-----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, VfOXyPb5eHqORe5/fSwblaKFiP1ayfY73XWTCdCFAtX67e4CSz5Bg+PCB70PeqFx hnySaBo4pnwoPRV4MKrdCQ== 0000950134-96-002848.txt : 19960614 0000950134-96-002848.hdr.sgml : 19960614 ACCESSION NUMBER: 0000950134-96-002848 CONFORMED SUBMISSION TYPE: S-1/A PUBLIC DOCUMENT COUNT: 8 FILED AS OF DATE: 19960613 SROS: NONE FILER: COMPANY DATA: COMPANY CONFORMED NAME: NATIONAL ENERGY RESOURCES TRUST SERIES A CENTRAL INDEX KEY: 0001002171 STANDARD INDUSTRIAL CLASSIFICATION: CRUDE PETROLEUM & NATURAL GAS [1311] STATE OF INCORPORATION: CA FISCAL YEAR END: 0731 FILING VALUES: FORM TYPE: S-1/A SEC ACT: 1933 Act SEC FILE NUMBER: 033-98042 FILM NUMBER: 96580440 BUSINESS ADDRESS: STREET 1: 21800 BURBANK BLVD SUITE 100 CITY: WOODLAND HILLS STATE: CA ZIP: 91364 BUSINESS PHONE: 8002018666 S-1/A 1 AMENDMENT NO.1 TO FORM S-1 1 As filed with The Securities and Exchange Commission on June 13, 1996. REGISTRATION NO. 33-98042 ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------------- AMENDMENT NO. 1 TO FORM S-1 REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933 ------------------------- NATIONAL ENERGY RESOURCES TRUST SERIES A THROUGH L (Exact Name of Registrant as Specified in its Charter) ------------------------- CALIFORNIA 1300 APPLIED FOR (State of Incorporation (Primary Standard Industrial (I.R.S. Employer or Organization) Classification Code No.) Identification No.) 21800 BURBANK BLVD, SUITE 100 WOODLAND HILLS, CALIFORNIA 91364 (800) 201-8666 (Name, address, including zip code and telephone number, including area code, of Registrant's principal executive office)
MARSHALL J. FIELD WITH COPIES TO: President MARK A. ROBERTSON, ESQ. NATIONAL ENERGY RESOURCES, INC. ROBERTSON & WILLIAMS 21800 BURBANK BLVD., SUITE 100 3033 N.W. 63RD ST., SUITE 160 WOODLAND HILLS, CALIFORNIA 91364 OKLAHOMA CITY, OK 73116 (800) 201-8666 (405) 848-1944 (Name, address, including zip code and telephone number, including area code, of agent for service)
------------------- APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as possible after the Effective Date of the Registration Statement. ------------------- If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. [x] THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SECTION 8(A), MAY DETERMINE. ================================================================================ 2 NATIONAL ENERGY RESOURCES TRUST SERIES A THROUGH L CROSS REFERENCE SHEET SHOWING LOCATION IN PROSPECTUS, FILED AS PART OF REGISTRATION STATEMENT, OF INFORMATION REQUIRED BY FORM S-1
ITEM NUMBER IN FORM S-1 ITEM CAPTION IN FORM S-1 LOCATION IN PROSPECTUS - -------- ------------------------ ---------------------- 1. Forepart of Registration Statement and Outside Front Cover Page of Prospectus . . . . . . . . . . . Front Cover Page 2. Inside Front and Outside Back Cover Pages of Prospectus . . . . . . . . . . . . . . Back Cover Page 3. Summary Information, Risk Factors and Ratio of Earnings to Fixed Changes . . . . . . . . . . . . . . Summary of Prospectus; Risk Factors 4. Use of Proceeds . . . . . . . . . . . . . . . . . . . . Use of Proceeds 5. Determination of Offering Price . . . . . . . . . . . . Front Cover Page 6. Dilution . . . . . . . . . . . . . . . . . . . . . . . Not Applicable 7. Selling Security Holders . . . . . . . . . . . . . . . Not Applicable 8. Plan of Distribution . . . . . . . . . . . . . . . . . Front Cover Page; Plan of Distribution 9. Description of the Securities . . . . . . . . . . . . Summary of Prospectus; Description of Trust Units 10. Interest of Named Experts and Counsel . . . . . . . . . Not Applicable 11. Information with Respect to Registrant . . . . . . . . The Trust; National Energy; The Production Payment and Underlying Properties 12. Disclosure of Commission Position on Indemnification for Securities Act Liabilities . . . . . . . . . . . . . . . . . . . . . National Energy 13. Expenses of Issuance and Distribution . . . . . . . . . . . . . . . . . . . . Part II of Registration Statement 14. Indemnification of Directors and Officers . . . . . . . Part II of Registration Statement 15. Recent Sales of Unregistered Securities . . . . . . . . Part II of Registration Statement 16. Exhibits; Financial Statement Schedules . . . . . . . . Exhibits to Registration Statement 17. Undertakings . . . . . . . . . . . . . . . . . . . . . Part II of Registration Statement
3 PROSPECTUS NATIONAL ENERGY RESOURCES TRUST SERIES 6,000 TRUST UNITS Each unit of beneficial interest ("Trust Unit") offered by National Energy Resources, Inc. ("National Energy") the sponsor of the Trusts, evidences an undivided interest in the National Energy Resources Trusts ("Trusts"), a series of grantor trusts to be formed for the purpose of acquiring oil and gas production payments. The assets of each Trust will consist of defined production payments ("Production Payments") from working interests in producing properties located in Texas, Oklahoma, Louisiana and Mississippi (collectively, the "Underlying Properties"). The Trusts will receive the proceeds of the offering. This Prospectus describes the 500 Trust Units offered in National Energy Resources Trust-A ("Trust-A") on an all-or-none basis. The Production Payment to be purchased by Trust-A will entitle the Trust to receive 78% of the Net Cash Flow from the Underlying Properties until the Trust has received $500,000 plus an amount equal to 12 1/2% per annum of the principal sum. Additional Trust Units may be offered in Trust B through L only upon the closing of this offering, up to a total of 6,000 Trust Units for the entire Series A though L. Each offering including the offering in Trust A, will be for a period of 3 months from the date of its Prospectus, which period may be extended by National Energy for 60 days (the "Offering Period"). Units in only one Trust will be offered at a time. Each Trust will include a minimum of 500 Trust Units and may include a maximum number of Trust Units if the identified underlying properties permit a larger Production Payment. Except for the 500 Trust Units to be issued by Trust-A, no Trust Units are offered by this Prospectus unless it is accompanied by a Supplemental Prospectus relating to the Trust for which Trust Units are then being sold. There is no assurance that any additional Trust Units will be offered after the 500 Trust Units for Trust-A. Each Trust will be terminated (i) when investors have received from the Production Payment their original investment plus interest at a rate per annum specified for that trust anticipated to occur 5 years from the date of formation of the Trusts; (ii) upon sale of the Production Payment which may occur at any time after 2 years from the date of formation of the Trusts by exercise of the Option by National Energy or a vote of 80% of the Trust Unitholders; (iii) upon expiration of the number of years specified to comply with the rule against perpetuities; or (iv) by vote of 80% of the Trust Unitholders. 1. INVESTMENT IN THE SECURITIES IS SPECULATIVE AND INVOLVES A HIGH DEGREE OF RISK. 2. SEE "RISK FACTORS" AT PAGE 10 FOR INFORMATION THAT SHOULD BE CONSIDERED BY EACH PROSPECTIVE INVESTOR. 3. THERE IS NO PUBLIC MARKET FOR THE TRUST UNITS. 4. ASSETS OF THE TRUSTS WILL BE LIMITED TO THE PRODUCTION PAYMENT DESCRIBED IN THE PROSPECTUS FOR EACH TRUST. THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.
