-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AqcHJ7cP6sRMWNe6A99AaMRJl/l+fJiutahfVm98ghgwhcz4AtskT05URuwvdiEF cKjMQrxSyTG7eMmt9cROFA== 0000950129-97-003383.txt : 19970912 0000950129-97-003383.hdr.sgml : 19970912 ACCESSION NUMBER: 0000950129-97-003383 CONFORMED SUBMISSION TYPE: 10KSB PUBLIC DOCUMENT COUNT: 10 CONFORMED PERIOD OF REPORT: 19970531 FILED AS OF DATE: 19970815 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: ADAIR INTERNATIONAL OIL & GAS INC CENTRAL INDEX KEY: 0000355300 STANDARD INDUSTRIAL CLASSIFICATION: 1311 IRS NUMBER: 742142545 STATE OF INCORPORATION: TX FISCAL YEAR END: 0531 FILING VALUES: FORM TYPE: 10KSB SEC ACT: SEC FILE NUMBER: 000-10056 FILM NUMBER: 97664655 BUSINESS ADDRESS: STREET 1: 3000 RICHMOND AVENUE STREET 2: SUITE 100 CITY: HOUSTON STATE: TX ZIP: 77098 BUSINESS PHONE: 7136218341 MAIL ADDRESS: STREET 1: 3000 RICHMOND AVENUE STREET 2: SUITE 100 CITY: HOUSTON STATE: TX ZIP: 77098 FORMER COMPANY: FORMER CONFORMED NAME: ROBERTS OIL & GAS INC DATE OF NAME CHANGE: 19920703 10KSB 1 ADAIR INTERNATIONAL OIL AND GAS, INC. - 05/31/97 1 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 ------------------------- 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 [ ] 2 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 3 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 4 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 5 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 6 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 7 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. 8 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 9 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. 10 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 11 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 12 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 13 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 14 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. 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 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 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. 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 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.
Years ended May 31 1997 1996 Oil and gas sales $205,920 $118,705 Lease operating expenses 298,948 134,815 -------- -------- Operating (loss) $(93,028) $(16,110)
- - -------------------------------------------------------------------------------- The following table reflects the Company's cumulative costs incurred in oil and gas properties.
Years Ended May 31 Oil and gas properties at full cost 1997 1996 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
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. 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. 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:
Age Position with Company 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)
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 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 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:
Title of Class Name and Address of Amount and Nature of Percent of Beneficial Owner Beneficial Ownership Class 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.
(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 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:
Title of Class Name and Address of Amount and Nature of Percent of Class Beneficial Owner Beneficial Ownership 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)
(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 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. 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) 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 28 ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA ADAIR INTERNATIONAL OIL AND GAS, INC. BALANCE SHEET MAY 31, 1997
ASSETS 1997 ----------- 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 ===========
The accompanying notes are an integral part of the financial statements 29 ADAIR INTERNATIONAL OIL AND GAS, INC. STATEMENTS OF OPERATIONS For the years ended May 31, 1997
1997 1996 --------- --------- 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) --------- ---------
The accompanying notes are an integral part of the financial statements 30 ADAIR INTERNATIONAL OIL AND GAS, INC. STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended May 31, 1997 and 1996
Retained Common Additional Earnings Shares Stock Paid-in Capital (Deficit) ---------- ---------- --------------- ----------- 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) ========== ========== =========== ===========
The accompanying notes are an integral part of the financial statements. 31 ADAIR INTERNATIONAL OIL AND GAS, INC. STATEMENTS OF CASH FLOWS For the years ended May 31, 1997 and 1996
1997 1996 ----------- -------- 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 =========== ========
The accompanying notes are an integral part of the financial statements. 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. 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. 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 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:
1997 -------- Promissory note payable, as described below $600,000 Less: Current maturities -0- -------- Long term debt $600,000 ========
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. 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:
Years ended May 31, ------------------------------------------ 1997 1996 ------------------------------------------ % of % of Pretax Pretax Amount Income Amount Income ------------------------------------------ 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% ========= === ===== ==
37 The sources of deferred income taxes are as follows:
Years ended May 31, ---------------------------- 1997 1966 ---------------------------- 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 =========== ===========
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:
Years ended May 31 ------------------ 1997 12% 1996 5%
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:
United States Colombia Total - - ----------------------------------------------------------------------------------------------- MAY 31, 1997 OIL AND GAS PROPERTIES 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 =========== =========== ===========
Costs incurred in oil and gas property acquisition, exploration, and development activities are as follows:
United States Colombia Total - - ------------------------------------------------------------------------- 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 ====== ========== ==========
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
United States Colombia Total - - ----------------------------------------------------------------------------------------------- OIL (BARRELS) Proved reserves: 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 ======= ========== ==========
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.
