed, new Directors may be elected at the same
meeting.
Place of Meetings
3.07 Regular meetings of the Board of Directors shall be held at any place
within or without the State of Texas which has been designated from time to
time by resolution of the Board or by written consent of all members of the
Board. In the absence of such designation, regular meetings shall be held at
the registered office of the corporation. Special meetings of the Board may be
held either at a place so designated or at the registered office. Any regular
or special meeting is valid, wherever held, if held on written consent of all
members of the Board given either before or after the meeting and filed with
the Secretary of the corporation.
Regular Meetings
[TO COME]
Call of Regular Meetings
(2) All regular meetings of the Board of Directors of this
corporation shall be called by the President, or, if he is absent or is unable
or refuses to act, by any Vice President or by any Director.
Notice of Regular Meetings
(3) Written notice of the time and place of the regular meetings of
the Board of Directors shall be delivered personally to each Director, or sent
to each Director by mail or by other form of written communication at least
seven (7) days before the meeting. If the address of a Director is not shown
on the records and is not readily ascertainable, notice shall be addressed to
him at the city or place in which the meetings of the Directors are regularly
held. Notice of the time and place of holding an adjourned meeting of a meeting
need not be given to absent Directors if the time and place are fixed at the
meeting adjourned.
Validation of Meeting Defectively Called or Noticed
(4) The transactions of any meeting of the Board of Directors,
however, called and noticed or wherever held, are as valid as though had at a
meeting duly held after regular call and notice, if a quorum is present, and
if, either before or after the meeting, each of the Directors not present
signs a waiver of notice, a consent to holding the meeting, or an approval of
the minutes thereof.
<PAGE> 1
EXHIBIT 9
VOTING AGREEMENT
THIS AGREEMENT is made on the day and year last above written by and
among the undersigned shareholders of common shares of Roberts Oil and Gas,
Inc. ("Corporation") for the purpose of voting as a unit their shares in the
Corporation.
1. Meeting. A meeting of the parties to this Agreement may be
called by parties to this Agreement holding more than one half of the shares
held by all such parties by their giving to all the parties to this Agreement
10 days prior written notice of the time and place of such meeting.
2. Subject Matter. At such meeting, the parties to this
Agreement shall determine how all of the shares of the Corporation will be
voted with respect to the amendment to the Articles of Incorporation of the
Corporation for the purpose of increasing the authorized capital stock of the
Corporation and determining the rights and privileges of the holders of each
class of such capital stock. Such determination shall be made by a vote at
such meeting of the parties to this Agreement. Each party shall be entitled to
cast one vote for each share of the Corporation's common stock he holds. Such
matter shall be determined by a majority of the shares represented at such
meeting vote in favor of such matter.
3. Voting. At any meeting of the shareholders of the Corporation
with respect to the subject matter of this Agreement, each party to this
Agreement shall cast his votes in accordance with the determination made by the
parties to this Agreement pursuant hereto.
4. Authority. Each person signing this Agreement in a
representative capacity represents that he is authorized to sign it on behalf
of his principal and to give its proxy.
5. Termination. This Agreement shall have no force or effect
after December 31, 1997.
Executed this ___ day of June, 1996.
1
<PAGE> 2
Adair Oil International
Canada, Inc.
(10,200,000) shares)
By
--------------------------
John Adair, Chief
Executive Officer
Pardo Investors, Inc.
(750,000 shares)
By
--------------------------
Betty J. Crum, Agent
Terra Group, Inc.
(500,000 shares)
By
--------------------------
Betty J. Crum, Agent
Vigilant Investments, S.A.
(750,000 shares)
By
--------------------------
Betty J. Crum, Agent
Kolima Trading, Inc.
(650,000 shares)
By
--------------------------
Betty J. Crum, Agent
Carmina Panamericana, S.A.
(500,000 shares)
By
--------------------------
Betty J. Crum, Agent
Sun-Shine Financing
Development Corporation
(650,000 shares)
By
--------------------------
Betty J. Crum, Agent
Key Paradise Designs, Inc.
(100,000 shares)
By
--------------------------
Patrico Romano
2
<PAGE> 1
JOINT OPERATING AGREEMENT
CHIMICHAGUA ASSOCIATION CONTRACT
LOW MAGDALENA VALLEY, COLOMBIA
THIS JOINT OPERATING AGREEMENT (hereinafter referred to as this "JOA"
dated effective as of the 5th day of March, 1997 (hereinafter referred to as the
"Effective Date"), is among Roberts Oil and Gas, Inc. a corporation existing
under the laws of Texas, United States of America (hereinafter referred to as
"ROG") and Geopozos S.A. a corporation existing under the laws of Colombia
(hereinafter referred to as "GEOPOZOS"). The above parties are hereinafter
collectively referred to as the "Parties" and individually referred to as a
"Party."
RECITALS
WHEREAS, on January 20, 1989, Esso Colombiana Ltd. and Empresa Colombiana de
Petrolaos (hereinafter referred to as "ECOPETROL") entered into an Exploration
and Exploitation Contract for the Chimichagua Sector (hereinafter referred to as
the "Ecopetrol Contract") protocolized by means of public deed 2892 of December
22 of 1988 of Notary 26th of the Circuit of Bogota, and duly registered before
the Ministry of Mines and Energy.
WHEREAS, Esso Colombiana Ltd. prior authorization granted by Ecopetrol assigned
to Maxus its entire interest in the mentioned Ecopetrol Contract by means of a
contract that was protocolized by Public Deed No. 782 of March 26, 1992 of
Notary 26th of the Circuit of Bogota, and duly registered before the Ministry of
Mines and Energy.
WHEREAS, Maxus prior authorization granted by Ecopetrol assigned to Geopozos its
entire interest in the mentioned Ecopetrol Contract by means of a contract that
was protocolized by Public Deed No. of 1996 of Notary of the
Circuit of Bogota, and duly registered before the Ministry of Mines and Energy.
WHEREAS, Geopozos has assigned totally all of its interest in the Ecopetrol
Contract to ROG, by means of a Purchase and Sale Agreement (hereinafter referred
as PSA) between them dated February 25, 1997.
WHEREAS the parties pursuant to the terms and provisions of Section 1.5 of the
PSA are entering into this JOA, therefore this JOA is subject to the terms and
conditions of such PSA, and
WHEREAS the Parties desire by this JOA to provide as between themselves the
basis under which the exploration, development, production and operation works
of oil and gas reserves underlying the area subject to the Ecopetrol Contract
will conduct in accordance with the terms and provisions of the Ecopetrol
Contract, the PSA and the applicable Colombian regulations.
1 of 112
<PAGE> 2
NOW THEREFORE, in consideration of the premises and of the mutual agreements
contained herein and other goods and valuable considerations, the receipt and
sufficiency of which are hereby acknowledged, the Parties agree as follows:
ARTICLE 1
DEFINITIONS
1.1 Unless otherwise expressly provided in this JOA, terms used herein
shall have the same meaning as when used in the Ecopetrol Contract.
1.2 Where the context requires, the singular shall include the plural and
the plural shall include the singular.
1.3 Definitions:
Additional Mayor facilities as used herein shall mean any capital facilities
and equipment for use in the operation on the Ecopetrol Contract other than the
facilities and equipment included in a Development Program and other than such
reasonable handing and transportation, storage facilities from the well head to
delivery facilities, if necessary, as may be required to enable Operator to
deliver Available Oil and Available Gas to the Parties as required herein and
which require an expenditure of over Two Hundred Fifty Thousand Dollars
(US $250,000).
Additional Obligatory Works as used herein shall mean any additional exploration
or development work or additional exploratory or development investment provided
by the terms of the Ecopetrol Contract or any applicable law or regulation and
which work or investment, if not performed, will require that the Ecopetrol
Contract be surrendered, in whole or in part.
Affiliate as used herein shall mean:
a) A company or corporation which is a direct or indirect subsidiary of
the party.
b) An individual or company or corporation of which the Party is a
direct or indirect subsidiary; or
c) A company or corporation which is a direct or indirect subsidiary of
an individual or a company or a corporation of which the Party is a direct or
indirect subsidiary.
For purposes of this definition, a company or corporation is a
"subsidiary" of an individual or of another company or corporation if the
latter owns directly more than fifty percent (50%) of all the shares of the
former carrying voting rights by which its management is controlled.
JOA as used herein shall mean this instrument, and any extensions, renewals,
substitutions or amendments thereof.
Appraisal Well means a well which is not an Exploratory Well or a Development
Well and is drilled with the objective of further defining a potentially
commercial discovery indicated by an exploratory well.
Authorization for Expenditure as used herein the term "AFR" shall mean an
authorization for expenditure which sets forth in an itemized fashion the
anticipated costs of a proposed operation.
2 of 112
<PAGE> 3
Available Petroleum as used herein shall mean the total volumes of Petroleum
produced less:
(i) the amount corresponding to Royalty;
(ii) The amount, if any, owned by Ecopetrol;
(iii) the amount unavoidable lost in the course of Joint Operations;
and,
(iv) the amount used in the conduct of Joint Operations.
Barrel means a quantity or unit of oil of forty-two (42) gallons of the United
States of America liquid measure, with appropriate adjustments for bottom
sediment and water (BS & W), corrected to a temperature of 60 degrees Fahrenheit
and pressure of 14.73 pounds per square inch absolute.
Budget as used herein means the estimated revenues and expenditure necessary to
carry out a Program.
Calendar Day or Day means a twenty-four (24) hour period according to the
Gregorian calendar.
Calendar Month or Month means a calendar month according to the Gregorian
calendar.
Calendar year or Year means a calendar year according to the Gregorian calendar
consisting of a period of twelve (12) calendar months commencing on January 1
and ending on the following December 31.
Casing Point means that point at which a well has been drilled, deepened or
sidetracked to its objective depth, or such greater or lesser depth as the
Parties participating in the cost of such operation mutually agree upon, and
all budgeted or agreed upon test have been run.
Commercial Field as used herein shall have the meaning given to it in the
Ecopetrol Contract.
Completed as a Producer in a relation to a Well shall mean completion of any
Well that has Commercial Production or that the Participating Parties in that
well have determined (based on data including, but not limited to, well log
data, core analysis data, drill stem test data, wire line formation test data,
or any combination of such data) capable of Commercial Production.
Contract Area as used herein shall mean that portion described on Clause 3 of
the Ecopetrol Contract.
Default Interest Rate as used herein shall mean in the case of colombian pesos
the maximum default interest rate allowed by law fixed by the Superintendency
of Banking, or in the case of Dollars the prime rate fixed by the Chase
Manhattan of New York, plus five percent (5%).
Determination, Determine, or Determined shall mean an action taken by the
Operating Committee pursuant to a vote of the Representatives in accordance
with Article 3 of this JOA.
Development Program shall mean the drilling, completing and equipping for
production of one or more wells and the transportation and storage facilities
necessary to deliver to the Parties or to purchaser the production of Petroleum
obtained therefrom. Said wells, equipment and facilities are hereinafter
referred to as "Production Facilities."
Development Well as used herein shall have the meaning given to it in the
3 of 112
<PAGE> 4
Ecopetrol Contract.
Discovery means a finding of hydrocarbon-bearing reservoir(s) by a single well
capable of producing Petroleum in such quantities that by itself, or when
combined of Petroleum that a Determination by the Operating Committee estimates
may be produced from subsequent wells in the same interpreted closure or a
structural geological trap or geological stratigraphic trap, will provide the
Parties a reasonable profit on the investments required to exploit such
discovery, taking into consideration the fair market value of the Petroleum and
all applicable costs including royalty and income tax associate with producing
and transporting such petroleum to the point of delivery to the purchaser.
Dollars means United States of America currency or the equivalent thereof in
any other currency.
Executive Committee shall mean the Committee provided for by the Ecopetrol
Contract.
Exploitation Operations as used herein shall mean the operations conducted in
the development of a Commercial Field under the supervision of the Executive
Committee, including but not limited to, any geological or geophysical
operation, or any drilling, reworking, deepening or plugging back operation
conducted with respect to any well.
Exploration Operations as used herein shall mean the operations conducted in
relation to the search and discovery of Petroleum within the Ecopetrol Contract
Area, to be run by a decision of the Operating Committee at any time, including
geological and geophysical seismic program and drilling, testing, completing,
reworking, deepening or plugging back of any well(s) obligatory or not under
the Ecopetrol Contract.
Exploration Well shall mean either:
a) a well drilled in the Ecopetrol Contract Area at a location
lying inside the untested interpreted closure of any geologic structure or
stratigraphic trap on which a well has been drilled in which Petroleum of
potentially commercial significance has been found to be present as determined
by the Operating Committee, or
b) a well drilled in the Ecopetrol Contract Area at a location
lying outside the interpreted closure of any geological structure or
stratigraphic trap on which a well has been drilled in which Petroleum of
potentially commercial significance has been found to be present as Determined
by the Operating Committee on which a Discovery has occurred; or
c) a well drilled or deepened in the Ecopetrol Contract Area at a
location lying inside the interpreted closure of any geological structure or
stratigraphic trap as determined by the Operating Committee on which a
Discovery has occurred and which well is drilled or deepened to a different
stratigraphic level from that in which such hydrocarbons were found to be
present within that interpreted closure and which is not completed in the
horizon in which such hydrocarbons were found to be present; or
d) as Determined by the Operating Committee, a well drilled in the
Ecopetrol Contract Area to confirm and/or define a potentially commercial
Discovery indicated by a), b) and/or c) herein above.
Field Terminal means the place in the Ecopetrol Contract area at which:
a) Oil is delivered for measurement, including storage and
processing installations that might be required; and/or
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<PAGE> 5
b) Natural Gas is delivered for measurement after normal field
operations.
Government means the Government of the Republic of Colombia.
Joint Account means the set of operations maintained by the Operator in
accordance with the provisions of this Agreement and of the accounting
procedure attached to the Ecopetrol Contract as Exhibit "B", in which the
Operator shall record all charges, expenditures and credits made by it in
carrying out the Joint Operations hereunder which are chargeable or creditable
to the Parties as provided herein.
Joint Operations as used herein shall have the meaning given to it in the
Ecopetrol Contract.
Market Value shall mean;
a) For Natural Gas, the weighted average realized field price of
sales to non-Affiliated third parties during each calendar year.
b) For Oil and Natural Gas liquids, the weighted average price
F.O.B point of loading received from non-Affiliated, third party customers
generally and regularly purchasing the Oil in significant volumes on
arms-length competitive terms. If the Government or its duly authorized agency
officially established a price for Oil, the price shall be the market value for
Oil in transactions in which the Government or its duly authorized agency
requires such price to be utilized. In the absence of third-party purchases in
significant volumes, the Market Value will be determined by references to the
arms-length market prices for freely traded Oils form Colombia of comparable
gravity and quality adjusted for differences in transportation costa and terms
of sale.
MCF shall mean 1000 cubic feet of natural Gas, 1 cubic foot of which shall be
the quantity of Natural Gas necessary to fill 1 cubic foot of space at a
temperature of 60' Fahrenheit and a pressure of 14.73 pounds per square inch
absolute.
Measuring Point means the point where the Petroleum production form the
Contract Area is measured for purposes of distribution to the Parties and for
distribution to Ecopetrol.
Minimum Work commitment means any mandatory exploration work required by the
terms of the Ecopetrol Contract or by a reasonable and justificable Exploration
Operation decision take by the Operating committee at any time in accordance
with article 3 of this Agreement, decision that shall be mandatory to all
Parties.
Natural Gas as used herein shall have the meaning given to it in the Ecopetrol
Contract, which is in the gaseous state a temperature of 60' Fahrenheit and a
pressure of 14.73 pounds per square inch absolute.
Non-Consent means an election by a Party not to participate in a particular
operation.