========================================================================================================== Initial Public Underwriting Proceeds to Offering Price Commission (1) Trust (2)(3) - ---------------------------------------------------------------------------------------------------------- Per Trust Unit . . . . . . . $1,000.00 $80.00 $920.00 ------------------------------------------------------------------------ Total Trust-A . . . . . . $500,000.00 $40,000.00 $460,000.00 Total Series . . . . . . $6,000,000.00 $480,000.00 $5,520,000.00 ==========================================================================================================
(See Footnotes on the following page) The date of this Prospectus is ____________, 1996. 4 (1) There is no firm commitment underwriting. The Trust Units are being offered on a best efforts basis by members of the National Association of Securities Dealers, Inc. (the "Soliciting Dealers"). National Energy Resources, Inc. ("Sponsor") has agreed to indemnify the Soliciting Dealers against certain liabilities including liabilities under the Securities Act of 1933, as amended. See "PLAN OF DISTRIBUTION." (2) All subscriptions will be payable to Boatmen's Trust Company ("Escrow Agent") and will be held along with the Subscription Agreements in escrow by the Escrow Agent until the offering is closed or terminated. Subscription funds will earn interest during the escrow which will be paid to the subscribers promptly after the closing or termination of the offering. Subscription funds will be returned promptly to subscribers by the Escrow Agent if an offering fails to raise $500,000 within the Offering Period. Subscription Agreements may be revoked by subscribers until they are counter signed by National Energy which has 15 days after receipt of the Subscription Agreements by the Escrow Agent to accept them. (3) Before deducting expenses of the offering payable by Trust estimated at $30,000 for the Trust-A and $360,000 for the entire Series. _____________________ AVAILABLE INFORMATION National Energy Resources Trust Series has filed with the Securities and Exchange Commission, Washington, D.C. ("SEC"), a registration statement on Form S-1, Registration No. 33-98042 ("Registration Statement), under the Securities Act of 1933, as amended ("Securities Act"), with respect to the Trust Units offered hereby. This prospectus (together with any supplement) which is a part of the Registration Statement ("Prospectus"), omits certain of the information contained in the Registration Statement in accordance with the rules and regulations of the SEC, and reference is hereby made to the Registration Statement and the exhibits thereto for further information with respect to the Trusts and the Trust Units. Statements made in this Prospectus concerning the provisions of any document are not necessarily complete and, in each instance, reference is made hereby to the copy of such document filed as an exhibit to the Registration Statement. Each such statement is qualified in its entirety by such references. Items of information omitted from this Prospectus but contained in the Registration Statement may be inspected and copies at the public reference facilities maintained by the SEC at 450 Fifth Street, N.W., Washington, D.C. 20549; Everett McKinley Dirksen Building, 219 South Dearborn Street, Room 1204, Chicago, Illinois 60604; and 75 Park Place, Room 1228, New York, New York 10007, at prescribed rates. This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy the Trust Units offered hereby in jurisdictions in which such offer or solicitation is unlawful. PROSPECTUS SUMMARY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3 RISK FACTORS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 USE OF PROCEEDS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 THE TRUST . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 THE PRODUCTION PAYMENT AND THE UNDERLYING PROPERTIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 14 NATIONAL ENERGY . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 19 FEDERAL INCOME TAX CONSEQUENCES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 21 ERISA CONSIDERATION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 23 DESCRIPTION OF THE TRUST AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 24 DESCRIPTION OF THE TRUST UNITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 27 PLAN OF DISTRIBUTION . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 VALIDITY OF SECURITIES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 29 EXPERTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 30 INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 31 RESERVE REPORT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Exhibit A
2 5 PROSPECTUS SUMMARY The following summary is qualified in its entirety by the more detailed information appearing elsewhere in this Prospectus. See "Risk Factors" for considerations relevant to an investment in the Trust Units. THE OFFERING Trust Units offered . . . . . . . . . . . . A total of 6,000 Trust Units is being offered of which only 500 to be issued by Trust-A are being offered by means of this Prospectus. The additional Trust Units will be offered only by this Prospectus when accompanied by a Supplemental Prospectus relating to the Trust in which Trust Units are then being offered. Purchase Price . . . . . . . . . . . . . . $1,000 per Trust Unit with a minimum of Ten (10) Trust Units ($10,000) per investor and a minimum of 500 ($500,000) total Trust Units per Trust. Trust A will consist of 500 Trust Units. Trusts offered later may include additional Trust Units. Production Payment . . . . . . . . . . . . For Trust A, the Production Payment will be equal to 78% of the Net Cash Flow from the Underlying Properties consisting of 5 producing natural gas wells in Oklahoma until Trust A receives $500,000 plus 12 1/2% per annum. For the other Trusts the percentage of Net Cash Flow will vary depending on the estimated future net revenues of the wells selected and the interest rate may vary from 12 to 14%. Use of Proceeds . . . . . . . . . . . . . . 8% commission payable to the selling broker dealer; up to 6% as a reimbursement of offering expenses to National Energy; 86% to the Trust for the purchase of the Production Payment from National Energy. Sponsor . . . . . . . . . . . . . . . . . National Energy Resources, Inc. 21800 Burbank Blvd., Suite 100 Woodland Hills, California 91364 (800) 201-8666 Trustee . . . . . . . . . . . . . . . . . Boatmen's Trust Company, an Oklahoma trust company Cash Distributions . . . . . . . . . . . . Semi-annual distributions will be made to Trust Unitholders in an amount equal to 12 1/2% per annum on the amount of their investment. The excess of receipts from the Production Payment over the distribution will be used to establish a Reserve Fund to pay the amount of Unitholder's investment upon the termination of the Trust. Trust Term . . . . . . . . . . . . . . . . The Trust will terminate when the Production Payment is paid in full which is expected to occur in 5 years. The Trust will also terminate if National Energy exercises its option to repurchase the Production Payment which is may occur at any time after 2 years from the effective date of
3 6 the Production Payment. Otherwise the Trust will terminate upon vote of 80% of the Unitholders or the lapse of years specified in the Trust Agreement to avoid violation of the rule against perpetuities. Redemption of Trust Units . . . . . . . . . . . . . . . No Trust Units will be redeemed except in connection with the termination of the Trust when all Trust Units will receive distributions in complete payment of Unitholders initial investment (or partial payment if cash proceeds of Trust Assets are insufficient to make full payment).
NATIONAL ENERGY RESOURCES TRUST SERIES National Energy Resources, Inc. ("National Energy") is the sponsor of a series of trusts offering up to 6,000 units of beneficial interests ("Trust Units"). Certificates evidencing the Trust Units will be issued on the Closing Date of each trust. Each trust will offer a minimum of 500 Trust Units for a possible total of 12 grantor trusts to be formed during the 12 month period following the effective date of registration of the Trust Units. Each trust will be a grantor trust formed pursuant to a Trust Agreement in substantially the form of agreement included in the Registration Statement filed with the SEC. Boatmen's Trust Company will serve as the trustee of each trust and subscribers to Trust Units will be the grantors and the beneficiaries of the trusts. The name of the trusts will be National Energy Resources Trust plus the designation of a letter from A through L to indicate the specific trust. Subscribers to the first 500 Trust Units will be grantors and beneficiaries of National Energy Resources Trust-A ("Trust-A"), subscribers to the second 500 Trust Units will be grantors and beneficiaries of National Energy Resources Trust B and so forth unless in the discretion of National Energy a trust should be formed with more than the minimum 500 Trust Units. In no event will a trust be formed with less than 500 Trust Units. The term "Trust" as used hereafter shall refer to all the trusts together or to a single trust as the context may require. This Prospectus describes only the Underlying Properties and Production Payment which will be included in the first trust to be formed after the commencement of this offering. Thereafter a Supplemental Prospectus will describe the Underlying Properties and Production Payment to be included in the Trust to be formed on the closing of the next group of Trust Units sold. Except for the 500 Trust Units to be issued by Trust-A, no Trust Units are offered by this Prospectus unless it is accompanied by a Supplemental Prospectus relating to the Trust for which Trust Units are then being sold. There is no assurance that any additional Trust Units will be offered after the 500 Trust Units for Trust- A. The Trust will be a passive entity and will not engage in business. The Trustee will have only such powers as are necessary for the collection and distribution of the proceeds received by the fund, the establishment, maintenance and final distribution of a Reserve Fund and the payment of Trust liabilities and expenses. TRUST ASSETS After the completion of the offering for each Trust, the Trust will purchase from National Energy a production payment from a group of oil and gas properties (the "Underlying Properties") which will entitle the Trust to receive a specified percentage of net cash flow from the Underlying Properties until the Trust has received a sum of money equal to the total contributions of Trust Unitholders (at least $500,000 for each trust) plus a specified annual rate of return which is expected to range from 12% to 14%. The exact rate of return, the specific terms of the Production Payment, a description of the Underlying Properties from 4 7 which a Production Payment is carved and an estimate of the reserves attributable to the Underlying Properties as well as to the Production Payment as they relate to a particular Trust will be described in a Supplement to this Prospectus except as to Trust-A which is described below. The Production Payment owned by the Trust and the Reserve Fund established by the Trustee out of part of the receipts of the Production Payment will be the sole assets of a Trust. The Underlying Properties from which a Production Payment is carved will be completely separate from the Underlying Properties burdened by a Production Payment payable to another Trust. PRODUCTION PAYMENT. A production payment is a right to a specified share of the production from minerals in place or the proceeds from production which has an expected economic life at the time of its creation of shorter duration than the economic life of one or more of the mineral properties burdened by the payment. The share of production may be limited in time by dollar amount or amount of production. The Production Payment owned by a Trust will be limited by the dollar amount of the total contributions ($500,000 or more) to the Trust by its grantors (the subscribers to Trust Units) plus a specified percentage (from 12% to 14%) per annum of the total contributions. The Production Payment will be payable by National Energy out of a specified percentage of the net cash flow from the Underlying Properties. "Net Cash Flow" is defined in the Conveyance of Production Payment as the total