1997 - - ------------------------------------------------------------------------------------------ (In Dollars) United States Colombia Total - - ------------------------------------------------------------------------------------------ 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 --------- ------------ ------------
1996 - - ------------------------------------------------------------------------------------------ (In Dollars) United States Colombia Total - - ------------------------------------------------------------------------------------------ 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 --------- ------------ ------------
40 The following are the principal sources of changes in the standardized measure of discounted future net cash flows during 1997 and 1996.
1997 - - ----------------------------------------------------------------------------------------------- (In Dollars) United States Colombia Total - - ----------------------------------------------------------------------------------------------- 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 --------- ----------- -----------
1996 - - ----------------------------------------------------------------------------------------------- (Dollars in thousands) United States Colombia Total - - ----------------------------------------------------------------------------------------------- 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 --------- ----------- -----------
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 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. 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.
EX-2.1 2 PURCHASE AND SALES AGREEMENT DATED 2/27/97 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 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 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 EX-2.2 3 LETTER OF AGREEMENT DATED 3/14/97 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. EX-2.3 4 AGREEMENT DATED 5/30/97 - ADAIR OIL INT'L CANADA 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 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 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 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 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 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 7 ADAIR'S SHAREHOLDERS John W. Adair 10,000,000 shares Jalal Alghani 10,000,000 shares William A. Petty 10,000,000 shares
7 8
Roberts' Shareholders 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
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EX-3.1 5 ARTICLES OF INCORPORATION 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 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 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 EX-3.2 6 BYLAWS OF THE COMPANY 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. 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 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. 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 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. 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. 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. EX-9 7 VOTING AGREEMENT EFFECTIVE 5/16/97 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 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 EX-10.4 8 JOINT OPERATING AGREEMENT EFFECTIVE 3/5/97 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 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 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 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 4 of 112 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. 5 of 112 6 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. 6 of 112 7 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. 7 of 112 8 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. 8 of 112 9 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 9 of 112 10 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 10 of 112 11 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 11 of 112 12 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, 12 of 112 13 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. 13 of 112 14 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 14 of 112 15 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 15 of 112 16 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 16 of 112 17 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 17 of 112 18 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 18 of 112 19 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: 19 of 112 20 (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 20 of 112 21 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 21 of 112 22 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 22 of 112 23 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 23 of 112 24 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 24 of 112 25 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. 25 of 112 26 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. 26 of 112 27 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 27 of 112 28 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 28 of 112 29 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 29 of 112 30 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) 30 of 112 31 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. 31 of 112 32 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. 32 of 112 33 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. 33 of 112 34 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 34 of 112 35 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 35 of 112 36 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. 36 of 112 37 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 37 of 112 38 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 38 of 112 39 (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. 39 of 112 40 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 40 of 112 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 41 of 112 42 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 42 of 112 43 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 43 of 112 44 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 44 of 112 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. 45 of 112 46 [TO COME] 46 of 112 EX-23 9 CONSENT OF BRADEN, BENNINK, GOLDSTEIN, GASAWAY 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 EX-27 10 FINANCIAL DATA SCHEDULE
5 12-MOS MAY-31-1997 JUN-01-1994 MAY-01-1996 130,175 0 21,809 0 0 0 7,858,674 3,087,908 3,895,101 0 0 60,000 0 3,089,180 0 3,495,101 0 205,920 0 298,948 0 0 0 0 0 0 0 722,530 0 629,502 .06 .06
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