Non-consent well means a well drilled as a Non-Consent operation.
Non-Obligation Well means all wells other than minimum obligation work wells
drilled in the Ecopetrol Contract Area under the terms of this JOA.
Non-Operator means a Party other than the acting Operator.
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participate pursuant to this JOA.
Sole Risk Program Description means a proposal for sole risk work which shall
be included, in reasonably sufficient detail, the Program, scope of work and an
estimate of the costs of such Program.
Working Interest means the respective percentages of each Party in the
operating rights and rights to production under the Ecopetrol Contract which
obligates each Party to contribute to the chargeable expenses of the Joint
Account under the terms of the Ecopetrol Contract, the Farmout Agreement and
this JOA.
ARTICLE 2
PARTICIPATING INTEREST
2.1 All rights and obligations in the Ecopetrol Contract other than the
rights and obligations of Ecopetrol and all information, equipment, materials
and facilities purchased and acquired for the Joint Account shall be owned by
the Parties in undivided interest in the percentages set out in Section 2.2
below, and the rights and obligations of the Parties, as among themselves, in
respect of the Ecopetrol Contract, and any Petroleum produced thereunder shall
be governed by and be subject to the provisions of this JOA.
2.2 The Parties costs, ownership and benefits resulting from this Agreement
shall be proportionate to the Participating Working Interest of each Party,
subject to Articles 8 and 14 herein, in and the Ecopetrol Contract in relation
to all operations other than the Exploitation Operations are as follows:
ROG 100%
---
Total 100%
2.3 The percentages set forth in Article 2.2 above are the current
Participating Interest of the Parties. If from time to time the Participating
Interest of any Party increases or decreases, the proportion of costs and
expenses to be paid by that Party as well as its proportionate share of the
benefits shall be increased or decreased correspondingly in accordance with the
provisions of this JOA.
2.4 The participating working interest of Ecopetrol and the Parties,
subject to Articles 8 and 14 herein, in and the Ecopetrol Contract for the
conduct of Exploitation Operations in the development of a Commercial Field are
as follows:
ECOPETROL 50%
ROG 50%
---
Total 100%
2.5 Any assignment of a Participating Interest or part thereof by a Party
hereunder shall be conditioned upon the assignee accepting all the terms and
conditions of this JOA.
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ARTICLE 3
OPERATING COMMITTEE
3.1 There shall be created an Operating Committee to establish the goals
and objectives of the Joint Operations hereunder to be conducted under the
Ecopetrol Contract. The Operating Committee shall appoint an Operator to
manage, pursuant to contractual obligations, all operations of the Joint
Venture. The Operating Committee shall supervise that the Operator is
satisfying said goals and objectives in an orderly and professional manner. In
no way this provision shall be interpreted as reduce the contractual and legal
responsibilities of Operator before the Parties under the Ecopetrol Contract,
the Farm-out Agreement, this JOA and the applicable Columbian regulations.
3.2 Upon execution of this JOA, each Party shall designate one (1)
Representative, who shall be authorized to act for such Party, and an Alternate
Representative to act for it in its absence. Such designation shall be made by
each Party by notice in writing to the other Parties. In any matter arising
under this JOA, a Representative, or, in his absence, the Alternate
Representative, shall have full power and authority to represent and bind such
Party, and all decisions made by him or is alternate shall be deemed to be the
decisions of the Party which appointed him. Each Party at any time, may change
its Representative or Alternate Representative by giving like notice to the
other Parties, and the Operator. In addition to its Representative or
Alternate, each Party may have such advisors present at any meeting as it may
desire.
3.3 The Representatives of the Parties shall appoint by unanimous decision
the Chairman of the Operating Committee. The Operator shall act as Secretary
of the Operating Committee. The Operating Committee shall establish such
subcommittees including technical, accountant, and financial as the Operating
Committee shall deem appropriate. The functions of such subcommittees shall
be specified by the Operating Committee.
3.4 For all ordinary meetings of the Operating Committee, the Operator
shall prepare and furnish to the Parties, at least fifteen (15) Days in advance
of the date of any such meeting, a copy of the agenda and such supplementary
information as may be appropriate, together with notice of the date, time and
place of any such meeting. Any Party may add additional items to the said
agenda by written notice to all other Parties, the Chairman and the Operator,
to be received by them no later than eight (8) Days prior to a meeting. At all
meetings of the Operating Committee decisions shall be made only on such
matters as may be on the agenda, but at any of such meetings the agenda may be
amended to include other matters as to which the Representatives of all the
Parties unanimously agree.
3.5 For all decisions to be made without holding a meeting in any matter
arising under this JOA may be submitted to the Operating Committee for
consideration and to a vote, provided that such matter is submitted by notice
in writing to all Parties, upon the request of the Operator when a prompt vote
is necessary for operational reasons, such as when drilling equipment is on
location or is on route and charges are being incurred. In such event, each
Representative shall vote within forty-eight (48) hours of its receipt of such
notice, by giving written notice sent by fax of such vote to the Chairman, with
copies to all other Parties and the Operator, and any decision so reached shall
be binding in accordance with the provisions of this JOA on all the Parties
hereto. Failure by any Party to respond to any such notice as provided in the
manner above prescribed shall be deemed a negative vote. Operator shall
immediately report to the Parties by notice in writing the results of such vote
after receipt of the votes of all Parties and shall submit it promptly to each
Party as for a next meeting of the Operating Committee, and shall keep a
written record thereof open to inspection by the Parties at all reasonable
times.
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3.6 Any matter relating to Joint Operations hereunder may be submitted to the
Operating Committee for consideration and vote by means of conference telephone
or similar communications equipment by means of which all persons participating
in the meeting can hear each other, and such participation in a meeting in such
a manner shall constitute presence in person at the meeting. The Chairman
shall submit it promptly to each Party as for a next meeting of the Operating
Committee, and shall keep a written record for each such decision.
3.7 In case of emergency, the Chairman may give each Representative not less
than 72 hours notice (or such lesser notice as may be unanimously agreed by each
Representative) by telephone, to be confirmed in writing by Fax, of a meeting
stating in such notice, including the general nature of the matter or matters
to be considered at such emergency meeting.
3.8 All meetings will be held at the offices of the Operator in Santafe de
Bogota, Colombia, unless otherwise agreed to by the Parties. Any Party shall
have the right to request Operator to call additional meetings at any time but
no more often than once each calendar quarter, by giving twenty (20) Days
advance notice to all Parties and to Operator, including information on the
matters which the requesting Party wishes to discuss. Minutes of each meeting
shall be prepared, approved, signed by the Representatives of the Parties and
the Operator within each meeting and kept by the Operator and furnished to
each Party within fifteen (15) Days after such meeting. Unless all parties are
notified of objections thereto within such fifteen (15) Days after the date of
their receipt of the minutes of such meeting, the record of the meeting shall
be deemed to have been agreed to by the Parties. However, no Party, or
Participating Party if less than all Parties participate in the meeting, shall
modify its vote cast and recorded at the Operating Committee meeting to which
the Minutes relate.
3.9 All matters within the jurisdiction of the Operating Committee properly
brought before it as provided in this JOA shall be Determined by the
affirmative vote of two (2) or more Parties (Parties which are Affiliates of
each other are considered one (1) Party for this purpose) owning Participating
Interests aggregating fifty-one percent (51%)or more of the total Participating
Interests of all Parties and such a Determination shall be binding upon all
Parties unless specific provisions of this JOA require that a Determination be
made otherwise, in which event the specific provisions shall prevail. Each
Party through its Representative or substitute by the Alternate Representative
shall be entitled to a vote equal to its Participating Interest at the time the
vote is taken in each meeting.
3.10 Without limiting the generality of the foreign, meetings of the Operating
Committee shall be called as follows:
a) The Operating Committee shall meet at least quarterly during March,
June, September, and December of each calendar year during the term of this
Agreement for the purpose of discussing and agreeing in relation with the
Exploration activities done by the Operator, and any other matters proposed by
any of the Parties or by the Operator, including the approval of the annual
Program and Budget to be submitted to Ecopetrol pursuant to Clause 7 of the
Ecopetrol Contract and referred to in Article 7 herein below or any other
matter. The Operating Committee shall also use the quarterly meetings to
consider the Exploitation Operations and the matters that will be discussed at
the regularly scheduled quarterly meetings of the Executive Committee during
January, April, July, and October, referred to in Clause 18.2 of the Ecopetrol
Contract.
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b) The Operating Committee shall meet to consider any additional
work required by Ecopetrol before the acceptance of a Commercial Field pursuant
to Clause 9.3 of the Ecopetrol Contract, within one month after Operator
receives notice of such additional work from Ecopetrol.
c) At the request of any Party, the Operating Committee shall meet
to consider whether to renounce the Ecopetrol Contract pursuant to Chapter VI
of such contract. Any decision to renounce the Ecopetrol Contract must be by
unanimous vote of the Representatives of the Parties.
d) The Operating Committee shall meet to consider the matters that
will be discussed at any special meeting of the Executive Committee as referred
to in Clause 18.3 of the Ecopetrol Contract.
e) Within six (6) weeks after the first Commercial Field has been
accepted by Ecopetrol, the Operating Committee shall hold a special meeting to
consider the first work Program and Budget to be submitted to the Executive
Committee as referred to in Clause 11.1 of the Ecopetrol Contract and Article 7
of this Agreement.
f) The Operating Committee shall meet on or before September 15 of
each year if Ecopetrol has advised Operators of recommended changes in the
annual program of activities and budget in order to discuss and, if
appropriate, approve said recommended change.
g) The Operating Committee shall meet each year following approval
of the work Program and Budget for the following year if necessary in order for
the Parties to vote on operations which were materially changed by the
Executive Committee.
h) The Operating Committee shall meet to approve by majority vote
any portion of the Ecopetrol Contract Area to be returned to Ecopetrol pursuant
to Clause 8 of the Ecopetrol Contract.
3.11 All important matters concerning Joint Operations, including but not
limited to the following, shall be submitted to the Operating Committee for
Determination unless otherwise agreed unanimously by the Parties in a
particular case:
a) To approve by a majority vote after the minimum Work Commitment
as established in Clause 5 of the Ecopetrol Contract has been performed new
Exploration Operations in the Ecopetrol Contract Area as Additional Obligatory
Work for all the Parties, including but not limited to shooting of a new
seismic and related works, drilling of a new Exploratory or Development Well.
b) To approve by a majority vote the Exploration Programs and
Operation to be conducted by Contractors and/or sub-contractor under
responsibility and control of the Operator during any Exploration Phase,
including budgets and revisions and amendments thereto; seismic programs and
related works, environmental license and other permits, social works in the
area of operations, security, location, drilling, additional testings,
completion, plugging back, deepening, sidetracking relating to the Obligation
Wells or any well, including any additional work required by Ecopetrol before
the acceptance of the Commercial Field, according to Clause 9.3 of the
Ecopetrol Contract.
c) To decide by a majority vote a drilling of any appraisal well
for obtaining financing from any individual or financing institution or whether
to develop a Commercial Field without Ecopetrol's participation, according to
Clause 9.5 of the Ecopetrol Contract. For purposes of this Agreement
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the decision to drill the appraisal well shall be considered an Obligation Work
for all the Parties, unless otherwise other decision will be taken by the
majority vote of the Operating Committee.
d) To approve by a majority vote the Exploitation Operations to be
included in work Programs and Budgets (or revisions or additions thereto
proposed to Ecopetrol.
f) To approve by a majority vote the area in each reservoir
considered capable of producing commercial quantities of petroleum for
submission to Ecopetrol for acceptance of a Commercial Field pursuant to Clause
9.1 of the Ecopetrol Contract.
g) To approve by majority vote any revision or addition to an
approve work Program and Budget proposed by Ecopetrol pursuant to Clause 11.1
of the Ecopetrol Contract.
h) To approve by a majority vote to review and discuss the Maximum
Efficiency Rate for each Commercial Field to be submitted by the Operator to
the Executive Committee every six (6) months, in accordance with Clause 12.1 of
the Ecopetrol Contract.
i) To approve by a majority vote to review and discuss spacing
methods development drilling to be presented by the Operator to the Executive
Committee each year in accordance with Clause 12.2 of the Ecopetrol Contract.
j) To approve by a majority vote to review and discuss programs
prepared by Operator every three (3) months showing participation in production
and distribution for the next six (6) months, in accordance with Clause 12.3 of
the Ecopetrol Contract.
k) To approve by majority vote to consider the use of any Natural
Gas part of any financing programs, including but not limited to such programs
and Exploitation Operations propose to the Executive Committee, pursuant to
Clause 15 of the Ecopetrol Contract.
l) To approve by a majority vote any unitization program to be
presents to the Executive Committee and negotiated with Outside parties in
accordance with Clause 15 and 16 of the Ecopetrol Contract.
m) To approve by a majority vote the vote position to be taken by
the Operator's representative in meetings of the Executive Committee.
n) To approve by a majority vote exploration, development and
production operations for the exclusive account of the Parties under Clause 21
of the Ecopetrol Contract in the event that such operations are not approved by
the Executive Committee.
o) To approve by a majority vote the abandonment of any well.
p) Subject to Article 13.4 hereof, to approve by a majority vote
any question concerning the relinquishment of all or part of the Contract Area;
and
r) To approve by a majority vote the Determination to appraise a
Discover for financial purposes.
3.12 If more than one operation is proposed in connection with a well, then
unless the Operating Committee (or Participating Parties in a Sole Risk
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operation) unanimously agrees on the sequence of such operations, such
proposals shall be considered and disposed of in the following order of
priority:
a) Proposals to do additional testing, coring or logging;
b) Proposals to attempt a completion in the deepest objective zone;
c) Proposals to plug back and attempt completions in shallower
zones, in ascending order;
d) Proposals to sidetrack any well to reach any zone not below the
deep original authorized objective;
e) Proposals to deepening any well, in descending order;
f) Proposals to plug and abandon any well.
3.13 All proposals for action shall be Determined by the Representatives
voting in accordance with the procedures set forth above; except, that the
following proposals, to be binding upon all the Parties, shall be adopted only
if approved by the unanimous vote of the Operating Committee.
a) Completing or conducting additional testing, coring or logging
in connection with a well drilled as a Joint Operation;
b) An expenditure in excess of Five Hundred Thousand Dollars (US
$500.00 for construction or acquisition of Additional Major Facilities;
c) Unitization of the Ecopetrol contract Area, subject to
compliance with applicable laws, regulations and the terms of the Ecopetrol
Contract;
d) Amendment of the terms of the Ecopetrol Contract;
e) Amendment of the Farmout Agreement;
f) Amendment of this JOA;
g) The Determination to recommend to Ecopetrol the designation of
a Commercial Field.
h) Non-compulsory relinquishment of all or part of the Ecopetrol
contract Area.
i) The Determination to terminate the Ecopetrol Contract pursuant
its Clause 24.03 thereof. If any Party wishes to abandon all or a portion of
his interest in the Ecopetrol Contract, such Party may do so only in accordance
with the provisions set forth in Article 10 of the JOA.
ARTICLE 4
APPOINTMENT, POWERS AND DUTIES OF OPERATOR
4.1 Geopozos is hereby appointed Operator.
4.2 In accordance with the terms of the Ecopetrol contract and subject to the
provisions of Article 3 of this JOA relating to the Operating Committee, the
Operator shall have the exclusive right and obligation to direct, manage,
conduct and have charge of all Joint Operations in a workmanlike manner, and in
accordance with good oil field practice as would a prudent and professional
capable Operator under the same or similar
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circumstances shall act. The Joint Operations will included explorations,
exploitation, appraisal, development, production, storage and transportation
operations under the Ecopetrol Contract and this JOA. All Joint Operations
shall be conducted in compliance with the terms and provisions of this
Agreement, the Ecopetrol Contract, the Regulations and applicable Colombian
laws, and in accordance with the agreed Programs and Budgets and Determinations
of the Operating Committee. Operator shall comply with and require all of its
employees, agents, contractors and sub-contractors to comply with the Ecopetrol
Contract and with all applicable laws, rules, regulations, orders or
requirements of any competent governmental body jurisdiction over the Ecopetrol
Contract Area.