revenues received from the sale of production less all costs and expenses, including gross production taxes, lease operating expenses, workover costs, development costs, and any other expenses directly attributable to ownership of the working interest in the Underlying Properties other than Federal and state income tax. National Energy expects to acquire only those Underlying Properties which have estimated reserves sufficient to create a Production Payment which will reach its term in 5 years or less, but there can be no assurances that any Production Payment will be paid in full in the expected time period or any time period. See "Risk Factors." Under the terms of the Conveyance of Production Payment, National Energy will have the right to repurchase the Production Payment at any time after 2 years from the Effective Date at a purchase price equal to an amount sufficient to pay the amount of the total contributions of the Trust Unitholders plus the specified annual rate of return for that Trust, less amounts already distributed to the Unitholders and the amount held in the Reserve Fund. In this event, the Trustee would distribute the cash to the Trust Unitholders and terminate the Trust. UNDERLYING PROPERTIES. National Energy will acquire working interests in a group of oil and gas leases on which are located producing oil and gas wells from Blackjack Oil & Gas, Inc. ("Blackjack") an Oklahoma corporation which is not affiliated with National Energy or the Trust, or from other independent oil and gas operators. Blackjack owns, operates and acquires oil and gas properties located principally in Oklahoma, Texas, Louisiana and Mississippi. A "working interest" is an interest in an oil and gas leasehold which is subject to some portion of the cost of development, operation, or maintenance. Although National Energy will be responsible for development costs, and such costs would be deducted in calculating Net Cash Flow out of which the Production Payment is paid, National Energy will not acquire working interests in Underlying Properties where additional wells are expected to be drilled. There will be, however, some workover costs associated with the wells to be acquired, which will be paid by National Energy and deducted from gross revenues in calculating Net Cash Flow. National Energy will own the Underlying Properties subject to and burdened by the Production Payment, and is entitled to any Net Cash Flow received by reason of such ownership in excess of the percentage of Net Cash Flow paid to the Trust in satisfaction of the Production Payment. RESERVE FUND. The Production Payment owned by a Trust will entitle the Trust to receive a specified percentage of the Net Cash Flow from the Underlying Properties until the Trust has received the total investment in the Trust made by Trust Unitholders plus a specified rate of return (from 12% to 14% per annum). Therefore, a portion of each payment received by the Trust represents a return of capital. That part of the Production Payment which represents a return of capital will be set aside in a separate interest bearing account as a sinking fund (the "Reserve Fund"). Upon the full payment of the Production Payment, 5 8 the Trust will terminate and amounts in the Reserve Fund will be distributed to Trust Unitholders as a return of their investment. The Trustee will manage the Reserve Fund and will make all investment decisions with regard to the funds; however, National Energy has the right to make recommendations to the Trustee concerning investments of the Reserve Fund. Interest received on the Reserve Fund will be used to pay general and administrative expenses of the Trust and the Trustee's fees. Interest in excess of Trust expenses will reduce the amount owed under the Production Payment and will be distributed to Trust Unitholders upon termination of the Trust. NATIONAL ENERGY RESOURCES TRUST-A The Production Payment which will be purchased by Trust-A will entitle the Trust to receive 78% of the Net Cash Flow from the Underlying Properties until the Trust has received $500,000 plus an amount equal to 12 1/2% per annum of the principal sum. The Underlying Properties to which this Production Payment will be attributable are five (5) producing gas wells which have well-established production histories and are operated by Blackjack. They are located in the following named counties in Oklahoma and National Energy will acquire the interests set forth below: Action #2 in Logan County, Oklahoma. National Energy will acquire a 100% working interest burdened by a 23% royalty and overriding royalty interest resulting in a 77% net revenue interest. Gas is being purchased by Conoco, Inc. Bryan #1-6 in Pawnee County, Oklahoma. National Energy will acquire a 100% working interest burdened by a 23% royalty and overriding royalty interest resulting in a 77% net revenue interest. Gas is being purchased by Conoco, Inc. Davis #1-A in Oklahoma County, Oklahoma. National Energy will acquire a 75% working interest burdened by a 28% royalty and overriding royalty interest resulting in a 47% net revenue interest. Gas is being purchased by GPM. Enoch #1 in Blaine County, Oklahoma. National Energy will acquire a 100% working interest burdened by a 23% royalty and overriding royalty interest resulting in a 77% net revenue interest. Gas is being purchased by Trident NGL. Phillips #1 in Ellis County, Oklahoma. National Energy will acquire a 100% working interest burdened by a 21% royalty and overriding royalty interest resulting in a 79% net revenue interest. Gas is being purchased by Midland Marketing Corp. SUMMARY RESERVE INFORMATION. The following table sets forth, as of April 17, 1996, the estimated proved producing oil and gas reserves, prices used to estimate future net revenues, estimated future net revenues and discounted estimated future net revenues attributable to the Underlying Properties. The reserve report dated April 17, 1996, from which the following information is derived was prepared by F. W. Elton, Petroleum Engineer, and is attached to this Prospectus as Exhibit "A." 6 9
Reserve to Proved Proved Nat- Discounted Name Production Producing Producing ural Estimated Estimated of Index Reserves Reserves Oil Gas Future Net Future Net Well (Years) Oil (Bbls) Gas (Mcf) Price Price Revenues Revenues* Bryan #1-6 15 0 1,165,226 -- .70 $ 475,496 $ 283,445 Enoch #1 10 0 226,590 -- 1.60 184,953 131,045 Action #2 11 0 370,295 -- 1.60 357,836 188,620 Davis #1 12 12,391 226,422 17.00 1.60 220,976 144,348 Phillips #1 13 0 242,406 -- 1.60 193,456 127,086 TOTALS 12,391 2,430,932 $1,432,717 $ 874,544
- ---------------- *The Discount rate of 10% was used. NET CASH FLOW. The following table sets forth the Net Cash Flow allocable to Trust-A and to National Energy based on the Estimated Future Net Revenues set forth in the Summary Reserve Table above. There are no assurances that Trust Unitholders will receive the total cash distributions set forth below due to fluctuations in oil and gas prices, seasonal demand for natural gas, natural production declines and other risk factors inherent in any investment in oil and gas. See "Risk Factors."
Net Cash Allocation of Flow Net Cash Flow to Trust Revenues Cash Year to Trust National Energy Reserve Fund Distributions 1st $220,240 $ 22,740 $135,000 $ 62,500 2nd 204,235 16,735 125,000 62,500 3rd 176,177 8,677 105,000 62,500 4th 154,494 11,994 80,000 62,500 5th 137,106 19,606 55,000 62,500 TOTALS $892,252 $ 79,752 $500,000 $312,500
NATIONAL ENERGY National Energy Resources, Inc. is a California corporation formed in August, 1994 for the purpose of engaging in the development and ownership of oil and gas and for forming the Trusts and conducting this offering. Its shareholder is Marshall J. Field who owns 100% of the issued and outstanding stock of National Energy. Its only officer is Marshall J. Field. National Energy was formed with minimum capital and its initial capital has been substantially used in the up front costs of the offering for which it will be reimbursed out of the proceeds of sale of Trust Units. The principal executive offices of National Energy are located at 21800 Burbank Blvd., Suite 100, Woodland Hills, California 91364 and its telephone number is (800) 201-8666. See "National Energy." National Energy has no prior experience in the oil and gas industry nor does it have prior experience in sponsoring oil and gas investments such as the Trust Units. 7 10 SUMMARY OF RISK FACTORS An investment in the Units is subject to certain risk factors that should be evaluated by prospective investors before purchasing the Units. Such risk factors include: Risks associated with the oil and gas industry generally, including: (a) decreased revenues and reduced production due to volatility of oil and natural gas prices; (b) increased production expenses which could result in reduced oil or gas production volumes; (c) reduced value of the Units if the reserve estimates of quantities and values of natural gas differ materially from actual quantities and values of reserves; (d) risks of reduced distributions to Unitholders if production were interrupted for any reason; (e) entities not controlled by National Energy could curtail production on the Underlying Properties or excess production capacity could reduce natural gas prices, either of which could adversely affect the Trust distributions; (f) the amount of cash distributions throughout the year may vary substantially due to the seasonal nature of demand; (g) decisions regarding operations, future development and production levels are made by an independent entity and such decisions may result in decreased cash distributions; and (h) the operator of the Underlying Properties has no contractual or fiduciary duty to protect the interests of the Unitholders. Risks associated with the Trust and the Trust Units in particular, include: (a) Trustee is not personally liable to Unitholders under terms of Trust Agreement unless it acts in bad faith; (b) Transfer of Underlying Properties in violation of Conveyance could result in delay of distribution; (c) Portions of Production Payment would be extinguished if a well is abandoned; and (d) Trust Unitholders have limited voting rights. (e) No secondary market for Trust Units and illiquid investment; and (f) Trust Unitholders will not participate in revenues in excess of Production Payment. 8 11 SUMMARY FEDERAL INCOME TAX CONSEQUENCES THE TAX CONSEQUENCES OF AN INVESTMENT IN TRUST UNITS TO A PARTICULAR INVESTOR WILL DEPEND IN PART ON THE INVESTOR'S OWN TAX CIRCUMSTANCES. EACH PROSPECTIVE INVESTOR SHOULD THEREFORE CONSULT HIS OWN TAX ADVISOR ABOUT THE FEDERAL, STATE AND LOCAL TAX CONSEQUENCES TO SUCH INVESTOR IN TRUST UNITS. The following is a summary of certain Federal income tax consequences of acquiring, owning and disposing of Trust Units and is based on the opinion of Robertson & Williams, counsel to National Energy Resources, Inc. ("Counsel"). For a more detailed discussion of these consequences and the qualifications to and limitations of the opinions of Counsel, see "Federal Income Tax Consequences" and "Risk Factors -- Tax Considerations." Classification and Taxation of the Trust . . . . . . . . . . . The Trust will be treated as a grantor trust and not as an association taxable as a corporation. As a grantor trust, the Trust will not be subject to tax. If the Trust were treated as an association taxable as a corporation, it would be treated as a separate entity subject to corporate tax on its taxable income. Taxation of Holders . . . . . . . . . . . . Because the Trust will be treated as a grantor trust for Federal income tax purposes, and because a Trust Unitholder will be treated, for Federal income tax purposes, as directly owning an interest in the assets of the Trust, each Trust Unitholder will be taxed directly on his pro rata share of income attributable to the assets of the Trust consistent with the Trust Unitholder's method of accounting and without regard to the taxable year or accounting method employed by the Trust. Interest Income . . . . . . . . . . . . . . For Federal income tax purposes, the Production Payment will be treated as a debt obligation. As a result, each purchaser of a Trust Unit will be required to treat that portion of each payment received by the Trust and distributed monthly to Trust Unitholders as interest income. Holder Reporting Information . . . . . . . Year-end tax information will be furnished to Trust Unitholders no later than March 31 of the following year.
9 12 RISK FACTORS An investment in the Trust is speculative and involves a high degree of risk. Prior to making an investment, prospective investors should carefully consider the following risk factors inherent in and affecting the business of the Trust and this offering. RISK ASSOCIATED WITH OIL AND GAS INDUSTRY GENERALLY POTENTIAL DECREASE IN REVENUES DUE TO VOLATILITY OF OIL AND NATURAL GAS PRICES AND PRODUCTION. The Trust's revenues will be dependent on the prices received for oil and natural gas production from the Underlying Properties and, in the case of Underlying Properties that are working interests, the costs of producing and developing such oil and natural gas. Prices for oil and natural gas are subject to wide fluctuations in response to relatively minor changes in supply, market uncertainty and a variety of additional factors that are beyond the control of the Trust and National Energy. These factors include political conditions in the Middle East, the foreign supply of oil and natural gas, the price of foreign imports, the level of consumer product demand, the severity of weather conditions, government regulations, the price and availability of alternative fuels and overall economic conditions. In recent years, natural gas prices have been more depressed than they have been historically when compared (on a net equivalent barrel basis) to the price of oil. Although National Energy believes that in the long-term prices for natural gas will increase in relation to oil prices, no assurances can be made that natural gas prices will increase in relation to oil prices or that the price of natural gas will increase at all. Additionally, lower oil and natural gas prices may reduce the amount of oil and natural gas that is economic to produce. Oil and natural gas prices have historically been volatile and are likely to continue to be volatile in the future. Such volatility makes it difficult to estimate the future levels of cash distributions to Trust Unitholders or the value of the Trust Units. PRODUCTION EXPENSES - MAY AFFECT PRODUCTION AND REVENUES TO TRUST. Production expenses typically include labor, fuel, repairs, hauling, pumping, insurance, storage, and supervision and administration. Production expenses may influence the decision of the operator as to the volume of oil or natural gas to produce from a property or the decision to shut-in or abandon a well. A working interest owner is obligated for its proportionate share of production expenses. Accordingly, higher or lower production expenses on the Underlying Properties may directly decrease or increase the amount received by the Trust from the Production Payment. All of the Underlying Properties are in productive fields where, based on information provided by Blackjack, material increases in production expenses are currently not expected to occur in the next several years. REDUCED VALUE OF UNITS IF RESERVE ESTIMATES ARE INACCURATE. The value of the Trust Units will be substantially dependent upon the proved producing reserves attributable to the Production Payments owned by the Trust. There are many uncertainties inherent in estimating quantities and value of proved reserves and in projecting future rates of production. The reserve data set forth herein, although prepared by independent consultants in a manner customary in the industry, are estimates only, and quantities and estimated values of oil and gas may differ from the amounts set fort herein. The Reserve Report of F. W. Elton, Inc., appears as Exhibit "A." In addition, the present values shown herein were prepared using guidelines established for disclosure of reserves with the SEC and should not be considered representative of the market value of such reserves or the Trust Units. A market value determination would include many additional factors. As of April, 1996, the estimated future net revenues from proved producing reserves, attributable to the Production Payment, discounted at 10% per annum, was $1,749 per Trust Unit. DISTRIBUTION COULD BE AFFECTED IF PRODUCTION IS INTERRUPTED. Trust distributions could be adversely affected if any of the hazards typically associated with the production and transportation of oil and natural gas were to occur, including personal injuries, property damage, damage to productive formations or equipment and environmental damages. Uninsured costs for damages for any of the foregoing will directly reduce the Production Payments from the Underlying Properties to the extent such damages reduce the volume of oil and natural gas produced. 10 13 PRODUCTION COULD BE VOLUNTARILY CURTAILED, REDUCING TRUST DISTRIBUTION. Approximately 97% of the estimated proved reserves of the Underlying Properties at April, 1996, are comprised of natural gas, based on the discounted present value of estimated future net revenues of proved reserves. The revenues of the Trust and the amount of cash distributions made by the Trust will be dependent upon, among other things, the volume of nature gas produced and the price at which such natural gas is sold. Since the early 1980's, the available natural gas production capacity nationwide has exceeded the demand by users of such gas, resulting in demand-related production curtailments. In addition, existing gathering systems and pipelines transporting natural gas to the users of such gas may not have sufficient capacity to transport the entire allowable production from a field, resulting in production from the Underlying Properties being curtailed. Curtailment may exist for demand-related reasons. See "The Production Payments and the Underlying Properties." In addition, during the 1980's and early 1990's, excess natural gas production capacity in the United States has generally resulted in downward pressure on natural gas prices. The effect of any excess production capacity which exists in the future cannot be predicted with certainty; however, any such excess capacity may have a material adverse effect on Trust distributions through its impact on prices and volumes. SEASONAL DEMAND MAY CAUSE DISTRIBUTION TO VARY SUBSTANTIALLY. Due to the seasonal nature of demand for natural gas and its effect on sales prices and production volumes, the cash distributions by the Trust may vary substantially on a seasonal basis. Generally, natural gas production volumes and prices tend to be higher during the first and fourth quarters of the calendar year. Because of the lag between National Energy's receipt of revenues related to the Underlying Properties and the dates on which distributions are made to Trust Unitholders, however, the seasonality that affects production and prices generally should be reflected in distributions by the Trust in later periods. NATIONAL ENERGY AND THE TRUST EXERCISE LIMITED CONTROL OF OPERATIONS AND DEVELOPMENT OF THE UNDERLYING PROPERTIES. Under the terms of the Production Payment, neither the Trustee nor the Trust Unitholders will be able to influence or control the operations or future development of the Underlying Properties. Additionally, National Energy, which is the owner of the Underlying Properties, will not operate or be able to significantly influence the operations or future development of such Underlying Properties. All such operations will be controlled by persons unaffiliated with the Trustee and National Energy. The Underlying Properties include National Energy's working interests in producing properties located in Oklahoma, as described in "The Production Payment and Underlying Properties". Each of these properties has an operating agreement whereby, if the requisite percentage of working interest holders approve a development project, all such holders are required to pay their proportionate share of development costs. The working interests owned by National Energy may not constitute a sufficient interest in any property to veto or control a development decision. Under the terms of the Conveyance creating the Production Payment in these Underlying Properties, the Trust will not be liable for any development costs, but the amount of such development costs will be deducted when computing Net Cash Flow payable to the Trust from such properties. THE OPERATOR OF THE UNDERLYING PROPERTIES HAS NO DUTY TO PROTECT INTERESTS OF UNITHOLDERS. Under the terms of the operating agreements relating to the Underlying Properties, Blackjack owes a duty to National Energy and the other working interest owners to conduct the operations on the Underlying Properties in a good and workmanlike manner and in accordance with its best judgment of what a prudent operator would do under the same or similar circumstances. Blackjack has no contractual or fiduciary duty to protect the interest of the Trust or the Unitholders. RISKS ASSOCIATED WITH TRUST AND TRUST UNITS IN PARTICULAR FIDUCIARY RESPONSIBILITY OF TRUSTEE. The Trustee is responsible to the Trust Unitholders as a fiduciary and, as such, under Oklahoma law is required to act in the best interests of the Trust Unitholders at all times and to exercise the judgment and care in supervising and managing the Trust's assets exercised by persons of ordinary prudence, discretion and intelligence. The Trust Agreement ("Agreement") provides, however, that the Trustee will 11 14 not be personally liable to the Trust Unitholders for the failure to exercise such standard of judgment and care, unless such failure is the result of bad faith. Due to the passive nature of the Trust, the Trustee is not required to make business decisions affecting the assets of the Trust. Therefore, the Trustee's primary functions under the Agreement are anticipated to be ministerial. Under certain circumstances, however, the Trustee may be required to approve or disapprove an extraordinary transaction affecting the Trust and Trust Unitholders. These transactions include a sale of the Production Payment, termination of the Trust and amendment of the Agreement. The Trustee is required to act in the best interests of Trust Unitholders in connection with any future extraordinary transactions but is not required to retain an unaffiliated person to represent the Trust Unitholders. Under Oklahoma law, if the Trustee, in bad faith, were to fail to collect amounts owed to the Trust or distribute cash held by the Trust for distribution, or otherwise, in bad faith, take or omit to take any action that is in the best interest of the Trust Unitholders, the Trustee would be liable to the Trust Unitholders for damages caused by any such act or omission, including any loss or depreciation in value of the Trust assets or failure to make a profit from such assets caused by such act or omission. Oklahoma law permits the Trust Unitholders to file an action seeking other remedies for such acts or omissions in addition to damages, including removal of the Trustee, specific performance, appointment of a receiver, an accounting by the Trustee to the Trust Unitholders, exemplary damages and other remedies. The availability of these remedies provided by Oklahoma law is explicitly incorporated into the Agreement. TRANSFER OF UNDERLYING PROPERTIES IN VIOLATION OF CONVEYANCE COULD RESULT IN DELAYED DISTRIBUTION. National Energy currently owns or has under contract to purchase