4.3 The Operator shall take all reasonable steps necessary to maintain the
Ecopetrol Contract and the Ecopetrol Contract Area in good standing. Without
reducing the responsibility assuming by the Operator, the Parties shall take
all reasonable steps to assist the Operator as requested by Operator from time
to time.
4.4 The Operator will represent the Parties on the Executive Committee
provided for in Clause 21 of the Ecopetrol Contract and will abide by
Determinations of the Operating Committee provided for in Article 3 of this
Agreement, and will on behalf of Sole Risk Operation under Article 14 of this
Agreement as required by the Ecopetrol Contract.
4.5 Operator under its own responsibility and liability shall select
employees and determine their number, hours of labor, and compensation. Such
employees shall be employees of the Operator. Operator may also cause employees
of any of its Affiliates to perform its obligations under this Agreement. For
the purposes of this JOA hereto, any such employees shall be considered only
employees of Operator.
4.6 If it so desires, Operator under his own responsibility may hire
outside contractors to perform directly or under sub-contracts, all or any
portion of its functions as Operator under this JOA. Outside contractors shall
be hired on competitive professional basis, quality of the work, rates and
other valuable considerations, including acceptance of terms and conditions
established by Operator that will warranty that the Joint Operations will
conducted in accordance with the decisions of the Operating Committee. Operator
shall have all Joint Operations, including seismic, drilling, reworking,
recompleting, deepening, sidetracking, plugging back, storage and transportation
operations conducted by qualified and responsible independent contractors under
competitive contracts.
4.7 Operator shall initially prepare all work Programs and Budgets and other
data to be discussed at meetings of the Operating Committee listed in Article 3
of this JOA. Operator shall pay all costs and expenses incurred by Operator for
the Joint Account promptly and when due and payable.
4.8 Operator in conducting the works under Joint Operations may, however,
employ its own equipment and tools in the conduct of such operations pursuant
to written agreement with the Participating Parties.
4.9 Operator shall carry out each program of operations within the limits
of the work Program and Budget therefore, and shall not undertake any
operations not included in any work Program and Budget or make any expenditures
during a budget period in excess of the budgeted amounts approved by the
Operating Committee therefore except as follows:
a) If necessary to carry out a project, Operator is authorized to
make expenditures in excess of the approved work Program and Budget adopted for
such project up to but no exceeding ten (10) percent of such Budget,
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provided that such excess expenditures shall be reported promptly to the
Participating Parties by the Operator.
b) Operator is also authorized to make expenditures for operations
under the Ecopetrol Contract not included in a work Program or Budget, limited
to US$ or its equivalent in colombian pesos per project or per quarter
during the Exploration Phase and US$ or its equivalent in colombian pesos
per project or per quarter during the Exploitation Phase.
c) In the case of emergency, Operator may make such immediate
expenditures as it deems necessary for the protection of like or property, and
such emergency expenditures shall be reported promptly to the Participating
Parties by Operator. Emergencies shall include but shall not be limited to
explosions, fires, floods and other unexpected contingencies.
4.10 The Operator shall give the Parties access to all relevant technical
and financial information relating to Joint Operations. The Operator shall,
without limiting the generality of the foregoing, provide under prior signature
of a confidential contract by a Party, currently as produced or compiled, the
following data and reports pertaining to the Joint Operations and each well
being drilled:
a) Copies of all geological and geophysical data, reports and maps
prepared by the Operator or its contractors, except magnetic tapes which shall
be storage by the Operator or its designates and made available for inspection
and/or copying at the sole expense of the Party requesting it;
b) Daily drilling progress reports and completion progress;
c) Complete reports of all core analyses.
d) Copies of any logs and surveys made in the well as run and upon
completion of the well a composite of all electrical type logs and mud logs or
any other information requested upon written request acquired as a result of
the Joint Operations;
e) Upon written request received by Operator prior to the
commencement of drilling, samples of cuttings and cores marked as to depth to
be packaged and shipped at the expense of the requesting Party.
f) Copies of any well tests, including drill stem tests, core
analysis reports, bottom-hole pressure surveys, gas and condensate analysis, or
any other pertinent information.
g) Reports of production, crude oil runs, and stocks.
h) Reports on status of wells including wells not producing and
not abandoned.
i) Copy of the plugging report in the event any well is completed
as a dry hole or is otherwise abandoned;
j) Copies of the final geological reports and the drilling reports
on all wells.
k) Field and well performance data, including production reports,
reservoir studies and reserve estimates;
l) Copies of all reports furnished by the Operator to the
Colombian government and/or Ecopetrol relating to Joint Operations.
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n) Monthly Progress and Operations Reports, including the
following: 1) capital budget status; 2) statement of account by monetary
origin; and 3) inventory management;
The information listed in (a) shall be furnished by Operator on a daily basis
and the information listed in rest sub-sections shall be furnished by Operator
to the Party that request it within seven(7) days.
Any additional information as the Parties or any of them may reasonably
request, shall be furnished provided that the requesting Party shall pay the
costs of preparation thereof and that the preparation thereof will not unduly
burden the Operator's administrative and technical personnel. The Operator
shall make available at reasonable times during regular business hours other
relevant technical data and financial data for use and copying by the Party at
their sole expense.
4.11 The Party shall have the right of access to the Ecopetrol Contract Area
at their own cost, risk and expense at all reasonable times to inspect Joint
Operations. The Parties shall have the right of access at all times during
critical well operations, including the drilling or coring of potential pay
zones, logging and testing, for the purpose of observing such critical well
operations. As observers, the Parties shall be permitted to examine and make
copies of any and all data and interpretations thereof, including but not
limited to cores, samples, logs and surveys concerning operations conducted
hereunder.
4.12 The Operator shall keep the property used in Joint Operations free from
all liens, charges and encumbrances which result from joint operations,
provided that this responsibility of Operator shall not be applicable to liens,
charges and encumbrances on a Party's Participating Interest occasioned by such
Party's action or inaction.
4.13 The Operator shall prepare and keep full and complete records of
accounts in accordance with Exhibit "B" of the Ecopetrol Contract and of
technical operations hereunder in accordance with Colombian laws and applicable
Regulations, and shall prepare and furnish on time to the Operating Committee
(and furnish or cause to be furnished on time to Ecopetrol or any agency of the
Colombian Government) such reports, statements, data and information as may be
required from time to time by the Operating Committee or any such agency
concerning the Ecopetrol contract or the Joint Operations.
4.14 The Operator, its officers, directors and employees shall not be liable
to the Parties Non-Operators for injury or damage resulting from any act done
or omitted in good faith performance of its duties under this Agreement, and
that will not involve misconduct; nor shall Operator, its officers, directors
and employees be liable to the Parties for consequential damages, except in
case that the Operator will be liable for gross negligence or willful
misconduct, and for all legal purposes any of such officers, directors, and
employees shall be considered only with labor relation with the Operator.
4.15 The Operator shall have a preferred lien on and security interest in
the Participating Interest of each party respectively in Petroleum produced and
saved under this Agreement or the Ecopetrol Contract, in the proceeds from the
sale of such Petroleum and in the material and equipment acquired for the Joint
Account, to secure for operator the payment of any sum due the Operator under
this Agreement from each Party, respectively, which may become in default for
non-payment thereof.
4.16 Any legal action or suit, to the extent not covered by insurance
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charged to the Joint Account, arising out of Joint Operations shall be
compromised, settled or defended by the Operator at the expense of the Joint
Account for the benefit of the Parties; provided, however, that the Operator
shall not pay more than Fifty Thousand Dollars (US$50,000) or its equivalent in
Colombian pesos thereof, in the settlement or defense, excluding fees and
expenses of outside counsel, of any legal action or suit without first
obtaining the approval of the Operating Committee. The Operator shall promptly
notify the Parties of the filing of any such legal action or suit, when it
first occur. Operator shall not incur more than Fifty Thousand Dollars
(US$50,000) or its equivalent in Columbian Pesos in costs for legal services in
connection with any single suit, proceeding or matter without first obtaining
the approval of the Operating Committee. No settlement or compromise shall be
agreed to by Operator unless such settlement or compromise results in final
disposition of the legal action or suit. Any Party shall be entitled to
individually represent its interest in any legal action or suit at its own
expense and risk.
4.17 Where the Operator is required to secure or furnish materials, supplies,
equipment or labor for drilling, constructing, installing or maintaining
facilities or equipment, and Operator has made timely and proper attempt to
obtain same, and is unable to secure or furnish same upon reasonable terms and
conditions, including costs, Operator shall be excused from such requirement
and Parties shall be immediately and fully advised.
4.18 The Operator shall:
a) call for the tender of bids for any single contract which in
its opinion will require expenditures of more than Dollars (US$
) or its equivalent in Colombian pesos or such limit as the Operating
Committee may Determine. Where bids are required, each Party and/or its
Affiliates shall have the right to submit a bid. Services provided by a Party
or an Affiliate under a contract shall be considered to be from an outside
source for purposes of the Accounting Procedure. Operator shall not, without
the Determination of the Operating Committee, enter into any contract which
will, in Operator's opinion, require expenditures in excess of:
1) $ for Exploration
2) $ 300,000 for Development
3) $ 500,000 for Production
b) The Operator shall require that any bid shall be include any
direct indirect tax or taxes to be withheld on income, or other taxes from
payments made by the Operator for the Joint Account. The bid shall separately
indicate: (1) the amount of any such taxes which are included in respect of
any work to be performed, and (2) any such taxes which are included on account
of any wages, salaries, or other benefits paid to any of the contractor's
personnel.
c) Represent the Parties before Ecopetrol, the Colombian
government or other authorities with respect to all matters arising under the
Ecopetrol Contract (except matters related to taxes based on income, net worth
or profits) and all Joint Operations, provided, however, that Operator shall,
when time allows, first consult with the other Parties with respect to any
matters materially affecting the Parties. Each Party may be separately
represented in meetings with Ecopetrol, the Colombian government or other
authorities on such matters, provided that Operator shall be spokesman.
d) The Operator is obligated to insert in all contracts with
contractors and/or sub-Contractors a arbitration provision clause, by means of
which any differences or disputes arising in connection with such contracts
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during its life period, or subsequent to its termination shall be submitted to
Arbitration in accordance with the text refers in Clause 25 of this JOA.
4.19 The Operator is authorized to:
a) make necessary expenditures to carry out the Program(s) within
the approved Budget plus a maximum of five percent (5%) in excess of the annual
approved Budget or ten percent (10%) of any like items in such Budget; provided
that such excess expenditures shall be reported promptly to the Parties by
Operator, and provided further that the aggregate of such excess expenditures
shall not exceed Dollars (US$ ) or its equivalent in
Colombian pesos;
b) during any Calendar Year, make expenditures for Joint
Operations not included in any Program or adopted Budget, not exceeding a total
of Dollars (US$ ) or its equivalent in Colombian pesos, provided
that such expenditures shall not be for purposes previously rejected by the
Operating Committee. When expenditures have been made under this authority, the
total amount authorized hereunder shall be correspondingly reduced, and such
expenditure shall be promptly reported to the Operating Committee. If the
expanded amount is approved by the Operating Committee, the amount authorized
hereunder shall be increased back to Dollars (US$ ) or equivalent
in Colombian pesos. It being the intention of the Parties that the Operator
shall have a fixed amount established by the Operating Committee which it can
expend without obtaining prior approval; and
c) in an emergency make such immediate expenditures as it deems
necessary for the protection of life or property. Such emergency expenditures
shall be reported promptly to the Parties. Emergencies shall include but shall
not be limited to explosions, fires, floods and other unexpected contingencies.
4.20 Operator shall submit to the parties an Authority for Expenditure (AFE)
for any capital expenditure in excess of One Hundred Thousand Dollars
(US$100,000) or its equivalent in Colombian pesos. The amount stated in any
particular AFE shall not exceed the approved Budget for such expenditures. Each
such AFE shall be itemized in a manner which readily allows each Party to
correlate the expenditures covered thereby to the relevant work Program and
Budget item, upon request of any party may reasonably request.
ARTICLE 5
RESIGNATION AND REMOVAL OF OPERATOR
5.1 Geopozos shall be the Operator until such time ROG or its assignee has
been approved by Ecopetrol to assume operatorship, scheduled not to exceed 12
months. Operator may resign at any time by giving notice to the Parties. Such
resignation shall not become effective until four (4) months after said notice,
unless prior to said period a successor Operator has assumed the duties of the
Operator and Ecopetrol has waived the six (6) months requirement in Clause 10.4
of the Ecopetrol Contract. The successor Operator may not assume such duties
until it has been qualified to do business in Colombia, and until Ecopetrol has
approved the appointment of the successor Operator.
5.2 The removal of resignation of an Operator who remains a Party shall in
no way prejudice its right and obligations as a Party and it shall retain
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and hold its right to vote as a Party in the selection of a successor Operator.
If Operator give notice of its withdrawal from this Agreement and the Ecopetrol
Contract, then such notice shall also be deemed its notice of resignation as
Operator, unless the Parties unanimously agree otherwise. In the absence of
such unanimous agreement the outgoing Operator shall not hold or retain the
right to vote in the selection of a successor Operator.
5.3 Operator may be removed by the unanimous vote of the Non-Operator(s)
(excluding any Affiliate of Operator) after thirty (30) days prior notice of
that effect if:
a) it becomes bankrupt, insolvent, goes into dissolution or
liquidation, commits or suffers any act of bankruptcy or insolvency;
b) it is in material breach of its duties or obligations hereunder
and does not commence to rectify the breach within thirty (30) days of
notification by all Non-Operators (other than any Affiliate of Operator) of the
alleged default; or
c) it was an Affiliate of any Party and has ceased to be such.
5.4 Within thirty (30) days after the giving of notice to Operator of its
prospective removal or within one hundred and twenty (120) days after the date
upon which notice is received from Operator of its intention to resign, as the
case may be, the Non-Operator(s) shall notify the Operator as to whether or not
one of the Non-Operators or an Affiliate of a Non-Operator wishes to take over
as Operator. If more than one (1) Non-Operator or Affiliate thereof wishes to
become Operator, the Operator shall, subject to the provisions of Article 5.2
hereof, be selected by an affirmative majority vote of two (2) or more Parties
that are not Affiliates owning Participating Interests, provided that the
outgoing Operator shall not vote to succeed itself as Operator. If none of the
Non-Operators or their Affiliates wish to take over as Operator, the Parties
shall by unanimous vote select a third party to act as Operator or shall
establish such other procedures as will carry out the purposes of this JOA. Any
third party so selected as Operator shall enter into a written instrument with
all Parties that will establish the corresponding remuneration and other terms
and conditions that may be established by the Operating Committee, and thereby
assume the duties of Operator under this JOA.
5.5 The physical change of Operator shall take place in a way that the
continuity of operatorship is ensured so that from the effective date of its
resignation or removal, one (1) of the Non-Operators or their Affiliates or a
third party, as the case may be, shall become temporal Operator and shall be in
charge of Joint Operations. The outgoing Operator's reasonable and appropriate
demobilization costs shall be charged to the Joint Account. On the effective
date of its resignation or removal at discretion of the Operating Committee,
the outgoing Operator shall surrender possession and deliver to the succeeding
Operator, or if none, to the Non-Operators, the following:
a) Such jointly-owned facilities, equipment, materials, inventory,
cas Available Petroleum and other assets as are relevant to the duties of
Operator not previously delivered to the Parties or their respective nominees,
and shall make an inventory and accounting to the said Parties for any such
items not so delivered.
b) All books of accounts, documents, agreements and other papers
relating to Joint Operations; and
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c) All data and information obtained by the Operator on behalf of
the Parties in the course of Joint Operations.
d) Replace the former Operator with the new Operator as signatory
of any bank or financing institution account or in any title or document.