the Underlying Properties from which will be conveyed the Production Payment to Trust-A. Under the terms of the Conveyance, National Energy will have no right to transfer all or any portion of its working, royalty, overriding royalty or fee mineral interests comprising the Underlying Properties as long as they are burdened by the Production Payment without the consent of the Trustee. The Production Payment constitutes a real property interest. The Conveyances will be recorded in the appropriate real property records so as to give notice of the Production Payments to National Energy's creditors and transferees, whose rights would be subject to the Production Payments and whose interests would be subsequent and inferior to the Production Payments. Any transferee will succeed to the responsibilities of National Energy as to the interests so transferred, including the payment duties and corresponding liabilities to the Trust for damages caused by breach of such responsibilities. The Agreement does not provide a specific mechanism whereby Trust Unitholders may compel the Trustee to institute action against National Energy or a transferee of an Underlying Property for damages caused by a delay or reduction in the payment of Production Payments to the Trust. As discussed under "-- Fiduciary Responsibility of Trustee," above, if the Trustee were to refuse in bad faith to enforce such damage remedies, the Trustee would be liable to the Trust Unitholders. The Trustee may cause the sale of the Production Payments if the holders of 80% or more of the Trust Units approve such sale or if National Energy exercises its option to purchase the Production Payment after two years. The net proceeds of any sale will be distributed to the Trust Unitholders and the Trust would be terminated. See "Description of the Trust Agreement -- Duration of the Trust; Sale of Production Payments." ABANDONMENT OF A WELL WILL EXTINGUISH PORTION OF PRODUCTION PAYMENT. National Energy and any transferees will have the right to abandon any well or property on an Underlying Property that is a working interest if, in its opinion, such well or property ceases to produce or is not capable of producing in commercially paying quantities, and upon termination of any such lease, that portion of the Production Payments relating thereto will be extinguished. The Underlying Properties are currently operated by Blackjack and National Energy does not anticipate any change in operations. The current operator of the Underlying Properties is under no obligation to continue operating the properties, and the Trustee, Trust Unitholders and National Energy may be unable to appoint or control the appointment of a replacement operator. See "Production Payments and the Underlying Properties -- Description of the Underlying Properties." 12 15 LIMITED VOTING RIGHTS OF TRUST UNITHOLDERS. While Trust Unitholders will have certain voting rights pursuant to the terms of the Trust Agreement, these rights are more limited than those of stockholders of most public corporations. For example, there is no requirement for annual meetings of Trust Unitholders or for an annual or other periodic re-election of the Trustee. See "Description of the Trust Units -- Voting Rights of Trust Unitholders." TAX CONSIDERATIONS. The Trust has received an opinion of Counsel that the Trust is a "grantor trust" for Federal income tax purposes, and that each Trust Unitholder will be taxed directly on his pro rata share of the income of the Trust and his pro rata share of other deductions of the Trust. Counsel believes that its opinion is in accordance with the present position of the IRS regarding these tax questions. There can be no assurances that National Energy or the Trust would be granted such a ruling if requested or that the IRS will not change it position in the future. The tax treatment of the Trust and Trust Unitholders could be materially different from that described above if the IRS were to successfully challenge that treatment. See "Federal Income Tax Consequences." LACK OF SECONDARY MARKET AND ILLIQUID INVESTMENT. There is no secondary market for the Trust Units and none is anticipated. Trust Unitholders will therefore, not be able to liquidate their investment readily and should expect to hold the Trust Units for the duration of the Trust. TRUST UNITHOLDERS WILL NOT PARTICIPATE IN EXCESS REVENUES. The Trust will receive from the Production Payment only the amounts specified in the Conveyance which for Trust A is $500,000 plus 12 1/2% per annum. This amount will be paid out of 78% of the Net Cash Flow from the sale of oil and gas produced by the Underlying Properties (which may be a different percentage for other Trusts) which is anticipated to be accomplished in 5 years based on the reserve reports. If gas prices or production increase, the Trust will not receive a larger total sum but the Production Payment will be paid in a shorter time period. If gas prices or production decrease, the Production Payment will be paid over a longer period and there is the risk that it will not be paid in full. USE OF PROCEEDS The Trust will receive all the proceeds from the sale of the Trust Units, all of which will be paid to National Energy for the Production Payment. National Energy will apply the proceeds from the sale of Trust Units in Trust-A in the approximate amounts set forth in the table below although there can be no assurance that the actual amounts will not vary from those set forth below: Commissions $ 40,000 Offering Expenses(1) 30,000 Acquisition of Production Payment 430,000
- --------------------- (1) Includes legal and accounting fees, consulting fees, Federal and state securities registration fees, escrow fees, printing and copying charges, telephone expense and miscellaneous costs. THE TRUST Trust-A will be formed pursuant to the Trust Agreement between Boatmen's Trust Company as trustee, and National Energy upon the deposit into escrow of $500,000 in payment for 500 Trust Units. National Energy currently owns or has under contract to purchase, the Underlying Properties which will be subject to and burdened by the Production Payment to be purchased by Trust-A from the proceeds of this offering. Accordingly, National Energy, as owner of the Underlying Properties, will receive payments from purchasers of production or the operators of such properties. National Energy will aggregate these payments, deduct operating costs and other expenses related to the Underlying Properties, and make payment to the Trustee each month for the amounts due to Trust-A under the Production Payment. 13 16 FEES AND EXPENSES The following is a description of certain fees and expenses anticipated to be paid or borne by Trust-A, including all fees expected to be paid to National Energy, the Trustee or their affiliates. ORGANIZATIONAL AND OFFERING EXPENSE. The organization and offering expenses allocable to Trust-A are $30,000 (6% of the subscription proceeds) for legal and accounting fees, consulting and engineering fees, registration fees, printing and miscellaneous costs, which will be reimbursed to National Energy upon the close of the offering of Trust Units in Trust-A. Each subsequent trust will bear the same percentage (6%) for organizational and offering expenses. National Energy has borne and paid the expenses of the entire offering of Units in the Trust Series but each trust will reimburse National Energy only one-twelfth (1/12) of such expenses or if more than 500 Units are offered by a Trust, that Trust will bear expenses in proportion to the number of Units issued by it bears to the total number of Units included in the registration. INTEREST. National Energy will not pay interest on any amounts received from the Underlying Properties prior to payment to Trust-A. TRUST ADMINISTRATIVE EXPENSES. The Trustee will be paid a trustee fee of $1,200 per year per trust and an escrow fee of $600 per account. See "Description of the Trust Agreement -- Compensation of the Trustee." The Trust will also incur legal, accounting and engineering fees, mailing and printing costs and other expenses which will be reimbursed to the Trustee at cost. THE PRODUCTION PAYMENT AND THE UNDERLYING PROPERTIES GENERAL The Production Payments will be carved out of the Underlying Properties which will consist of working interests in producing oil and gas properties acquired by National Energy from Blackjack or other independent oil and gas operators. The Production Payment to be acquired by Trust-A will entitle Trust-A to receive 78% of the Net Cash Flow from the sale of oil and gas produced from the Underlying Properties until the Trust has received generally the total investment made by its Trust Unitholders ("Primary Sum") as adjusted for potential expenses, interest income on reserves and general and administrative expenses, plus interest at the rate of 12 1/2% per annum on the Primary Sum. The Primary Sum will be increased if the Trust should be compelled for any reason to make payments on account of ownership of the Production Payment and will be decreased by the amount of interest income on the Reserve Account in excess of general and administrative expenses, if any. The net effect of these adjustments is to maintain the Primary Sum at $500,000. In general, Net Cash Flow equals the gross proceeds received by National Energy from the sale of production less designated costs, including transportation and marketing costs, applicable production and property taxes, operating and development costs. The computation of the Production Payment and its repayment is more specifically described in the Conveyance. DESCRIPTION OF UNDERLYING PROPERTIES Action #2 in Logan County, Oklahoma. National Energy will acquire a 100% working interest burdened by a 23% royalty and overriding royalty interest resulting in a 77% net revenue interest. Gas is being purchased by Conoco, Inc. Bryan #1-6 in Pawnee County, Oklahoma. National Energy will acquire a 100% working interest burdened by a 23% royalty and overriding royalty interest resulting in a 77% net revenue interest. Gas is being purchased by Conoco, Inc. Davis #1-A in Oklahoma County, Oklahoma. National Energy will acquire a 75% working interest burdened by a 28% royalty and overriding royalty interest resulting in a 47% net revenue interest. Gas is being purchased by GPM. 14 17 Enoch #1 in Blaine County, Oklahoma. National Energy will acquire a 100% working interest burdened by a 23% royalty and overriding royalty interest resulting in a 77% net revenue interest. Gas is being purchased by Trident NGL. Phillips #1 in Ellis County, Oklahoma. National Energy will acquire a 100% working interest burdened by a 21% royalty and overriding royalty interest resulting in a 79% net revenue interest. Gas is being purchased by Midland Marketing Corp. None of the royalty or overriding royalty interests burdening the above described properties is owned by an affiliate of National Energy or the Trust. RESERVES The following table summarizes estimated proved producing reserves attributable to the Production Payment and the Underlying Properties to be included in Trust-A as of April, 1996 as set forth in the Reserve Report attached as Exhibit "A."