5.6 As soon as practicable after the effective date of such change of
Operator, the Parties shall audit or procure the audit of the Joint Account.
All costs and expenses incurred in connection with such audit shall be for the
Joint Account. The results of such audit shall be reported to the Operating
Committee as soon as practicable. Upon delivery of all the information referred
in point 5.5 a) to d) above, and acceptance of such audit by the Operating
Committee, the outgoing Operator shall be released and discharged from all
obligations, rights and liabilities as Operator, but without prejudice to any
legal rights and liabilities accrued prior to the date of the acceptance by the
Operating Committee of such audit.
ARTICLE 6
OPERATIONS
6.1 Operator shall conduct the Exploration Seismic Operations pursuant to
the approved Exploration Seismic Operations and Budget for the benefit and at
the expenses of all Parties.
6.2 Operator shall conduct operations for the drilling of the obligations
Wells pursuant to the AFT for the particular Obligation Well for the benefit
and at the expenses of all the Parties.
6.3 Operator shall conduct operations for Exploration Operations pursuant
to the approved Exploration Program and Budget (or any revision or addition
thereto) for the benefit and at the expenses of all the Parties.
6.4 Operator shall conduct Exploitation Operations, pursuant to the
approved Exploitation Program and Budget (or any revision or addition thereto)
for the benefit and at the expense of the Participating Parties, and Ecopetrol,
if it decides to participate. Operator shall conduct Exploitation Operations
without the approval of the Executive Committee in accordance with the
provisions of Clause 21 of the Ecopetrol Contract and the provisions of this
JOA for the benefit and at the expenses of all the Participating Parties.
ARTICLE 7
WORK PROPOSAL PROGRAMS AND BUDGETS
7.1 As soon as practical by after the effective date of this JOA or before
October 1 of each year, the Operator shall submit to the Operating Committee
for the meeting to be held in September, and itemized Program and Budget of
proposed capital and operating costs and expenses for Joint Operations for the
next succeeding Calendar Year. The Operator will take into account the
recommendations of the Non-Operator (a) in the preparation of the Budget and
Program which will be submitted to the Operating Committee for Determination.
Operator must take into consideration for preparation of the Annual Budget the
possibility of contribute with cash for invest in the Joint Operations to be
held under the proposed Budget with the sale of the natural gas currently
discovered in the Astrea-No.1 Well and Arjona-No.1 Well located in the
Ecopetrol Contract Area. The final Budget and Program will be approved within
thirty (30) days following its submittal to the Operating Committee.
Such Program and Budget shall include facilities to provide the total capacity
for Petroleum if any, produced in accordance with Article 11
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below. Within thirty (30) days following the receipt of the Budgets and
Programs, the Parties will inform the Operator in writing concerning any
changes they wish to propose. The Operator will take into account the
recommendations and changes of the Parties in the preparation of the Budgets
and Programs which will be submitted for the final approval of the Operating
Committee.
7.2 Approval of the Budget shall constitute authority for the Operator to
arrange Joint Operations and make expenditure commitments in accordance with
the approved Program and commence expenditures on January 1 of the budget year.
7.3 The Operator and any Non-Operator may also from time to time submit to
the Operating Committee revisions of the Program and Budget covering additions,
and adjustments which it considers to be in the best interest of Joint
Operations.
7.4 Subject to Article 4 hereof, Operator shall not be obligated or
entitled to perform any work or incur in any expenditure or indebtedness
hereunder for the Joint Account until the Operating Committee shall have
approved a Budget which shall authorize the expenditures necessary to complete
the Program for the Calendar Year in question.
7.5 The following procedures shall apply with respect to proposals for
Exploration Operations:
a) On or before May 1 of each year, Operator shall submit to each
Non-Operator a recommended initial work Program and Budget relating to
Exploration Operations to be conducted during that Contract Year. Such work
program and budget shall include all anticipated Exploration Operations,
including but not limited to Non-Development Wells, Development Wells,
Development Facilities and geophysical operations and shall include a detailed
itemization of each proposed operation and the estimated costs thereof.
b) On or before June 1 of each year each Non-Operator shall submit
to Operator and all Non-Operators proposed amendments and adjustments to the
initial annual work Program and Budget as proposed by Operator.
c) At the quarterly meeting of the Operating Committee to be held
during June of each year, the representatives of the Parties, shall review and
discuss the initial annual work Program and Budget for Exploration Operations
as submitted by the Operator and all amendments and adjustments thereto
proposed by Non-Operators. At such meeting the Representatives of the Parties
shall vote on all recommendations and proposals and shall formulate a final
work Program and Budget for the Exploration Operations. Those Exploration
Operations receiving a majority vote interest of the Operating Committee as
provided in Article 3.10.(a) of this Agreement shall be included in the final
work Program and Budget for Exploration Operations for that Contract year
(hereinafter the "Exploration Program and Budget"). Each Party whose
Representative votes to approve an operation for inclusion in the Exploration
Program and Budget shall be a Participating Party in said operation, and each
party whose representative votes to disapprove an operation or fails to vote on
such operations shall be a Non-Participating Party in said operation. The
participating parties shall be obligated to pay their proportionated shares of
the costs of the operation.
d) A party hereto may from time to time propose revisions to the
Exploration Program and Budget (hereinafter "Revised Exploration Operations')
in accordance with the following procedures:
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(1) In proposing such Revised Exploration Operations related to a
Non-Consent Operation, to each Participating Party a detailed itemization of
each Revised Exploration Operations and the anticipated costs thereof.
(2) Not later than 15 days from receipt of a Party's proposed Re
Exploration Operation, each Party (or Participating Party in the case of a
Non-Consent Operation) shall submit to the Party making the proposal its
proposed amendments and adjustments to the proposed Revised Exploration
Operation.
(3) At the next quarterly meeting of the Operating Committee, or at
special meeting of the Operating Committee call by the Chairman, if Operators
deems necessary due to the nature of the Revised Exploration Operations, the
Representative of each Party (or Participating Party in the case of a
Non-Consent Operations) shall vote to approve or disapprove each Revised
Exploration Operations. Any proposed Revised Exploration Operation receiving a
majority vote of the Representatives of the Parties (or the Participating
Parties in the case of a Non-Consent Operation) shall be conducted by the
Operator pursuant to Article 6.3 above. Each party whose Representative votes to
approve a Revised Exploration Operation shall be deemed a Participating Party in
the Revised Exploration Operation, and each Party whose Representative votes to
disapprove a Revised Exploration Operation or fails to vote shall be a
Non-Participating Party in the Revised Exploration Operation. The Participating
Parties shall be obligated to pay their proportionate shares of the costs of a
Revised Exploration Operation.
(4) Not less than ninety (90) days before commencing an Exploration
Operation (or Revised Exploration Operation), Operator shall notify all
Participating Parties specifying the work to be performed, the location,
proposed depth, objective formation, estimated costs and other information
relating to the operation, which AFE shall be in accordance with the approved
Exploration Program and Budget (or Revised Exploration Operation) and the terms
of this JOA, and shall be for information purposes only. The Participating
Parties shall be obligated to pay their proportionate shares of the AFE and any
additional costs authorized under Article 4.20 of this JOA.
7.6 The following procedures shall apply with respect to proposals for
Exploitation Operations:
a) On or before May 1 of each year, (except upon the first
acceptance of the Commercial Field, within two weeks after such acceptance),
Operator shall submit to each Non-Operator a recommended initial work program
and Budget for the next following Calendar Year. If there are at least six and
one-half month remaining in the Calendar Year, after the first acceptance of a
Commercial Field, the initial work program and budget shall cover the remainder
of such Calendar Year. The initial work Program and Budget shall include all
anticipated operations concerning the development of the Commercial Field,
including but not limited to Non-Development Wells, Development Wells,
Development Facilities and other operations. Said initial work Program and
Budget shall include a detailed itemization of each proposed operation and the
estimated costs thereof.
b) On or before June 1 of each year (except upon the first
acceptance of Commercial Field, within one month after such acceptance), each
Non-Operator shall submit to Operator and all other Non-Operators its proposed
amendments and adjustments to the initial work Program and Budget proposed by
Operator. Each operation in the initial work Program and Budget recommended by
Operator and each operation submitted by a Non-Operator as
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an amendment, modification, addition or adjustment thereto shall be submitted
to the Operating Committee for discussion and a vote at its June meeting (or
six weeks after the first acceptance of a Commercial Field).
c) At the quarterly meeting of the Operating Committee to be held
during June of each year (or six weeks after the first acceptance of a
Commercial Field), the Representatives of the Parties, shall review and discuss
all proposals submitted, and shall vote on each operations submitted to the
Operating Committee, and shall formulate the Work Program and Budget (the
"initial Exploitation Program and Budget") to be submitted to Ecopetrol on
August 15th of each year (or two months after the first acceptance of a
Commercial Field). Each operation receiving a majority vote shall be included
in the initial Exploitation Program and Budget. Except as hereinafter provided
each Party whose Representatives votes to approve an operation for inclusion in
the Initial Exploitation Program and Budget shall be a Participating Party in
said operation; and each Party whose Representative votes to disapprove an
operation or fails to vote shall be a Non-Participating party in said operation.
d) Operator shall present the Initial Exploitation Program and
Budget to Ecopetrol no later than August 15th of each year (or two month after
the first acceptance of a Commercial Field) in accordance with the terms of
Clause 11.1 of the Ecopetrol Contract. Operator shall inform all Parties of the
changes recommended by Ecopetrol in the Initial Exploitation Program and Budget
and shall freely consult with all Parties regarding those changes and take into
consideration all recommendations and suggestions of all Parties regarding the
preparation of the final detailed work Program and Budget (hereinafter the
"Final Exploitation Program and Budget") to be submitted to the Executive
Committee for final approval. Taking into consideration the recommendations of
Ecopetrol and Non-Operators, Operator shall submit the Final Exploitation
Program and Budget to the Executive Committee in accordance with Clause 11.1 of
the Ecopetrol Contract.
e) Those operations included in the Final Exploitation Program and
Budget approved by the Executive Committee without material change shall be
conducted by Operator in accordance with Article 6.4 of this JOA (Operation for
Exploitation Operations) at the expense and for the benefit of the
Participating Parties and Ecopetrol in accordance with the terms of the
Ecopetrol Contract.
f) Those operations included in the Final Exploitation Program and
Budget which were approved by the Executive Committee with material change
shall be considered at a special meeting of the Operating Committee, and the
Representative of each Party shall vote on each such operation. Such vote shall
supercede the initial vote provided for in Article 7.5 (c) above. Each Party
whose Representative votes to approve an operation shall be a Participating
Party in said operation, and each Party whose Representative votes to
disapprove an operation or fails to vote shall be a Non-Participating Party in
said operation. Only those operations receiving a majority vote shall be
conducted by the Operator, and they shall be conducted for the benefit of the
Participating Parties and Ecopetrol in accordance with the terms of the
Ecopetrol Contract.
g) Those operations included in the Final Exploitation Program and
Budget which are not approved by the Executive Committee, shall be considered
at a meeting of the Operating Committee and the Representative of each Party
shall vote regarding whether or not to proceed to conduct each such operation
for the exclusive account of the Parties pursuant to the terms of Clause 21 of
the Ecopetrol Contract. The vote provided for in this Article 7.5 (g) shall
supercede the vote provided for in Article 7.5 (c) above. Each Party whose
Representative votes to proceed with an operation shall be
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Ecopetrol in accordance with the terms hereof and the terms of the Ecopetrol
Contract.
(5) If any of the Revised Exploitation Operations approved by the
Executive Committee differ materially from those approved by majority vote of
the Operating Committee (or Participating Parties in the case of Non-Consent
Operations) those Revised Exploitation Operations so altered shall again be
submitted to the Parties (or Participating Parties in the case of Non-Consent
Operations) for approval in the same manner as provided in Section 7.5 (f)
above. If a Revised Exploitation Operation is not approved by the Executive
Committee and if Operator is authorized to act with respect to such Revised
Exploitation Operation pursuant to the terms of Clause 21 of the Ecopetrol
Contract and this Agreement, then at a meeting of the Operating Committee, the
Representative of each Party (or Participating Parties in the case of
Non-Consent Operation) shall vote regarding whether or not to proceed to
conduct such Revised Exploitation Operations for the exclusive account of the
Parties pursuant to the terms of Clause 21 of the Ecopetrol Contract. Each
Party whose Representative votes to proceed with such a Revised Exploitation
Operation shall be a Participating Party in the operation; and each Party whose
Representative votes not to proceed with a Revised Exploitation Operation or
fails to vote shall be a Non-Participating Party in the Revised Exploitation
Operation. Operator shall conduct those Revised Exploitation Operations which
receive the majority vote of the Operating Committee (or Participating Parties
in the case of Non-Consent Operations) at the expense and for the benefit of
the Participating Parties. Subject to the terms of Clause 21 of the Ecopetrol
Contract each Participating Party shall pay the portion of the costs and
expenses attributable to Ecopetrol's Working Interest in such operation and
except as hereinafter set forth shall receive the portion of the Petroleum
attributable to Ecopetrol's Working Interest in the operation (after deduction
of the royalty of Ecopetrol) in the ratio that each Participating Party's
Interest bears to the total interest of all Participating Parties. In the event
Revised Exploitation Operations not approved by the Executive Committee are
conducted for the exclusive account of the Parties pursuant to Clause 21 of the
Ecopetrol Contract and this Agreement, the benefits of the provisions of Clause
21 of the Ecopectrol Contract regarding the recoupment of the costs and expenses
of such operations with a premium, shall accrue solely to the Participating
Parties in the subject operations pro rata in the proportion that the
Participating Parties of each such Party in the subject operation bears to the
total Participating Interest of all Participating Parties in such operation.
(6) Not less than ninety (90) days before commencing an Exploitation
Operation (or Revised Exploitation Operation), Operator shall notify all
Participating Parties specifying the work to be performed, the location,
proposed depth, objective formation, estimated costs and other information
relating to the operation, which AFE shall be in accordance with the approved
Exploitation Program and Budget (or Revised Exploitation Operation) and the
terms of this Agreement, and shall be for information purposes only. The
Participating Parties shall be obligated to pay their proportionate shares of
all costs for the approved operations including those costs authorized under
Article 4.20 of this Agreement.
ARTICLE 8
COSTS, EXPENSES AND ADVANCES
9.1 Except as herein otherwise specifically provided, all costs, expenses and
benefits, accruing or resulting from Joint Operations, shall be borne and paid
by and accrued to the Parties in proportion to their respective Participating
Interests. All charges, credits and accounting for such expenditures among the
Parties and between the Parties and Ecopetrol and
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the rendering of accounts by Operator in respect thereof shall be in accordance
with Exhibit "B" of the Ecopetrol Contract.
8.2 Except as otherwise provided concerning advance payments, Operator
initially shall pay all costs and expenses, including required advances to
third parties; and discharge all Joint Account costs and expenses and shall
charge the Parties with their respective Participating Interest shares of such
costs and expenses.
8.3 Funds received by Operator under this JOA shall be segregated or
maintained by it as a separate fund. Funds received as estimated advances shall
be maintained by Operator in an interest-bearing account or otherwise invested
in a manner to earn interest which will not interfere with Operator's
obligation to pay all costs and expenses when due. Interest earned shall be
credited to each Party advancing such funds, pro rate, in accordance with the
Party's Participating Interest in the operation for which the advance was made.