Production Payment Underlying Properties ------------------ --------------------- Proved Producing Oil (Bbls) 4,540 5,821 Gas (Mcf) 1,360,170 1,743,808 Future net revenues $812,500 $1,432,717 Present value discounted at 10% per annum $682,144 $ 874,544
The reserve estimates were prepared using assumptions required by the Financial Accounting Standards Board. Such assumptions include the use of period-end prices for oil and natural gas and period-end costs for estimated future development and production expenditures to produce the proved reserves. Future net cash flows are discounted at a 10% per annum rate. Because the Trust and National Energy (as owner of the Underlying Properties) are not subject to Federal income taxation, no provision is included for Federal income taxes. Proved reserve quantities are estimates based on information available, including prices and costs, at the time of preparation. Such estimates are by their very nature imprecise and subject to change as additional information becomes available. The Reserve Report uses prices for natural gas in effect at the time the reserve report was prepared. Such prices are influenced by seasonal demand for natural gas and may not be the most appropriate or representative prices to use in estimating future revenues or reserve data. See " -- Oil and Gas Sales Prices," below for a description of average gas prices received by the owner of the Underlying Properties. The reserves actually recovered and the timing of production of those reserves may be substantially different from the foregoing estimates. Moreover, the present values shown above should not be considered representative of the market value of such reserves. A market value determination would include many additional factors. Proved reserve quantities set forth in the foregoing table are calculated in accordance with the SEC's guidelines for disclosure of oil and natural gas reserves and assume that oil and natural gas prices, production expenses and development costs in effect on the date of the report remain constant over the economic life of the property. Proved reserve quantities for the Underlying Properties are calculated by multiplying the net revenue interest applicable to the Underlying Properties by the total amount of oil and natural gas estimated to be economically recoverable from the properties. Reserve quantities are calculated differently for the Production Payment because such interests do not entitle the Trust to a specific quantity of oil or gas. Proved reserves attributable to the Production Payment, which are carved out of the Underlying Properties are calculated by deducting an amount of oil or gas sufficient, if sold at the prices used in preparing the reserve estimates for the Underlying Properties, to pay the Primary Sum, as adjusted for interest earned, less general and administrative expenses, plus 15 18 interest at an annual rate of 12-1/2% over a term of 5 years. As oil and natural gas prices vary from those used to calculate the applicable reserve estimate, more or less quantities of oil and natural gas are required to pay in full the Production Payment. The underlying properties were selected for their consistent production history and for estimated future net revenues in the amounts sufficient to return $500,000 plus 12.5% per annum in 5 years without depleting reserves since it is a requirement for production payments that they be paid solely out of reserves in a period less that the life of the properties as estimated at the time the production payment is created. The Company has no interest in any adjacent properties; however, the operator may. The trusts would not be entitled to participate in any other wells in the area as the Production Payment is limited to the wells identified. Oklahoma's spacing laws would prevent the operator from drilling additional wells which would jeopardize production from the Underlying Properties. If drainage occurs, the trusts would have legal rights to damages. AVERAGE PRICES ON UNDERLYING PROPERTIES Year to year changes in oil prices relate directly to changes in posted prices. The average wellhead price received in 1995 was $17.00 per barrel. The posted price for crude oil in Oklahoma on June 6, 1996 was $18.50 per barrel. Year to year changes in gas prices relate directly to changes in posted prices. The average natural gas price for production from the five wells included in the Underlying Properties during 1992 was $1.76 per Mcf. The average natural gas price for production from these properties during 1993 was $2.03 per Mcf, and was $1.70 per Mcf for 1994, and $1.42 per Mcf for 1995. PRODUCTION HISTORY FOR UNDERLYING PROPERTIES The Action #2 well was recompleted by Maze Oil & Gas in March 1993. It is located in Logan County, Oklahoma. The initial production was 500 Mcf of gas per day and produces from the Hoover Zone. It has produced for three years and has another eleven years of economic life. The Bryan #1 well was drilled and completed by Blackjack Oil in 1994. It is located in Pawnee County, Oklahoma. The initial production was 750 Mcf of gas per day and produces from the Tonkawa Sand. It has produced for two years and has another fifteen years of economic life. The Davis well was drilled by J.L. Thomas in 1953. It is located in Oklahoma County, Oklahoma. The initial production was 1.7 Mmcf of gas per day and produces from the Bartlesville Zone. It has produced for thirty-three years and has another twelve years of economic life. The Enoch well was drilled by Heffel Resources in 1989. It is located in Blaine County, Oklahoma. The initial production was 275 Mcf of gas per day and produces from the Morrow Zone. It has an economic life of ten years. The Phillips #1 well was drilled by Phillips Petroleum in 1962. It is located in Ellis County, Oklahoma. The initial production was 1.8 Mmcf of gas per day and produces from the Morrow Zone. It has an economic life of thirteen years. COMPETITION, MARKETS AND REGULATIONS COMPETITION. The oil and natural gas industry is highly competitive in all of its phases. National Energy will encounter competition from major oil and natural gas companies, independent oil and natural gas concerns, and individual producers and operators. Many of these competitors have greater financial and other resources than National Energy. Competition may also be presented by alternative fuel sources, including heating oil and other fossil fuels. 16 19 MARKETS. Where the Underlying Properties consist of royalty or royalty interests in properties, the operators of the properties will make all decisions regarding the marketing and sales of oil and natural gas production. Although National Energy generally has the right to market oil and natural gas produced from the Underlying Properties that are working interests, National Energy will generally rely on the operators of the properties to market the production. The ability of the operators to market the oil and natural gas from the Underlying Properties will depend upon numerous factors beyond their control, including the extent of domestic production and imports of oil and natural gas, the proximity of the natural gas production to gas pipelines, the availability of capacity in such pipelines, the demand for oil and natural gas by utilities and other end-users, the effects of inclement weather, state and Federal regulation of oil and natural gas production and Federal regulation of natural gas sold or transported in interstate commerce. There is no assurance that such operators will be able to market all of the oil or natural gas produced on the Underlying Properties or that favorable prices can be obtained for the oil and natural gas produced. The supply of natural gas capable of being produced in the United States has exceeded demand in recent years as a result of decreased demand for natural gas in response to economic factors, conservation, lower prices for alternative energy sources and other factors. As a result of this excess supply of natural gas, natural gas producers have experienced increased competitive pressure and significantly lower prices. Many natural gas pipelines have reduced their takes from producers below the amount they were contractually obligated to take or pay at fixed prices in excess of spot prices or have renegotiated their obligations to reflect more market responsive terms. The decline in demand for natural gas resulted in many pipelines reducing or ceasing altogether their purchases of new natural gas. Substantially all of National Energy's natural gas production is sold at market responsive prices. Demand for natural gas production has historically been seasonal in nature. Due to unseasonably warm weather over the last several years the demand for natural gas has decreased, resulting in lower prices received by producers during the winter months than in prior years. Consequently, on an energy equivalent basis, natural gas has sold at a discount to oil for the past several years. Such price fluctuations will directly impact Trust distributions, estimates of Trust reserves and estimated future net revenue from Trust reserves. In view of the many uncertainties affecting the supply and demand for crude oil, natural gas and refined petroleum products, National Energy is unable to make reliable predictions of future oil and natural gas prices and demand or the overall effect they will have on the Trust. National Energy does not believe that the loss of any of its purchasers would have a material adverse effect on the Trust, since substantially all of the natural gas sales from Underlying Properties are made on the spot market. REGULATION The production, transportation and sale of oil and gas from the Underlying Properties are subject to Federal and state governmental regulation, including regulations concerning the ceiling prices at which certain categories natural gas may be sold, regulation of tariffs charged by pipelines, taxes, the prevention of waste, the conservation of oil and natural gas, pollution controls and various other matters. The United States has power to permit increases in the amount of oil imported from other countries and to impose pollution control measures. FEDERAL REGULATION OF NATURAL GAS. The Underlying Properties will be subject to the jurisdiction of the Federal Energy Regulatory Commission ("FERC") and the Department of Energy ("DOE") with respect to various aspects of oil and natural gas operations including marketing and production of oil and natural gas. The Natural Gas Act and the Natural Gas Policy Act of 1978 ("Policy Act") mandate federal regulation of interstate transportation of natural gas and of wellhead pricing of certain domestic natural gas, depending on the category of the natural gas and the nature of the sale. In July 1989, however, Congress enacted legislation that terminated wellhead price controls on all domestic natural gas as of January 1, 1993, with price-decontrol effective immediately for certain gas, and effective for other gas as contracts expire or are terminated. Natural gas from newly spudded wells was price-decontrolled on May 15, 1991. In addition, parties may voluntarily agree in writing, as of July 26, 1989 and thereafter, to effect decontrol of natural gas. In April 1992, the FERC issued Order No. 636, which provides for the fundamental restructuring of interstate pipeline sales and transportation services. Among other things, Order No. 636 requires interstate pipelines 17 20 to "unbundle" their merchant sales functions from their transportation and storage functions, requires interstate pipelines to assign capacity rights they have on upstream pipelines to the pipelines' former sales customers and provides for the recovery by interstate pipelines of costs associated with the pipelines' transition from providing bundled sales services to providing unbundled transportation and storage services. In August 1992, the FERC issued an Order on Rehearing ("Order No. 636-A"), largely upholding the regulations and requirements of Order No. 636. While Order Nos. 636 and 636-A would not directly regulate National Energy's activities, the wide ranging implications of those orders for the natural gas industry may have an indirect effect on such activities. Among other things, Order No. 636 may increase transportation costs and tariffs on interstate pipelines and cause interstate pipelines to seek to renegotiate or terminate certain of their existing purchase contracts, but ultimately may enhance gas marketing opportunities and transportation availability. Order Nos. 636 and 636-A are subject to further rehearing by the FERC and court challenges. Although the outcome of these proceedings and the various individual interstate pipeline restructuring proceedings required by those Orders cannot be predicted with certainty, National Energy does not believe the Orders will have an adverse effect on its operations or the Trust. Nevertheless, the Orders have resulted in a degree of uncertainty with respect to interstate natural gas sales and transportation because the precise effects of the Orders will remain unknown for some time. NO PRICE CONTROLS ON LIQUID HYDROCARBONS. Sales of crude oil, condensate and natural gas liquids can be made at uncontrolled prices. There are currently no price controls on crude oil, condensate or natural gas liquids. LEGISLATIVE PROPOSALS. In the past, Congress has been very active in the area of natural gas regulation. Legislation recently enacted repeals incremental pricing requirements and gas use restraints previously applicable. There are other legislative proposals pending in the Federal and state legislatures, which, if enacted, would significantly affect the petroleum industry. At the present time it is impossible to predict what proposals, if any, might actually be enacted by Congress or the various state legislatures and what effect, if any, such proposals might have on the Underlying Properties and Trust. STATE REGULATION. Many state jurisdictions have at times imposed limitations on the production of natural gas by restricting the rate of flow for natural gas wells below their actual capacity to produce and by imposing acreage limitations for the drilling of a well. States may also impose additional regulation of these matters. Most states regulate the production and sale of oil and natural gas, including requirements for obtaining drilling permits, the method of developing new fields, the spacing and operation of wells and the prevention of waste of oil and gas resources. The rate of production may be regulated and the maximum daily production allowable from oil and natural gas wells may be established on a market demand or conservation basis or both. ENVIRONMENTAL REGULATION GENERAL. Activities on the Underlying Properties are subject to existing federal, state and local laws and regulations governing environmental quality and pollution control. It is anticipated that, absent the occurrence of an extraordinary event, compliance with existing federal, state and local laws, rules and regulations regulating the discharge of materials in the environment or otherwise relating to the protection of the environment will not have a material effect upon the Trust. National Energy cannot predict what effect additional regulation or legislation, enforcement policies thereunder, and claims for damages to property, employees, other persons and the environment resulting from operations on the Underlying Properties could have on the Trust. SOLID AND HAZARDOUS WASTE. The Underlying Properties have produced oil and natural gas for several years and will be purchased by National Energy only upon completion of the offering for Trust-A. Although, to National Energy's knowledge, the operators have utilized operating and disposal practices that were standard in the industry at the time, hydrocarbons or other solid wastes may have been disposed or released on or under the Underlying Properties by the current or previous operator. State and federal laws applicable to oil and gas wastes and properties have become increasingly more stringent. Under these new laws, National Energy or an operator of the Underlying Properties could be required to remove or remediate previously disposed wastes or property contamination (including groundwater contamination) or to perform redial plugging operations to prevent future contamination. 18 21 The operators of the Underlying Properties may generate wastes that are subject to the Federal Resource Conservation and Recovery Act and comparable state statutes. The Environmental Protection Agency ("EPA"), the Oklahoma Corporation Commission and the Texas Railroad Commission have limited the disposal options for certain hazardous wastes and are considering the adoption of more stringent disposal standards for nonhazardous wastes. Furthermore, it is anticipated that additional wastes (which could include certain wastes generated by oil and gas operations) will be designated as "hazardous wastes," which are subject to more rigorous an costly disposal requirements. SUPERFUND. The Comprehensive Environmental Response, Compensation and Liability Act ("CERCLA"), also known as the "superfund" law, imposes liability, without regard to fault of the legality of the original conduct, or certain classes of persons that contributed to the release of a "hazardous substance" into the environment. These persons include the owner and operator of a site and companies that disposed or arranged for the disposal of the hazardous substance found at a site. CERCLA also authorizes the EPA and, in some cases, third parties to take actions in response to threats to the public health or the environment and to seek to recover from the responsible classes of persons the costs of such action. In the course of their operations, the operators of the Underlying Properties have generated and will generate wastes that may fall within CERCLA's definition of "hazardous substances." National Energy or operator of the Underlying Properties may be responsible under CERCLA for all or part of the costs to clean up sites at which such wastes have been disposed. National Energy has not been named a potentially responsible party in any action brought under CERCLA. AIR EMISSIONS. The operators of the Underlying Properties are subject to federal, state and local regulations for the control of emissions from sources of air pollution. Administrative enforcement actions for failure to comply strictly with air regulations or permits are generally resolved by payment of a monetary penalty and correction of any identified deficiencies. Alternatively, regulatory agencies could require the operators to forego construction or operation of certain air emission sources. OSHA. The operators of the Underlying Properties are subject to the requirements of the Federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication standard, the EPA community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act, and similar state statutes require an operator to organize information about hazardous materials used or produced in its operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens. NATIONAL ENERGY GENERAL National Energy was formed as a California corporation in August, 1994. National Energy's principal executive office is located at 21800 Burbank Blvd., Suite 100, Woodland Hills, California 91364, and its telephone number is (800) 201-8666. BUSINESS National Energy is a development stage company organized to engage in the acquisition, exploitation and development of producing properties and related facilities, the exploration for oil and natural gas and the production, marketing and transportation of oil and natural gas. National Energy has entered into contracts to acquire five properties, located in Oklahoma. National Energy's offices are located in Woodland Hills, California, in approximately 1,200 square feet of leased space. National Energy also maintains a leased field office in Enid, Oklahoma with Blackjack. 19 22 MANAGEMENT The business and affairs of National Energy are controlled by its Board of Directors which is composed of 1 member. The officers of National Energy are elected by and serve until their successors are appointed by its Board of Directors. The directors and executive officers of National Energy are as follows: Name Title ---- ----- Marshall J. Field President and Director Set forth below is the business experience during the past five years of the directors and executive officers of National Energy. Marshall J. Field, age 46, has been President and Director of National Energy Resources, Inc. since its formation in August, 1994. Mr. Field currently serves as Chief Executive Officer and President of Marshall Field & Company under Spectrum Securities. Mr. Field was Executive Vice President of United California Securities, from June of 1994 to January 1996. From December 1993 until June 1994, Mr. Field was with American Business Securities. From July 1991 until December 1993 Mr. Field was with Southern California Securities. He has served as a registered representative in several major brokerage firms, including Prudential Bache from September 1985 to July 1989 and PaineWebber from July 1989 to July 1991. His background in the industry spans eighteen years of experience in income investments. Mr. Field has been a regular on "The Interest Rate Report" on KWHY-TV for the past eight years. Mr. Field was educated at California State Northridge and Santa Monica College in California. EMPLOYEES National Energy had no employees as of May 28, 1996. CONSULTANTS F. W. Elton in an independent consulting engineer, performing engineering and some geological duties depending upon the clients' need and wishes. Mr. Elton has performed mineral valuations for banks, estate work for attorneys, valuations for producers and royalty owners. In addition, he does open hole log and sample interpretations; prepares procedure and cost estimates; supervises drilling, completion and remedial and day to day production operations. His work has covered Oklahoma, Central and Southeast Kansas, Northwest Mississippi and a portion of Arkansas. From July 1949 to March 1976 Mr. Elton was employed by Shell Oil Company holding the position of Petroleum Engineer (1949-1958) and Production Foreman (1958-1976). Mr. Elton retired from Shell Oil Company in 1976. Mr. Elton has an M.E. Degree from the Colorado School of Mines, Golden, Colorado. Mr. Elton served in the United States Air Force from 1942 until 1945, in the Colorado National Guard from 1946 until 1949 and the Army Reserve Corps of Engineers from 1949 until 1953. BLACKJACK Blackjack Oil & Gas, Inc., which operates all of the Underlying Properties from which Trust-A will derive its revenues, is a corporation formed in 1983 in Oklahoma. It employs six people and operates over 65 wells in Oklahoma. Blackjack's offices are located at 1633 West Garriott Road, Suite D, Enid, Oklahoma 73703. Its officers and key employees are: Gary Foster, age 52. Mr. Foster is the owner of Blackjack and prior to starting Blackjack in 1983, he was the co-owner of Oil Operating Company and was an independent oil and gas landman. Mr. Foster received a B.A. degree in 1966 and a M.A. degree in 1972 from the University of Northern Colorado and did post-graduate study at the University of Northern Colorado, University of Nebraska and Missouri Western. Tom Gilbert, age 46. Mr. is the Production Superintendent. He has been engaged in the oil and gas business for 24 years. Mr. Gilbert was the Area Manager (Rocky Mountain District) for Pool Well Service from 20 23 1986-1994 before being employed at Blackjack. He worked for various other well service companies from 1972-1986. He has supervised both the drilling and completion of wells. CERTAIN TRANSACTIONS National Energy is purchasing the Underlying Properties from Blackjack Oil & Gas, Inc. who is the operator of the wells. The purchase price for the Underlying Properties is $508,000 and is based upon a present value determination of the wells by National Energy's consulting engineer using reserve reports, production information and other well data. The purchase price paid by National Energy to Blackjack is greater than the Production Payment sales price from National Energy to the Trust. Mr. Marshell, the principal of National Energy, will contribute sufficient capital to National Energy to complete the accquisition. FEDERAL INCOME TAX CONSEQUENCES GENERAL This section summarizes the principal Federal income tax consequences of the ownership and sale of the Trust Units. The laws, regulations, court decisions and IRS interpretations on which this summary is based are subject to change by future legislation, regulations or new interpretations by the courts or the IRS, which could have an adverse effect on the ownership of Trust Units. National Energy will not request advance rulings from the IRS dealing with the tax consequences of ownership of Trust Units but will rely on the opinion of Counsel, Robertson & Williams, Inc., Oklahoma City, Oklahoma, regarding the classification of the Trust and certain tax consequences described below. Consummation of the offering is conditioned upon the confirmation of Counsel's opinion at the time of the closing. Counsel believes that its opinion is in accordance with the present position of the IRS regarding such trusts. Such opinion is not binding on the IRS or the courts, however, and no assurance can be given that the IRS or the courts will agree with such opinion. CLASSIFICATION AND TAXATION OF THE TRUST In the opinion of Counsel, under current law, the Trust will be taxable as a grantor trust and not as an association taxable as a corporation. As a grantor trust, the Trust will not be subject to tax at the trust level. For tax purposes, the grantors (in this case, the Trust Unitholders) will be considered to own the Trust's income and principal as though no trust were in existence. A grantor trust simply files an information return, reporting all items of income, credit or deductions which must be included in the tax returns of the grantors. If, contrary to the opinion of Counsel, the Trust were determined to be an association taxable as a corporation, it would be treated as a separate entity subject to normal corporate tax on its taxable income, the Trust Unitholders would be treated as shareholders, and distribution to Trust Unitholders would be treated as nondeductible corporate distributions. Such distributions would be taxable to a Trust Unitholder, first, as dividends to the extent of the Trust Unitholder's pro rate share of the Trust's deemed earnings and profits, then as a tax-free return of capital to the extent of his basis in his Trust Units, and finally as capital gain to the extent of any excess. In the absence of any legislative change or other development deemed adverse by the Trustee, the Trustee does not intend to set aside any reserve for possible Federal income taxes imposed on the Trust. DIRECT TAXATION OF TRUST UNITHOLDERS Since the Trust will be treated as a grantor trust for Federal income tax purposes, each Trust Unitholder will be taxed directly on his pro rata share of the income of the Trust and will be entitled to claim his pro rata share of the deductions of the Trust. The income of the Trust will be deemed to have been received or accrued by the Trust Unitholders at the time such income is received or accrued by the Trust and not when distributed by the Trust. Income and expenses of the Trust will be taken into account by Trust Unitholders consistent with their method of accounting and without regard to the taxable year or accounting method employed by the Trust. 