8.4 The Operator at its election shall have the right to request and receive
from each Party payment in advance in Colombian pesos unless the Party elects
to fund in other currency of each Party's respective share of the estimated
amount of expenditures for Joint Operations for the succeeding quarterly period
payable to the Operator on the due date established by the Operator based on
the currency established by the Operating Committee. Such estimates shall be
based on the latest information available to the Operator at the time the
request to the Party for advance is made. Such request for advance shall be
furnished to the Parties at least forty-five (45) days prior to the first day
of any quarterly period in which such advances are due. The quarterly cash
calls shall be paid by each Party not earlier than the first Day of the
quarterly period to which the cash call applies. Payment shall be considered
made when good funds have been received at the bank account place designated by
the Operating Committee. Proper adjustment each quarterly cash call shall be
made between advances and expenditures in the currency so advanced as part of
the calculation of the cash call for the next succeeding quarterly period, to
the end that each Party shall bear and pay its proportionate share of actual
expenditures. Payment of any cash calls pursuant to this Article, shall not
prejudice the right of any Party to protest or question the correctness thereof
within the time limits specified in the Exhibit "B" of the Ecopetrol Contract.
8.5 The Operator shall pay all fees, rentals and imposts and shall charge the
Joint Account any such fees, rentals and imposts so paid; provided, however
each Party shall pay to the Colombian government all taxes computed by
reference to profits, income, networth, distributions or capital, required
by the applicable Regulations to be paid on account of Joint Operations or
by the terms and provisions of the Ecopetrol Contract.
8.6 Each Party shall timely pay or deliver, or cause to be paid or delivered,
to the appropriate governmental authority, all taxes computed by reference to
income, profits, net worth, distributions, or capital properly payable by such
Party, and such Party shall hold the other Parties free from any liability
therefor.
8.7 Operator shall, in accordance with Clauses 13 and 14 of the Ecopetrol
Contract, deliver to Ecopetrol the portion of the production from the Ecopetrol
Contract Area representing Ecopetrol's royalty. If the Operator is requested by
Ecopetrol to pay royalty as provided for in Clause 14.6 or the Ecopetrol
Contract, then the Operator shall make such payment, and each Party shall
furnish Operator with all information necessary for it to do so, and shall
advance to Operator such funds as are necessary to pay timely
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to Ecopetrol the royalty in respect of the share of production taken from the
Ecopetrol Contract Area and disposed of by such Party.
8.8 If the existence of a Commercial Field in the Ecopetrol Contract Area is
recognized by the Parties and Ecopetrol and Joint Operations with Ecopetrol are
commenced under the Ecopetrol Contract, the provisions of this JOA shall, as
among each of the Parties, be applicable and controlling with respect to those
operations; provided, however, that in the event of conflict between the
provisions of this Agreement and those of the Ecopetrol Contract, the latter
shall prevail as among Ecopetrol, and each of the Parties.
8.9 In each contract signed by Operator with the Contractors and/or
sub-contractors it will be an express provision, by means of which such persons
agree and accept the Parties harmless from and against any and all claims,
demands, actions, causes of action, judgements, including attorney's fees and
legal costs, arising out of or resulting from death, injury, kidnaping, to
persons or damage to property during or in connection with the services to be
reder to the Joint Operations.
8.10 It is recognized that at the time major expenditures will be required
under development activities the Parties will review the equity of the
arrangements for cash advances, billings and like matters affected thereby.
Operator shall take into consideration for such review the possibility of
obtaining additional earnings with the sale of the natural gas currently
discovered in the Astrea-No. 1 Well and Arjona-No. 1 Well located in the
Ecopetrol Contract Area.
8.10 The rules of the Accounting Procedure marked as Exhibit "B" of the
Ecopetrol Contract shall govern all the provisions for accounting, billing
payments and allocation of all direct and indirect costs, expenses and overhead
charges and containing the principles to be adopted by the Operator and the
Parties for all accounting and fiscal purposes.
ARTICLE 9
DEFAULTS AND REMEDIES
9.1 In addition to any other security rights and remedies provided for by
law or equity with respect to services rendered or materials and equipment
furnished under this Agreement, each Party grants to Operator a first lien and
security interest upon its interest in this Agreement and the Ecopetrol
Contract, including any Petroleum production, credited thereto, in order to
secure payment of its share of expense together with interest thereon at the
rate for the currency in which the payment was supposed to be made set forth in
Exhibit "B" of the Ecopetrol Contract or the maximum rate allowed by law,
whichever is less, plus attorney's fees, court costs and other related
collection costs. If any Party does not pay its share of expense when due,
Operator shall have the right, without prejudice to other rights or remedies,
to collect from the Petroleum purchaser the proceeds from the sale of such
Party's share of production until the amount owed by such Party plus interest
at the rate herein provided has been paid. Each purchaser shall be entitled to
rely on Operator's statement concerning the amount owed and interest payable
thereon. Operator grants to the parties a similar lien and security interest to
secure payment of Party's supported share of expenses, and to secure the
obligation of Operator to properly disburse funds received from the Parties.
9.2 If such Party or Parties fails to pay any cash call made due in full
within the grace period of forty-five (45) Days from the date of receipt of
notice its proportionate share or to timely pay in full its proportionate share
of any quarterly expenditure made in accordance with this JOA and/or
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Exhibit "B" of the Ecopetrol Contract, it shall be in default ("Defaulting
Party or "Defaulting Parties" if more than one (1)). The Operator shall give
notice of such failure to such Party and amount thereof to all Parties. Each
Party not in default shall, within ten (10) Days of receipt of such notice, pay
to Operator the default amount in the proportion that its Participating
Interest bears to the total Participating Interest of all Non-Defaulting
Parties. Failure of a Non-Defaulting Parties to pay when due its share of such
default amount shall likewise and with the same effect be considered a default
and said Party will become a Defaulting Party hereunder.
9.3 The amount or amounts so advanced by each Non-Defaulting Party in
respect of each Defaulting Party shall bear interest at the Default Interest
Rate from the date so advanced until said amount together with such interest to
the date of payment has been paid in full by the Defaulting Party. Any sums
paid back by Defaulting Parties and allocated by the Operator within the next
five (5) Days to the Non-Defaulting Parties in the same proportion as the sums
were advanced, and will be applied first to interest due and the balance, if
any, to the default amount.
9.4 Notwithstanding any other provision of this Agreement, the Defaulting
Party shall not be entitled to attend Operating Committee meetings or to vote
on any matter coming before the Operating Committee during the period that such
default continues. The Non-Defaulting Parties alone shall have the right, at
any time subsequent to such default and for so long as such default continues,
to decide unanimously the course and extent of all future Joint Operations and
expenditures therefor, so long as such default remains in effect, including
without limiting the generality of the foregoing, expenditures incurred in the
quarterly period with respect to which the default first occurred and any
subsequent quarterly period, and the right to approve a surrender of all or
part of the Ecopetrol Contract Area or termination of the Ecopetrol Contract.
The Defaulting Party shall be bound by such decisions and any subsequent
Determinations, and during such period of time a Defaulting Party shall not
have the right to cast any vote on the Operating Committee. Subject to
Operators prior preferred lien, if any, pursuant to Article 9.1 each
Non-Defaulting Party shall have a preferred lien on all secure the payment of
all advanced funds due it from each Defaulting Party. Such preferred lien shall
also apply against all Petroleum otherwise attributable to each Defaulting
Party's Participating Interest and the proceeds thereof and shall remain in
effect until each Non-Defaulting Party recovers the full amount plus interest
of the sums so advanced by it.
9.5 Operator may, without limiting Operator's rights at law:
a) Withhold from such Defaulting Party any further information and
privileges with respect to Joint Operations; and
b) Treat the default as an immediate and automatic assignment to the
Operator of the proceeds of the sale of the Defaulting Party's share of the
Petroleum produced, such proceeds to be set-off against the sums in default:
and from and after Operator making such election, Operator may require the
purchaser of the Defaulting Party's share of the Petroleum to make payment
therefore to Operator while the default continues. Any such action by Operator
shall not operate to release such Defaulting Party from liability for payment
of any monies and shall be in addition to and not in lieu of the other
provisions of this Article 9 and any other legal, equitable or contractual
remedy which the Operator may have for the collection of such monies.
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9.6 In order to secure Operator for the non-payment of any sum due the
Operator under this Agreement from each Party, the Operator shall have a
preferred lien on and security interest in the Participating Interest of each
Party, in Petroleum produced and saved under this JOA or the Ecopetrol
Contract, in the proceeds form the sale of such Petroleum and in the material
and equipment acquired for the Joint Account.
9.7 Subject to Operator's lien, each Non-Defaulting Party shall have a
similar lien, mutatis mutandis, on all interests of the Defaulting Party under
the Ecopetrol Contract and this JOA to secure the payment of any and all
amounts advanced, plus interest thereon. Furthermore, any overriding royalty,
production payment, net proceeds interest, carried interest, or any other
interest carved-out of the Working Interest of a Party in the Ecopetrol
Contract shall be subject to the rights of the Parties to this Agreement, and
any Party whose Working Interest is so encumbered shall be responsible
therefor. If a Party does not pay its share of expense under this Article are
insufficient for that purpose, the security rights provided for therein may be
applied against the carved-out mentioned interests with which such Working
Interests is burdened. In such event, the rights of the owner of such
carved-out interest shall be subordinated to the security rights granted.
9.8 In addition and supplemental to any other remedy which may be available
to the Operator and Non-Defaulting Party, if any Party hereto shall be in
default in payment of advances or costs incurred hereunder, including any
Minimum Work Commitment, and if the Defaulting Party shall fail to remedy such
default within sixty (60) Days (or five (5) Days if a drilling rig is on an
Exploratory Well location) after receipt of written notice thereof by
Operator, Defaulting Party, at the sole option of the Non-Defaulting Party(ies),
effective as of the date of such default, if, Petroleum share it is not enough
to pay all the debts after deducting the royalties mentioned in Clause 13 of
the Ecopetrol Contract, the Defaulting Party shall in favor of the
Non-Defaulting Party or Parties be penalized promptly and immediately thereafter
with a penalty of Two Hundred percent (200%) in each case of all amounts due.
In case of any doubt in the calculation and application of this penalty, Clause
21.2 of the Ecopetrol Contract shall be apply.
9.9 No partial or total assignment of any interest that belongs to the
Defaulting Party shall relieve the Defaulting Party of its obligation to pay
the full amount of the sums in default, together with interest and the penalty
thereon provided in Article 9.8 above. Further, the Defaulting Party shall
continue to be liable for its accrued obligations under this JOA and the
Ecopetrol Contract until relieved of such obligations by all Non-Defaulting
Parties and for interest as provided above until the Defaulting Party has paid
the full amount of the sums in default together with such interest to the date
of payment for all loss, claims liability or damage incurred by the
Non-Defaulting Parties as a consequence of such default.
9.10 Since the remedies contained under this Article are not exclusive and
are without prejudice to any remedies or actions at law or equity that are or
may be available to the Non-Defaulting Parties for the enforcement of their
rights and collection of all sums due and owing from a Defaulting Party. The
failure to exercise any right or remedy at any time shall not constitute a
waiver of such right or remedy or stop the future exercise of such right or
remedy with respect to any default or subsequent defaults in the performance by
any Party of its obligations hereunder, including but not limited to the
obligations to advance funds.
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ARTICLE 10
WITHDRAWALS
10.1 No party shall withdraw from this Agreement until any Minimum Work
Commitment for the corresponding exploration year has been satisfied.
Thereafter, any Party may withdraw from this Agreement and the Ecopetrol
Contract upon at least sixty (60) Days notice in writing to the other Parties
of its intention to withdraw; When a Party ("Withdrawing Party") shall
thereafter cease to be entitled to vote on any matter submitted to the
Operating Committee affecting or applying to Joint Operations to be conducted
after the expiration of said sixty (60) Days.
10.2 The other Parties shall each have thirty (30) Days from the receipt of
the notice from the Withdrawing Party to elect, by giving notice to the
Parties, whether to take a transfer of the Withdrawing Party's interest or to
join in the withdrawal; a failure to respond within thirty (30) Days shall be
deemed an election not to withdraw. If all Parties elect to join in the
withdrawal, all Parties shall surrender their Participating Interests at the
earliest possible date and each Party shall be liable for its Participating
Interest share of all costs of surrendering the Ecopetrol Contract and related
operations. If one or more Parties elect not to join in the withdrawal, then
the Withdrawing Party, together with those Parties electing to join in the
withdrawal ("Withdrawing Parties"), shall at their sole cost, risk and expense,
borne in proportion to their respective Participating Interests, transfer their
Participating Interests in the Ecopetrol Contract and in this Agreement and in
the jointly-owned information, materials, equipment and inventory to the
Parties electing to continue ("Remaining Parties"). Such transfer shall be
effective upon the expiration of sixty (60) Days from the date that the first
notice of withdrawal from the original Withdrawing Party was received by the
last of the Parties to receive such notice and shall be free and clear of all
liens, claims and encumbrances. The Parties joining in the withdrawal, on and
after the date that their notice to withdraw, was received by the first of the
other Parties to receive notice, shall cease to be entitled to vote on any
matter submitted to the Operating Committee affecting or applying to Joint
Operations to be conducted after the effective date of such transfer. The
Remaining Parties shall take the interest transferred in proportion to their
respective Participating Interests unless they unanimously agree otherwise.
10.3 The Withdrawing Parties, at their sole cost, shall take such actions and
execute such documents as are necessary or desirable to obtain required consent
from the Ecopetrol or the Colombian government or both, and otherwise to give
effect to the transfer. Until such consents are obtained, the Withdrawing
Parties shall hold their Participating Interests in trust for the benefit of
the Remaining Parties.
10.5 Any withdrawing Party shall continue to be bound by the provisions of
Articles 18 and 20.3 hereof as if it were a Remaining Party.
ARTICLE 11
INSURANCE
11.1 In accordance with Clause 33 of the Ecopetrol Contract, Operator shall
carry for the Joint Account and shall require contractors and/or
sub-contractors to carry all insurance required to comply with the Regulations
applicable to the Ecopetrol Contract Area and any other obtainable insurance as
may be approved by the Operating Committee. In cases compatible with the
applicable Regulations, such insurance shall waive all right of recourse
against the Parties. Each policy of insurance obtained pursuant to this Article
11.1 shall, if Parties request, include
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as named insureds any mortgages other holders of a security interest in this
Agreement and Ecopetrol Contract.
11.2 At all times while operations are conducted hereunder, Operator shall
carry insurance of the types and in the amounts as follows:
a) Workers Compensation Insurance in full compliance with all
laws, orders or rules of the Colombian government body.
b) Employees Liability Insurance in the limits of US $100,000 per
accident covering injury or death to any employee which may be outside the
scope of the Workers' Compensation under section (a) above.
c) Comprehensive General Liability Insurance with limits of
a minimum of US $750.000 for Bodily Injury and Property Damage per occurrence
including 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.
d) Comprehensive Auto Liability insurance covering owned,
non-owned and hired automotive equipment with limits of a minimum of US $750,000
for Bodily Injury and Property Damage per occurrence.
e) Operators Extra Expense Coverage (Control of Well Insurance)
with a minimum of US $1,000,000 covering its proportionate share of expenses
involved in controlling a blowout, the expense of redrilling and certain
related costs.
f) Performance Bond, to guarantee overall compliance with the
obligations and Advances imposse to Operator and/or Contractors and/or
subcontractors, equal to the percentages and amounts to be established in each
case by the Operating Committee, without the later means reduction of any
responsibility on behalf of the Operator.
Coverage under 11.2 (c), (d), (e) and (f) may be carried for Non-Operators by
Operator.
11.3 Operator shall require all contractor and/or subcontractors to obtain,
maintain and keep in force during the time in which they are engaged in the
performance of operations or services hereunder such insurances as in the best
judgement of Operator are deemed necessary taking into account the nature of
the operation or services being performed hereunder and the risks associated
therewith.
11.4 All policies of insurance obtained hereunder by either Operator shall,
to the extent obtainable, (i) name as insureds the Parties with its percentages
of interest and (ii) contain provisions or endorsements waiving the insurer's
rights of subrogation against such named insures.
11.5 All deductibles contained in the policies of insurance obtained
hereunder shall be assumed and borne by the Parties in proportion to their
respective Participating Interests.
11.6 Operator shall, upon request, obtain and send copies to Parties prior
to the commencement of operations hereunder certificates of insurance covering
the respective insurances set forth above.
11.7 When Joint Operations are conducted by all of the Parties under the
terms of this Agreement, the cost of any insurance required hereunder with
respect to such Joint Operations, as well as losses, liabilities and
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expenses incurred as the result of such Joint Operations, shall be the burden
of all Parties. When Non-Consent Operations are conducted under the terms of
this Agreement, the cost of insurance requirements hereunder with respect to
such Joint Operations, as well as losses, liabilities and expenses incurred as
the result of such operations, shall be the burden of the Participating Parties
therein.
11.8 Except as provided in this Article 11, no other insurance will be
provided by the Operator for the benefit of the Parties except by approval of
the Operating Committee or as may be required by law or contractual agreements
entered into by Operator pursuant to Joint Operations under this Agreement.
11.9 It is understood and agreed that any Party may carry any other
insurance for its own account at its sole cost and expense for its own
Directors, officers, agents and employees, provided that such insurance
shall waive all right of recourse against the other Parties.
ARTICLE 12
DISPOSITION OF PETROLEUM PRODUCED
12.1 Each Party shall have the right to take in kind or separately dispose
of its share of Available Petroleum produced and saved from the Ecopetrol
Contract. After Oil and/or Gas have been discovered in commercial quantities
and jointly-owned facilities are available for storage and/or transportation
thereof, the Operating Committee shall determine an appropriate lifting
procedure in the event any Party wishes to separately dispose of its share of
Available Petroleum. Expenses incurred by the Operator to accommodate a Party's
separate disposition of Available Petroleum which are not common to all parties
shall be charged to and borne by such Party.
12.2 Any available Petroleum to which a Party is entitled from Sole Risk
Operation under Article 14 of this Agreement shall be delivered to such Party
in addition to any Available Petroleum which it receives under this Article 12.
Any extra cost of producing, transporting or storing such Petroleum shall be
borne solely by the Party entitled to receive it. Subject to Determination of
the Operation Committee, such Party may use jointly owned facilities if and to
the extent such use will not significantly interfere with Joint Operations.
12.3 At any time, and from time to time, when any Party shall fail to take
in kind or separately dispose of its proportionate share of Available
Petroleum, Operator shall have the right (revocable at will be the Party owning
same), but not the obligation, to sell such Petroleum to others at the same
price which Operator receives for its own share of Available Petroleum, or to
purchase same at the field price paid by a third party in an arms length
transaction, for the account of such non-taking Party, Any purchase or sale by
Operator of any other Party's share of Available Petroleum shall be only for
reasonable periods of time as are consistent with the minimum needs of the
industry under the circumstances, but in no event for a period in excess of
one (1) year.
ARTICLE 13
EFFECTIVE DATE AND TERMINATION
13.1 This JOA shall be effective as of March 5th, 1997.
13.2 This JOA shall be and remain in effect for so long as the Ecopetrol
Contract is not terminated by the Parties hereto or until this Agreement is
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otherwise terminated pursuant to the terms hereof, and until all materials,
equipment, and personal property used in connection with operations hereunder
have been removed and/or disposed of and final settlement has been made between
the Parties in accordance with the terms of this JOA, the Ecopetrol Contract,
the Farmout Agreement and the Regulations.
13.3 Notwithstanding the termination of this JOA, Operator shall have the
obligation to take whatever action is necessary if reasonable, in order to
obtain and retain possession of assets in which the Parties have an interest
pursuant to Clause 22.10 of the Ecopetrol Contract, and possession of funds
which had been deposited in Colombia and aboard for anticipated Joint
Operations.
13.4 Notwithstanding the termination of this Agreement, all Parties (or
Participating Parties in the case of Non-consent Operations) shall be obligated
to pay their proportionate shares of cost incurred by Operator pursuant to
Section 13.2 above, and for the reconditioning of land, plugging of wells and
any other such activity required by Ecopetrol or any other colombian authority
on the termination of the Ecopetrol Contract.
13.5 Any termination of this Agreement shall be without prejudice to any
accrued rights and remedies of the Parties; and the provisions of this
Agreement with respect to confidential information and the settlement of
disputes shall continue to have effect notwithstanding such termination.
ARTICLE 14
OPERATIONS BY LESS THAN ALL PARTIES
14.1 The Parties irrevocably agree to undertake the Minimum Work Commitment
required by the terms of the Ecopetrol Contract or by the Operating Committee
in accordance with this Agreement After satisfying the Minimum Work Commitment,
any proposal by Operator or a Party to drill an Exploratory or Development
Well shall be submitted to the Operating Committee for consideration in the
manner provided in Article 3 hereof. Should such a proposal fail to receive the
required vote of the Operating Committee then, within thirty (30) Days after
the Operating Committee votes on such proposal, any Party or Parties desiring
to conduct such operations shall give notice in writing to all the Parties of
their desire to do so, specifying the Sole Risk Program Description, and each
other Party shall, within thirty (30) Days after receipt of notice, give notice
to all Parties, stating whether or not it desires to join in such operations.
Each Party so giving notice that it desires to participate in such operation
shall be a "Participating Party" for such purpose. If all Parties are
Participating Parties, then such operation shall be conducted for the Joint
Account of the Parties under this Agreement and at such time as may be
mutually agreed upon. If any Party receiving said notice of desire to conduct
such operations shall notify the other Parties that it does not desire to join
in such operation, or shall fail to give notice to the other Parties in the
manner and within the period above provided, then such well or other
operation, if drilled or conducted, shall be at the sole cost, risk and
expense of the Participating Parties, in the proportion that their respective
Participating Interests, bear to the sum of their Participating Interests.
14.2 Participating Parties shall arrange for the drilling by the Operator of
any Sole Risk Well within ninety (90) Days after the end of the aforesaid
notice period of thirty (30) Days, or within such longer period as may be
required to enable Operator to move in and rig up drilling equipment. Upon
receipt of written request of Participating Parties, to be given to Operator at
the and of the aforesaid notice period of thirty (30)
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Days, Operator shall drill such well at the sole cost, risk and expense of
Participating Parties; provided that such drilling will not interfere with
Operator's due execution of a Program therefore adopted by the Operating
Committee, in which event, Operator shall select an alternative time for
drilling of said well subject to approval of Participating Parties and/or the
Operating Committee, as may be required. Notwithstanding anything to the
contrary in Article 14.1 herein, Operator shall have the option, if it is not a
Participating Party therein, to elect not to act as Operator for said Sole Risk
Well and the Participating Parties shall elect one of themselves to act as
Operator of the Sole Risk Well by a majority vote of their Participating
Interests. Notwithstanding any other provision of such Article 14.1, it is
agreed that no Party or Parties shall be entitled to drill a Sole Risk
Exploratory Well until all Additional Obligatory Work shall have been completed.
14.3 If a Sole Risk Exploratory Well is drilled in accordance with the terms
hereof, Operator, if directed by Participating Parties, shall conduct
appropriate tests of reasonable duration and shall furnish only the
Participating Parties with a copy of all test data together with copies of all
logs, analyses and other information obtained in connection with the drilling
of such well. If said Sole Risk Exploratory Well results in a Discovery of
Petroleum, the Participating Parties shall be entitled to receive One Hundred
percent (100%) of the Petroleum produced from the Sole Risk Exploratory Well and
Fifty percent (50%) of the Petroleum attributable to the Non-Participating
Parties produced from subsequent Joint Account wells in the Commercial Field
associated with the Discovery until Participating Parties have received from
the proceeds of sale thereof an amount equal to One Thousand percent (1000%) of
the cost of drilling, completing and operating such well.
14.4 If a Sole Risk Development Well is completed as a well producing or
capable of producing Petroleum, the Participating Parties shall be entitled to
receive one hundred percent (100%) of the Petroleum produced from said well
until Participating Parties have received from the proceeds of sale of such
Petroleum an amount equal to six hundred percent (600%) of the drilling costs
of such well, plus four hundred percent (400%) of the cost for surface
facilities, transportation and infrastructure required to produce the Petroleum
found in such well, plus one hundred percent (100%) of the cost of operating
such facility during the reimbursement and premium period provided for herein.
Thereafter, such well shall become a jointly-owned well, as any well drilled
for the Joint Account hereunder.
14.5 Prior to the abandonment of any Sole Risk well, each Party shall be
given notice in writing of the intention to abandon such well. Each Party shall
have a period of forty-eight (48) hours thereafter (or such additional time as
any Party may reasonably request provided, that all costs attributable to such
requested additional time shall be charged to the Party making such request) in
which to elect to take over and deepen, plug back or rework and attempt to
complete such well. If no Party elects to take over such well it shall be
plugged and abandoned at the sole cost and risk of the Participating Parties.
If any Parties elect to take over such well, all costs, expenses and other
liabilities incurred in connection with such well from the date of such
takeover shall be shared by such Parties in the proportions that their
respective Participating Interests bear to the sums of their Participating
Interests. All interests of any other Parties in such well shall be transferred
and assigned to the Parties electing to take over such well without
consideration or warranty. The Parties electing to take over such well shall
promptly pay to transferors the latter's share of the salvage value of the
material and equipment appurtenant to the well determined in accordance with
the Accounting Procedure established as Exhibit "B" of the Ecopetrol Contract.
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in accordance with Article 3.9 hereof, the acquisition or construction of such
Additional Major Facilities shall be undertaken by Operator for the Joint
Account. Provided, however, that any Party who voted against such proposal
shall not be required to participate therein if such Party advises Operator
within fifteen (15) Days after the adoption of such proposal of its intention
not to participate. In such case, the Parties participating in the acquisition
or construction of such Additional Major Facilities shall jointly bear the cost
thereof and shall own such Additional Major Facilities in the proportion that
the Participating Interest of each bears to the sums of their Participating
Interests. The Parties not participating in the acquisition or construction of
such Additional Major Facilities shall have no interest therein or right to the
use thereof except on such terms and conditions as the Parties participating
therein may specify.
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14.6 If any proposal for completing, deepening, plugging back, sidetracking,
re-completing, or reworking a well drilled hereunder fails to receive the
affirmative vote of the Parties in the Operating Committee for such proposals
to proceed as set forth in Article 3 then, within thirty (30) Days after the
vote on such proposal, any Party or Parties desiring to perform such work shall
give notice in writing to all the Parties of their desire to perform such work,
specifying the proposed work and estimated cost thereof, and each Party shall
within thirty (30) Days after receipt thereof, give notice to all Parties
stating whether or not it desires to join in such work. Each Party giving
notice as provided above that it desires to participate in such work shall be a
"Participating Party" for such purpose. If Parties holding Participating
Interests sufficient to approve such work in accordance with Article 3 elect to
join in such work then such work shall be done for the Joint Account this
Agreement; otherwise, the work shall be done at the sole cost, risk and expense
of the Participating Parties, in the proportions that their respective
Participating Interests bear to the sum of their Participating Interests. Where
a drilling rig is on location, the period for the giving of notice with respect
to a completion, deepening, plugging back, sidetracking, recompleting or
reworking operation shall be reduced to seventy-two (72) hours in each case.
14.7 If such operation results in the production of Petroleum from a well
which is:
a) An Exploratory Well, then with respect to the Petroleum
produced therefrom, the provisions of Article 14.2 shall apply, mutatis
mutandis, to the operation (including the penalty provided therein) to the
extent that such operation and production relates to the well as an Exploratory
Well;
b) Development Well, then with respect to the Petroleum produced
therefrom the provisions of Article 14.3 shall apply, mutatis mutandis, to the
operation and the recovery of costs (including the penalty provided therein)
to the extent that such operation and production relates to the well as a
Development Well.
14.8 Any proposal by Operator or other Party, for acquisition or
construction of Additional Major Facilities shall be submitted to the Operating
Committee in accordance with Article 3 hereof. Such proposal shall include, in
reasonably sufficient detail, the specifications for the facilities, equipment
and transportation to be acquired or constructed and the estimated cost
thereof. If the Operating Committee initially fails to adopt such proposal the
Operating Committee shall meet again (not less than twenty (20) Days nor more
than forty (40) Days thereafter) to reconsider and vote on such proposal. If,
upon reconsideration, such proposal is adopted in accordance with Article 3.9
hereof, the acquisition or construction of such Additional Major Facilities
shall be undertaken by Operator for the Joint Account. Provided, however, that
any Party who voted against such proposal shall not be required to participate
therein if such Party advises Operator within fifteen (15) Days after the
adoption of such proposal of its intention not to participate. In such case,
the Parties participating in the acquisition or construction of such Additional
Major Facilities shall jointly bear the cost thereof and shall own such
Additional Major Facilities in the proportion that the Participating Interest
of each bears to the sums of their Participating Interests. The Parties not
participating in the acquisition or construction of such Additional Major
Facilities shall have no interest therein or right to the use thereof except on
such terms and conditions as the Parties participating therein may specify.
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14.9 If additional testing, logging or coring ("Testing") is conducted as a
Sole Risk Operation, all data acquired therefrom by the Participating Parties
shall be their exclusive property and the Non-Participating Parties shall have
no right or interest in such data or right to have such data disclosed to them.
In the event a completion, plugging back, sidetracking or deepening operation
is thereafter proposed to be conducted in the same well, any Non-Participating
Party to the Sole Risk Testing Operation electing to participate in such
proposed operation, shall pay three hundred percent (300%) of the cost of the
Sole Risk Testing Operation to the Participating Parties and shall be entitled
to receive copies of, or access to, the data acquired as a result of such
Testing.
14.10 If a seismic operation is conducted as a Sole Risk Operation, all data
acquired therefrom by the Participating Party shall be its exclusive and
confidential property and the Non-Participating Party shall have no right or
interest in such data or right to have such data disclosed to it. Whenever by
Determination a location is to be drilled as an Exploratory Well, the
Non-Participating Party to the Sole Risk Seismic Operation shall purchase the
entire length of all Sole Risk Seismic Operation lines which have any portion
within a six kilometer radius circle drawn from such well location, by paying
Three Hundred percent (300%) of the cost of the Sole Risk Seismic Operation to
the Participating Party. In no event shall a Single Sole Risk Seismic Operation
Line pursuant to this Article 14.11 exceed twelve (12) kilometers.
Notwithstanding Articles 5.2 and 14.1 the Participating Parties shall have the
right to designate the Operator for the Sole Risk Seismic Operation.
14.11 With respect to any operation under this Article 14, Operator, within
sixty (60) days after the completion of such operation, shall furnish each of
the Parties with an inventory of the equipment and materials acquired in
connection with such operation and an itemized statement of the cost incurred
in such operation; or, at its option, Operator may submit in lieu thereafter
while Participating Parties are being reimbursed or receiving the applicable
premium as above provided, Operator shall furnish to the Parties an itemized
statement of all costs and liabilities incurred in the operation of well,
together with a statement of the quantity of Petroleum produced from it and the
amount of proceeds realized from the sale or other disposition of Available
Petroleum produced therefrom during the preceding Month. As used in this
Article 14 "Proceeds of Sale" of Available Petroleum means market value
determined by arm's length sales to third parties not related with the seller,
or if these are no such sales, such value as may be agreed on by the Parties
for the purposes hereof.
14.12 If any Party shall not agree to participate in any Additional
Obligatory Work within at least sixty (60) Days prior to the date upon which
the Parties are required to commence such Additional Obligatory Work, such
Party not desiring to conduct such work or make such investment shall in favor
of the Non-Defaulting Party or Parties be penalized promptly and immediately
thereafter with a penalty of Two Hundred percent (200%) in each case of all
amounts due. In case of any doubt in the calculation and application of this
penalty, Clause 21.2 of the Ecopetrol Contract shall be apply.
14.13 In case of recoupment of costs and relinquishment of rights, and
interests as to a development facility, the following provisions shall govern
with respect to any Non-Consent Operation in conducting the construction of a
Development Facility.
a) Whenever any Non-Consent Operation is conducted for the
construction Development Facility the Participating Parties, in the proportion
that each Participating Party's Interest bears to the total of the Participating
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Operating Committee shall means the Committee established pursuant to this JOA.
Operator means the Party, the Affiliate of a Party, or a third party appointed
to conduct Joint Operations in accordance with this JOA.
Party or Parties means the parties to this JOA, and shall at all times where
the context so admits include their respective successors and assignees.
Participating Interest means the respective percentage interest of each of the
Parties as provided in this Agreement which participates in a Joint Operation
by paying its portion of the cost and expenses of such Joint Operation.
Participating Party means a Party joining in an operation in accordance with
the terms of this JOA, paying its portion of the cost and expenses of the
operation and being entitled to its proportionate part of the benefits of the
operation.
Percentage Interest means a Party's percentage of participation in the
undivided rights and obligations of the Parties under this JOA.
Petroleum means the natural mixture in normal conditions of hydrocarbons in
liquid or gaseous state, as well as those substances accompanying or derived
from them, except helium and rare gases, in its liquid state at a temperature
of 60 degrees Fahrenheit and a pressure of 14.73 pounds per square inch
absolute. For purposes of this Agreement, the term Petroleum shall be read to
encompass Natural Gas liquids.
Program means a work program for carrying out Joint Operations as Determined by
the Operating Committee pursuant to this Agreement.
Quarter means the consecutive three (3) month period beginning on the first day
of January, April, July and October of any calendar year.
Regulations means the applicable laws, rules, statutes, regulations, orders,
and decrees of duly constituted governmental authorities of the Republic of
Colombia in force from time to time.
Reservoir means a porous and permeable stratum capable of producing Petroleum
and which must be considered because of the character of the substance it holds
(such as similitude of physical properties, density, GOR, viscosity a pressure
relationship) a unit in regard to its natural exploitation. According to
Commercial Reservoir shall mean a Reservoir which is capable of Commercial
Production.
Representative means the persons designated and appointed by each Party in
accordance with this Agreement for the purpose of making Determinations.
Semester means a six (6) month period beginning on January 1 or July 1 of a
Calendar Year.
Sole Risk Development means Development Well which is to be drilled by less
than all of the Parties.
Sole Risk Exploration Well means an Exploration Well which is drilled by less
than all of the Parties.
Sole Risk Operation means an operation in which less than all Parties
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Parties' interest, shall have the sole right to take all Petroleum production
allocable or attributable to the Parties and produced by means of or
transported or processed by such Development Facility, determined as the outlet
of the subject Development Facility, to the extent such Petroleum is allocable
or attributable to the Parties shall equal (after deduction of all production
taxes, operating expenses of the Development facility allocable to the Parties,
the royalty of Ecopetrol, and all overriding royalties, and other burdens
payable out of or measured by production) 500% of the costs (excluding the
aforesaid taxes, operating expenses, royalties, overriding royalties and other
burdens, but including costs incurred by the Participating Party in the
acquisition, the sign, building, moving installation and security of such
Development Facility) incurred by the Participating Parties in such Non-Consent
Operations (such time is hereinafter referred to as "Payout"), and such receipt
of Petroleum production is hereinafter referred to as "Recoupment of Costs with
Premium").
b) Upon the commencement of a Non-consent Operations for a
Development Facility which shall means execution of the construction contract,
each Non-Participating Party shall be deemed to have relinquished all of such
Non-participating Party's operating rights and working interest in such
facility until the payout referred to in Article 14.2 (a) above shall have been
accomplished. When such Payout shall have been accomplished the relinquished
interest shall revert to each Non-Participating Party and each Non-Participating
Party shall bear that percentage of costs thereafter incurred with respect to
the reverted interest and be entitled to the percentage of Petroleum produced,
processed or transported thereby that is equal to its regular Participating
Interest.
c) Operator shall, within One Hundred and Twenty (120) Days after
completion of a Non-Consent Development Facility, furnish all other Parties
with a statement of expenses incurred in connection with such facility or with
a copy of the monthly billing furnished to the Participating Parties. Parties
shall kept cost information confidential.
14.14 As between the Parties, all materials and equipment in or appurtenant
used in Separate Account Operations to a Non-Consent Operation shall be owned
by the Participating Parties until Recoupment of Costs with Premium as provided
in this Article 14. In care of an operation for the running and setting of
production string of casing and attempted completion of a well, or in case of a
deepening or plugging back operating, any material or equipment that is in or
appurtenant to the well at the time of the commencement of the operation and
which is necessary for the conduct of such operation may be used by
Participating Parties so long as necessary, but the Ownership thereof shall not
change. In the case of reversion to a Non-Participating Party of its
relinquished interest, such Non-Participating Party shall become the owner of
the same interest in the material and equipment acquired for the operation
conducted for only the Participating Parties which such Non-participating
Party would have owned had such operation been conducted for the account of all
Parties. Subject to the interest of Ecopetrol under the Ecopetrol Contract, any
amount realized from the sale or disposition of equipment acquired in connection
with any operation under this Article 14 which would otherwise be owned by a
Nonparticipant Party had it participated therein shall be credited to the
total unreturned costs of such operation and the Operating Expenses that are
chargeable against the relinquished interest of such Non-Participating Party as
above provided, and the balance, if any, shall be paid to such
Non-Participating Party as above provided, and the balance, if any, shall be
paid to such Non-Participating Party.
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14.15 Notwithstanding any other provision of this Article 14, Non-Consent
Operations shall neither interfere with operations being conducted by all
Parties nor be conducted if there is an unreasonable amount of risk of loss or
damage to such Parties' property.
14.16 Non-Consent Operations shall not be conducted in a well already having
multiple completions, each of which are not owned by the same parties in the
same proportions, unless the well is incapable of producing from any of its
completions or unless all Participating Parties in the well consent to such
operations.
14.17 As to any matter pertaining to Sole Risk Operations which are presented
to the Executive Committee under the Ecopetrol Contract for a vote, the
Participating Party shall have the right to vote the Non-Participating Party's
Participating Interest, and the Non-Participating Party, upon the writing
request of the Participating Party, shall promptly furnish the Participating
Party, with all documentation which may be necessary to demonstrate this right
to the other Representatives on the Executive Committee.
14.18 In the conduct of Non-Consent Operations, the Participating Parties
shall keep the lands and premises covered by the Ecopetrol Contract free and
clear of liens or encumbrances.
14.19 All overriding royalties, production payments or other burdens or
charges and all mortgages, liens or other encumbrances which any Party may grant
or otherwise create or permit to be created out of or with respect to its
interests in or its share or Petroleum production from its interest in/and to
the Ecopetrol Contract (hereinafter "Individually Created Lease Burdens or
Encumbrances") are hereby made subject to this Agreement and subordinate to all
rights of the other Parties hereunder, including rights of such other Parties
as Participating Parties in a Non-Consent Operation under this Article 14 to
receive a conveyance of interests or Recoupment of Costs with Premium. In the
event that any Party shall grant, create or permit any such Individually
Created Lease Burdens or Encumbrances, such Party hereby undertakes and agrees
to indemnify and hold the other Parties harmless from the effect thereof.
ARTICLE 15
RELATIONSHIP OF THE PARTIES
15.1 With the exception of severability and jointly liabilities of the
Parties referred in Clause 27.2 of the Ecopetrol Contract, the rights, duties,
obligations and liabilities of the Parties shall be several and not joint or
collective, it being the express purpose and intention of the Parties that
their respective interests in this Agreement and in the Ecopetrol Contract
shall be as tenants in common, and nothing herein contained shall ever be
construed as creating a new juridical person or entity, an association,
partnership or trust, or as imposing upon the Parties any joint or collective
duty, obligation or liability.
15.2 This JOA 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
U.S. federal income tax purposes, this Agreement and the operations hereunder
are regarded as a partnership, each U.S. 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
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Revenue Code of 1986, as amended, 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
United States Treasury Regulations Section 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 notice or take
any other action inconsistent with the election made hereby. If any future
Income Tax Laws of the United States contain provisions similar to those in
Subchapter "K". Chapter 1 Subtitle "A" 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 computation of partnership taxable income.
ARTICLE 16
ASSIGNMENT
16.1 No Party shall transfer all or any part of its interests in the
Ecopetrol Contract or any part of its interests in and to the right to
production from the Ecopetrol Contract Area, including but not limited to
any overriding royalty interests, production payment or interest of a similar
nature, except in accordance with this Article 16 and upon obtaining when it
will be required the consent of Ecopetrol in accordance with Clause 27 of the
Ecopetrol Contract, and provided that:
a) A Party shall only assign its undivided Participating Interest,
or a part thereof, in and to the Ecopetrol Contract and the entire Ecopetrol
Contract Area; and
b) Except with respect to an assignment to an Affiliate, no
assignment shall be made which has the effect of leaving the assignor or the
assignee with less than a five percent (5%) Participating Interest; and
c) With respect to an assignment of less than a five percent (5%)
Participating Interest to an Affiliate, such assignment shall contain the
express condition that the Participating Interest assigned shall be transferred
back to the Party in the event that said Affiliate ceases to be an Affiliate of
that Party.
16.2 If any Party hereto desires to transfer all or any part of its
interests in the Ecopetrol Contract, the Party desiring to transfer
(hereinafter referred to as the "Transferring Party") shall promptly give
written notice to all other Parties (the "Notified Parties") with full
information concerning the interest to be transferred, the price to be
receive and the form of payment for the proposed transfer. The Notified
Parties shall then have an optional prior right, exercisable by notice in
writing for a period of thirty (30) days after receive of the notice from the
Transferring Party to acquire for such a stated price in such form of payment
the interest which the Transferring Party propose to transfer. If two or more
Notified Parties exercise this optional prior right, they shall share the
interest to be transferred by the Transferring Party in the proportions that
their respective interests bear to the aggregate interest of all such Parties.
If all Notified Parties decline to exercise the aforesaid option (and failure
to respond in writing within the said thirty
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(30) Day period shall be so construed), the Transferring Party may proceed with
the transfer for the price and mode of payment set forth in the notice to the
Notify Parties, subject to the consent of Ecopetrol, provided that such
transfer must be completed (other than the receipt of government approvals)
within four (4) month from the end of such thirty (30) day period of the
Transferring Party shall be obligated to repeat the procedure established in
this Article. The provision of this article shall not apply when a Party
desires to transfer all or any part of its interests in the Ecopetrol contract
in the following cases:
a) A transfer by a Party to an Affiliate of that Party.
b) A mortgage or a pledge by a Party to a financial institution of
individual.
c) A merger, reorganization or consolidation provided the primary
purpose of such merger, reorganization or consolidation is not the transfer of
the rights and interest in the Ecopetrol Contract.
16.3 Every assignment of a Party's Participating Interest, or part thereof,
shall be made expressly subject to this Agreement and the Ecopetrol Contract.
Each transferee taking any such interest shall, either by the terms of the
instrument or transfer or by separate agreement in writing with the Parties,
assume and agree to be bound by all of the assignor's obligations, liabilities
and duties under this Agreement and the Ecopetrol Contract with respect to the
interest assigned, including but not limited to the payment of money. In the
event of a default by any such assignee or transferee of such a Party, any
other Party hereto may proceed with any remedies directly against such Party
without exhausting its remedies or taking any action whatsoever against any
such assignee or transferee. A transfer of a participating Interest or part
thereof, shall not be effective unless made by an instrument in writing duly
executed by the parties thereto in accordance with the Ecopetrol Contract, this
Agreement and the Regulations.
16.5 No assignment of this JOA and the Ecopetrol Contract shall be made
except subject to and in accordance with such consents and approvals as are
required by this Agreement, the Ecopetrol Contract and the Regulations;
provided that as to assignment of Participating Interests between the Parties
which are required by this JOA, including assignments contemplated by Articles
9 and 10 of this JOA, the prospective assignee shall, from the time the
assignment is to be effective according to this JOA and until the
aforementioned consents and approvals are obtained, assume all costs, expenses,
and obligations attributable to the Participating Interest to be assigned and
shall during such period be entitled to all of the rights and benefits
attributable to the Participating Interest to be assigned.
16.6 This JOA shall be binding upon, and shall insure to the benefit of, the
Parties and, except as otherwise prohibited, their respective heirs, devisees,
legal representatives, successors and assigns, and shall constitute a covenant
running with the interests covered hereby. Nothing contained in this Agreement
express or implied, is intended to confer upon any other person or entity any
benefits, rights or remedies. Each Party hereby obligates itself to incorporate
in any assignment of any interest in the Ecopetrol Contract and express
provision that such assignment is subject to this JOA and each such Party
further agrees to obtain such assignee's consent to be bound by the provisions
of this JOA.
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ARTICLE 17
RELINQUISHMENT
17.1 When it becomes necessary under the Ecopetrol Contract or the
Regulations to relinquish any part of the Ecopetrol Contract Area, Operator
shall, at least forty five (45) Days prior to the date on which any notice is
required to be given to Ecopetrol, give notice in writing to the Operating
Committee setting forth in detail all requirements of such relinquishment. Such
notice shall include descriptions of the specific area or areas proposed to be
relinquished, together with descriptions and boundaries of the area or areas to
be retained.
17.2 The Operating Committee shall determine the area or areas to be
relinquished.
17.3 Any non-compulsory relinquishment of all or any part of the Ecopetrol
Contract Area may only be affected with the unanimous consent of the Parties.
ARTICLE XVIII
LIABILITY
18.1 Each Party shall assume its own liability for any losses and expenses
on account of personal injury, kidnaping or death to its employees, agents or
representatives, except those arising out of willful misconduct or gross
negligence of the permanent, supervisory, salaried employees of the Operator.
Each Party, in proportion to its Working Interest, or in the case of a Joint
Operation in which fewer that all the Parties participate in proportion to such
Party's Participating Interest in such Joint Operation, shall be liable for any
losses and expenses that exceed the amount collectible under the insurance
carried by the Operator for the Joint Account (as set forth in Article 11
above) on account of personal injury or death to any employee, agent or
representative of Operator other than that resulting from the gross negligence
or willful misconduct of the permanent, supervisory, salaried employees of the
Operator.
18.2 Liability for damages to the property of third parties or injury to or
death of third parties arising from Joint Operations under the Ecopetrol
Contract including the expenses incurred in defending claims or actions
asserting liabilities of this character, shall be borne by the Parties of their
respective insurers in the same proportions that said Parties bear the costs
and expenses of the Joint Operations out of which such liability arises, except
that when some damage is caused by the gross negligence or willful misconduct
of the permanent, supervisory, salaried employees of the Operator, such loss
shall be borne by the Operator. In the event damage is caused by a Party other
than Operator, liability for such damage shall be borne by such Party, except
when such Party is specifically authorized to act for the Parties; then any
such damage except that caused by gross negligence or willful misconduct of
such Party shall be borne by each of the Parties in proportion to their
respective Participating Interest.
18.3 It is not the intention of the Parties hereto to create a partnership,
association, trust, or other character of business entity. The duties,
obligations, and liabilities are intended and declared to be separate and
individual and not joint, and nothing contained in this Agreement or in any
agreement made pursuant hereto shall ever be construed to create a partnership,
association, trust, or other character of business entity recognizable in law.
Each Party shall be individually responsible only for its own obligations as
set out in this Agreement and shall be liable only for its own proportionate
share of costs and expenses as herein stipulated. Each Party shall indemnify
and hold harmless all other Parties against all losses, claims, demands,
liabilities and liens in excess of a Party's proportionate share of losses,
claims, etc., as herein stipulated, regardless of the cause or causes thereof
including pre-existing
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<PAGE> 41
18.4 If any Party to this JOA is sued and receives a claim based on an
alleged cause of action arising out of Joint Operations on the Ecopetrol
Contract Area such Party shall give prompt written notice to the other Parties
hereto.
18.5 The defense of law suits shall be handled by a committee of attorneys
representing the Parties hereto, which Operator's attorney as chairman. Suits
may be settled only with the mutual consent of all Parties involved. No charge
shall be made for services performed by attorneys representing the Parties
hereto, but all other third person expenses incurred in the defense of suits,
together with the amount paid to discharge any final judgment, shall be
considered costs of the Joint Operation and shall be paid by all Parties in
proportion to their Working Interest in the Ecopetrol Contract or their
Participating Interest in the Joint Operations, whichever is applicable at the
time the cause of action arose. Outside counsel shall be used for the Parties
only with the written approval of all Parties. If it is agreed that an outside
counsel is to be hired, the fees and expenses shall be charged to all the
Parties in proportion to all their Working Interest in the Ecopetrol Contract
or their Participating Interest in the Joint Operation, whichever is applicable
at the time the cause of action arose.
18.6 Damage claims arising out of Joint Operations shall be handled by
Operator. The settlement of any such claims shall be within the discretion of
Operator so long as the amount paid in settlement of any such one claim does
not exceed or establish liability for a sum in excess of either US$50,000 or
its equivalent in colombian pesos, the limits of coverage of the claim in
question by insurance maintained in force by Operator for protection of the
Parties pursuant to Article II of this Agreement, which ever is greater. The
sums paid in settlement of such claims shall be charged as expenses to be paid
by all Parties in proportion to their Working Interest in the Ecopetrol
Contract or their Participating Interests in the Joint Operation, whichever is
applicable at the time the cause of action arose. In connection with all losses
which exceed US$50,000 or its equivalent in colombian pesos, the applicable
insurance coverage, Operator shall: (i) furnish the Parties copies of accident
reports; (ii) notify the Parties of the services of all information and legal
processes; (iii) inform the Parties as to the status of any claims or suits and
of any payments made in connection therewith; and (iv) furnish Non-Operators
any other available information required by them, or their insurance carrier,
for the purpose of fixing or adjustment of premiums or to support any claim.
18.7 The Participating Parties agree to hold any Non-Participating Party
harmless and to compensate, indemnify and protect it against any losses,
claims, demands, liabilities and liens of any Party hereto or any third party
for damage to or loss of any property or injury to or illness or death of any
person, which damage, loss, injury, illness or death arises out of or is
incidental to such Non-Consent Operations, and regardless of the strict
liability or the negligence be sole, joint or concurrent, active or passive.
ARTICLE 19
PUBLIC ANNOUNCEMENTS
19.1 Operator shall in accordance with good oil industry practice be
primarily responsible and have the exclusive authority to issue all press
releases and public statements with respect to Joint Operations conducted
pursuant to the Ecopetrol Contract and this JOA, and all Parties shall
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endeavor in good faith to agree promptly with Operator on the text and timing
of such releases and statements; provided only that no release or statement
shall be made until the same has been cleared with Ecopetrol. Any Party wishing
a release or statement to be issued shall notify Operator and all other Parties
of the proposed text and timing, and Operator shall promptly seek the agreement
of Ecopetrol and the Operating Committee on the content and timing of said
release. Notwithstanding any failure to obtain such approval, no Party or any
Affiliate of Party shall be prohibited from issuing or making any public
announcement or statement if it is obligated by any law, rules and regulations,
including those of any recognized stock exchange or security regulatory agency
to do so.
ARTICLE 20
CONFIDENTIAL INFORMATION
20.1 All information and data made available or obtained from Joint Operations
shall be and remain confidential among the Parties during the term of this
Agreement and for two (2) years thereafter. No Party shall disclose such
information and data, including interpretation of any nature, to any individual
or entity which is not a Party to this Agreement during such period without the
prior written consent of all Parties. A Party may disclose, without having
obtained such prior written consent, only general information and data, but
only insofar as is reasonably required, to:
a) Affiliates of a Party;
b) an agency of this government with competent jurisdiction;
c) an established Stock Exchange;
d) subject to Article 20.2, a lending institution or individual in
connection with a loan to the disclosing Party;
e) subject to Article 20.2, a contractor, consultant, attorney or
accountant employed by a Party;
f) subject to Article 20.2, an entity which is engaged with a Party in
good faith negotiations for the acquisition of all or a part of the
Participating Interest of such Party; and
g) employees of a Party for the purposes of Joint Operations, subject
to take customary precautions to ensure confidentiality.
20.2 Disclosures pursuant to 20.1 (D), (E) and (F) shall not be made unless
prior to such disclosure the disclosing Party has obtained a written
undertaking from the recipient to keep the information and data strictly
confidential and not to use or disclose the information and data except for the
express purpose for which the disclosure is to be made.
ARTICLE 21
FORCE MAJEURE OR CASUS FORTITUITUS
21.1 If as a result of Force Majeure or Casus Fortituitus, as defined in
accordance with Clause 34 of the Ecopetrol Contract, any Party is rendered
unable, wholly or in part, to carry out its obligations under this Agreement,
other than the obligation to pay other amounts due or to furnish security, then
the obligations of such Party to the extent affected by such Force Majeure or
Casus Fortituitus shall be suspended during the continuance of any inability so
caused, but for no longer period. The Party claiming Force Majeure or Casus
Fortituitus shall notify the other Parties of the Force Majeure situation
within a reasonable time after the occurrence of the facts relied on and shall
keep all Parties informed of all significant developments. Such notice shall
give reasonably full particulars of said Force Majeure or Casus Fortituitus,
and shall likewise estimate the period of time which said Party anticipates
will be required to remedy the Force Majeure or Casus Fortituitus. The affected
Party shall use all reasonable diligence to remove or overcome the Force
Majeure or Casus Fortituitus situation as quickly as possible, but shall not be
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obligated to settle any labor dispute except on terms acceptable to it and the
sole discretion of the affected Party.
ARTICLE 22
DISPOSITION OF ASSETS UPON TERMINATION OF THE
22.1 On termination of the Ecopetrol Contract whether by agreement or
otherwise, this Agreement shall be terminated, such assets as may have been
held for the Joint Account shall be applied in the first instance toward the
discharge of the debts and liabilities of the Joint Account. Any deficiency
shall be met by cash calls upon the Parties in proportion to their respective
Participating Interests immediately prior to such termination.
22.2 The remaining assets held for the Joint Account shall be distributed to
the Parties in such manner as they may agree upon or, failing such agreement,
the assets (other than cash) shall be sold and the monies thus available and
any other cash held for the Joint Account shall be distributed to the Parties
in proportion to their respective Participating Interests immediately prior to
the termination of the Ecopetrol Contract.
ARTICLE 23
BUSINESS ETHICS
23.1 The Parties agree that they and the Operator will follow a business
ethics policy which provides for (a) maintaining adequate internal controls,
(b) proper recording and reporting of all transactions, and (c) compliance with
all applicable laws. No Party and the Operator shall take any action that would
result in inadequate or inaccurate recording and reporting of Joint Operations
assets, liabilities or other transactions, or which would violate any
applicable laws. Each Party and the Operator agrees to respond promptly and in
reasonable detail to any notice from another Party, the Operator or its
auditors pertaining to the above stated undertaking, and shall furnish adequate
documentary support for its response upon request.
23.2 Each Party and the Operator shall avoid any conflict between its own
interests (including the interests of Affiliates) and the interests of the
other Parties in dealing with such contractors, sub-contractors, suppliers,
customers, and other organizations or individuals doing or seeking to do
business with the Parties (or any Affiliate) in connection with operations
under this Agreement. Competitive bidding shall be used whenever practicable in
the procurement of materials, supplies or equipment, and of contracted services.
ARTICLE 24
NOTICES
24.1 Except as otherwise specifically provided in this JOA, all notices
authorized or required to be given pursuant to any of the provisions of this
Agreement, shall be in writing, in Spanish and/or the English language and
shall be delivered in person, by registered mail, by courier service or by fax
or any electronic means of transmitting written communications, and addressed
to the recipient(s) as designated below. The originating notice given under any
provision of this JOA shall be deemed delivered only when actually received by
the Party, and when the case would be with a copy to the Operator, to whom such
notice is directed, and the time for such Party to deliver any notice in
response to such originating notice shall run from the date the originated
notice is received from the registered service air mail, courier service. The
second or any responsive notice shall likewise be deemed delivered when
received. "Received" for
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purposes of this Article 24 with respect to written notice delivered pursuant
to this agreement by non-electronic means shall mean actual delivery of the
notice to the address of the Party and acknowledging receipt be notified as
specified in accordance with this Article.
ROBERTS OIL AND GAS, INC.
Att: Mr. Earl K. Roberts
President, CEO
8556 Katy Freeway Suite 106
Houston, Texas 77024
Fax: (713) 621-8240
Telephone: (713) 621-8241
GEOPOZOS, S.A.
Carrera 14 No. 87-39, Ofician 202
Santafe de Bogota, Colombia
Att: Mr. Luis Clavijo P.
Fax: (57-1) 616-0907
Phone: (57-1) 616-4472
256-6539
24.2 Any Party may, from time to time, change his address by giving written
notice thereof to the other Parties and the Operator.
24.3 A copy of any notice given under this Agreement by any Party to any
other Party or the Operator shall be given concurrently to all Parties and
Operator by the same medium of communication as was used in giving the original
notice.
ARTICLE 25
ARBITRATION
APPLICABLE LAWS
25.1 This JOA shall be interpreted in accordance with the laws and Tribunals
of the Republic of Colombia.
25.2 Differences or disputes arising between the Parties or between the
Parties and Operator in connection with the Ecopetrol Contract, the Farm-out
Agreement and this JOA, during its execution or subsequent to its termination,
or in relation with the rights and obligations of the Operator under this
Agreement and the performance of its services, shall be submitted to the
following procedure:
In case there is a disagreement or contradiction in the interpretation of the
Clauses of this JOA and regarding the provisions of Exhibit "B" of the
Ecopetrol Contract, the provisions of the former shall prevail.
a) If the dispute is of a technical or accounting nature, the Parties may
request expert opinion or examination as in procedure laid down in Book 6,
Title IV of the Colombian Commercial Code or the applicable law or regulation,
and the decision there reached shall be binding on all Parties. The Parties
agree that any award issued shall be in force any competent Court of the United
States of America or any country:
(1) every factual or technical difference arising from the
interpretation or application of this Agreement, and which cannot be settled in
an amicable manner, shall be submitted to the final decision of experts
appointed as follows: one appointed by each Party and/or the Operator and the
third one by common agreement of the main experts appointed. If the experts
cannot reach an Agreement in the appointment of the third one, he shall be
appointed upon request of any of the Parties
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<PAGE> 45
and/or the Operator by the Board of Directors of Asociacion
Colombiana de Ingenieros de Petroleos "ACIPET" or by the Board of
Directors of the Asociacion Colombiana de Geofisicos y Geologos del
Petroleo "ACGGP," when the case will be with main office in Bogota.
(2) All accounting differences arising between Operator
regarding the interpretation and execution of this Agreement, the
Ecopetrol Contract or its Exhibit "B'' and which cannot be settled in
an amicable manner, will be submitted to the decision of experts, who
will be certified public accountants appointed as follows: one
appointed by each Party and/or the Operator and the third appointed
by the two main experts and in case there is no Agreement between them
and at the request of any of the Parties and/or the Operator, such
third expert will be appointed by "Junta Cerntral de Contadores Bogota'.
The decision of the experts shall have the effect of a settlement
between them, and therefore such decision will be final, unless one Party
involve in the arbitration decide in accordance with the applicable law to
appeal. The parties agree that any award issued shall be in force before
any competent Court of the United States of America or any other country.
In case of controversy between the Parties/and or the Operator on the
technical, accounting, or legal character of the controversy, it shall
be considered as legal controversy.
(b) If the dispute is on a point of law, or interpretation of this Agreement
or the application of any of its paragraphs, either Party and/or the Operator,
may request arbitration with the formalities and procedures laid down in
Book 6, Title III of the Colombian Commercial Code or any new locker
applicable laws or regulations and the place of deliberation of the Tribunal
shall be Bigota Colombia.
If the parties and/or the Operator do not agree on the nominations of
arbitrators, these will be appointed in accordance with the rules of the Centro
de Arbitraje y Concilicion Mercantilrs of the Chamber of Commerce of Bogota,
Colombia and they shall be licensed attorneys. The decision there reached shall
be binding on all parties. The parties agree that any award issued shall be in
force before any competent Court of the United States of America or any
other country.
ARTICLE 26
MISCELLANEOUS
26.1 It is understood and agreed by the parties hereto that the provisions of
the Ecopetrol Contract an its exhibits are immutable and that this JOA shall in
no way abrogate the terms and provisions thereof.
26.2 The topic headings used herein are inserted for convenience only and
shall not be construed as having any substantive significance as a meaning or
as indicating that all of the provisions of this Agreement relating to any
particular topic are to be bound in any particular Article or Paragraph.
The terms "heron," "hereof," and "hereunder" and like terms are reference
to this Agreement unless specified and applying to a particular Article.
26.3 There shall be no modification or amendment to this JOA except by written
instrument signed by all the Representatives of the Parties.
26.4 Except as expressly provided herein to the contrary, all previous
agreements and understanding, verbal or in writing, with respect to the subject
covered by this JOA are superseded by this JOA.
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<PAGE> 46
[TO COME]
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<PAGE> 1
EXHIBIT 23
CONSENT OF INDEPENDENT ACCOUNTANTS
We hereby consent to the use of our report dated August 8, 1997 on the
financial statements of Adair International Oil and Gas, Inc. (the "Company"),
which appears in the Form 10-KSB of the Company for the year ended May 31,
1997.
/s/
Braden, Bennink, Goldstein,
Gazaway & Company, PLLC
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> MAY-31-1997
<PERIOD-START> JUN-01-1994
<PERIOD-END> MAY-01-1996
<CASH> 130,175
<SECURITIES> 0
<RECEIVABLES> 21,809
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 0
<PP&E> 7,858,674
<DEPRECIATION> 3,087,908
<TOTAL-ASSETS> 3,895,101
<CURRENT-LIABILITIES> 0
<BONDS> 0
60,000
0
<COMMON> 3,089,180
<OTHER-SE> 0
<TOTAL-LIABILITY-AND-EQUITY> 3,495,101
<SALES> 0
<TOTAL-REVENUES> 205,920
<CGS> 0
<TOTAL-COSTS> 298,948
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 0
<INCOME-PRETAX> 0
<INCOME-TAX> 0
<INCOME-CONTINUING> 0
<DISCONTINUED> 0
<EXTRAORDINARY> 722,530
<CHANGES> 0
<NET-INCOME> 629,502
<EPS-PRIMARY> .06
<EPS-DILUTED> .06
</TABLE>