21 24 INTEREST INCOME Based on representations made by National Energy, the reserves to be burdened by each Production Payment acquired by a Trust and the expected term of each Production Payment will be such that the Production Payments will meet the definition of a "production payment" under Section 636(a) of the Code. Thus, each Trust Unitholder will be treated as making a mortgage loan on the Underlying Properties to National Energy in an amount equal to the purchase price of each Trust Unit less interest on the Reserve Fund. REPORTING OF TRUST INCOME AND EXPENSES Unless otherwise advised by Counsel or the IRS, the Trustee intends to treat the interest portion of each production payment it receives as the taxable income of the Trust Unitholders of record on the day of receipt (i.e., the first business day of each calendar month). Similarly, the Trustee intends to pay expenses only on the day it receives a production payment and to treat all expenses paid on a production payment receipt day as the expenses of the Trust Unitholder to whom the royalty income received on that date is distributed. Interest earned on a distribution amount will be treated as belonging to the Trust Unitholder to whom the distribution amount is paid. Interest earned on the Reserve Fund will not be distributed and will be allocated to income. In most cases, therefore, the income and expenses of the Trust for a period will be reported as belonging to the Trust Unitholder to whom the distribution is made for such period and the amount of the distribution for a Trust Unit will equal the net income allocated in respect of such Trust Unit other than the amount of interest earned on the Reserve Fund. It is possible that the IRS will attempt to impute income to persons who are Trust Unitholders when a production payment accrues, to disallow administrative expenses to persons who are not Trust Unitholders when the expenses are incurred, or both. If the IRS did attempt to impute such income, an accrual basis Trust Unitholder might realize royalty income in a tax year earlier than that reported by the Trustee. OTHER INCOME AND EXPENSES It is anticipated that the only other income of the Trust will be interest income earned on funds held as a reserve for payment of the original investment by Trust Unitholders on termination of the Trust, or funds held until the next distribution date. Other expenses of the Trust will include any state and local taxes imposed on the Trust and administrative expenses of the Trustee. Although the issue has not been definitely resolved, Tax Counsel believes that all or substantially all of such expenses are deductible in computing adjusted gross income and, therefore, are not the type of miscellaneous itemized deductions that are allowable only to the extent that the aggregate of such deductions exceeds 2% of adjusted gross income. NON-PASSIVE ACTIVITY INCOME AND LOSS The income and expenses of the Trust will not be taken into account in computing the passive activity losses and income under Code Section 469 for a Trust Unitholder who acquires and holds Trust Units as an investment. SALE OF TRUST UNITS Generally, a Trust Unitholder will realize gain or loss on the sale or exchange of his Trust Units measured by the difference between the amount realized on the sale or exchange and his adjusted basis for such Trust Units. Gain or loss on the sale of Trust Units by a Trust Unitholder who is not a dealer with respect to such Trust Units and who has a holding period for the Trust Units of more than one year will be treated as long-term capital gain or loss. A Trust Unitholder's basis in his Trust Units will be equal to the amount paid for such Trust Units pursuant to this offering or pursuant to market transactions. It is possible that the IRS would take the position that a portion of the sales proceeds is ordinary income to the extent of any accrued income at the time of sale allocable to the Trust Units sold, but which is not distributed to the selling Trust Unitholder. 22 25 BACKUP WITHHOLDING In general, distributions of Trust income will not be subject to "backup withholding" unless: (i) the Trust Unitholder is an individual or other noncorporate taxpayer and (ii) such Trust Unitholder fails to comply with certain reporting procedures. REGISTRATION PROVISION Tax shelter offerings must register with the Service on a form which includes a brief description of the tax shelter and the promoter. National Energy believes the Trusts are not tax shelters for the purpose of this registration requirement. Ownership of the Production Payment by the Trust may subject Trust Unitholders to tax in states in which the Underlying Properties are located as well as the state in which a Trust Unitholder resides or is domiciled. Prospective Trust Unitholders should consult their own tax advisors regarding the impact of state and local taxes on their proposed investments. ERISA CONSIDERATION The Employee Retirement Income Security Act of 1974, as amended ("ERISA"), imposes certain requirements on pension, profit-sharing and other employee benefit plans to which it applies ("Plans"), and contains standards on those persons who are fiduciaries with respect to such Plans. In addition, under the Code, there are similar requirements and standards which are applicable to certain Plans and individual retirement accounts (whether or not subject to ERISA) (collectively, together with Plans subject to ERISA, referred to herein as "Qualified Plans"). A fiduciary of a Qualified Plan should carefully consider fiduciary standards under ERISA regarding the Plan's particular circumstances before authorizing an investment in Trust Units. A fiduciary should first consider (i) whether the investment satisfies the prudence requirements of Section 404(a)(1)(B) of ERISA, (ii) whether the investment satisfies the diversification requirements of Section 404(a)(1)(C) of ERISA and (iii) whether the investment is in accordance with the documents and instruments governing the Plan as required by Section 404(a)(1)(D) of ERISA. In order to avoid the application of certain penalties, a fiduciary must also consider whether the acquisition of Trust Units and/or operation of the Trust might result in direct or indirect nonexempt prohibited transactions under Section 406 of ERISA and Code Section 4975. In determining whether there are such prohibited transactions, a fiduciary must determine whether these are "plan assets" involved in the transaction. On November 13, 1986, the Department of Labor published final regulations (the "DOL Regulations") concerning whether or not a Qualified Plan's assets (such as a Trust Unit) would be deemed to include an interest in the underlying assets of an entity (such as the Trust) for purposes of the reporting, disclosure and fiduciary responsibility provisions of ERISA and analogous provisions of the Code, if the Plan acquires an "equity interest" in such entity. The DOL Regulations provide that the underlying assets of an entity will not be considered "plan assets" if the interests in the entity are a publicly offered security. Trust Units are considered to be "publicly offered" for this purpose if they are part of a class of securities that is (i) widely held (i.e., owned by more than 100 investors independent of the issuer and each other), (ii) freely transferable, and (iii) registered under Section 12(b) or 12(g) of the Exchange Act. Fiduciaries, will need to determine whether the acquisition of Trust Units is a nonexempt prohibited transaction under the general requirements of ERISA Section 406 and Code Section 4975. Due to the complexity of the prohibited transaction rules and the penalties imposed upon persons involved in prohibited transactions, it is important that potential Qualified Plan investors consult with their counsel regarding the consequences under ERISA and the Code of their acquisition and ownership of Trust Units. 23 26 DESCRIPTION OF THE TRUST AGREEMENT The following information and the information set forth under "Description of the Trust Units" are subject to the detailed provisions of the Trust Agreement between National Energy and Boatmen's Trust Company which acts as Trustee for the Trust. The following is a general description of the basic framework of the Trust, and is qualified by the detailed provisions concerning the Trust set forth in the Agreement, a copy of which was filed as an exhibit to the Registration Statement. See "Available Information." For a description of the fiduciary responsibility of the Trustee, including remedies available for the breach of these duties, see "-- Fiduciary Responsibility and Liability of the Trustee," below. CREATION AND ORGANIZATION OF THE TRUST; AMENDMENTS Pursuant to the Conveyances, the Production Payments will be conveyed by National Energy to the Trust in exchange for net proceeds from this offering. The Trust Units are being offered by Trust-A pursuant to this Prospectus and by Prospectus Supplements relating to Trusts yet to be formed for the remaining Trust Units. The Trust will be created under Oklahoma law pursuant to the terms of the Agreement to acquire and hold the Production Payment for the benefit of the Trust Unitholders. The Production Payment is passive in nature and the Trustee will have no control over and no responsibility for costs relating to the operation of the Underlying Properties. Neither National Energy nor the operators of the Underlying Properties have any contractual commitments to the Trust to conduct further drilling on the Underlying Properties nor to maintain their ownership interest in any of such properties. For a description of the Underlying Properties and other information relating to such properties, see "Production Payment and the Underlying Properties." The beneficial interest in the Trust-A is divided into 500 Trust Units, which represent equal undivided portions. For additional information concerning the Trust Units, see "Description of the Trust Units." The Agreement may be amended by a vote of holders of 80% of the Trust Units. No provision of the Agreement, however, may be amended that would increase the power of the Trustee to engage in business or investment activities or to alter the rights of the Trust Unitholders as among themselves. ASSETS OF THE TRUST The only assets of the Trust, other than cash and temporary investments being held for the payment of expenses, and for distribution to the Trust Unitholders, are the Reserve Funds and the Production Payments. See "The Production Payments and the Underlying Properties." DUTIES AND LIMITED POWERS OF THE TRUSTEE The duties of the Trustee are specified in the Agreement and by the laws of Oklahoma. The basic duties of the Trustee are to collect income attributable to the Production Payment to pay out of the Trust's income and assets all expenses, charges and obligations and to distribute the distributable income to the Trust Unitholders. The Trustee is authorized to take such action as in its judgment is necessary or advisable to best achieve the purposes of the Trust. After payment of or provision for Trust expenses and obligations, the Trustee will make semi-annual distributions to the Trust Unitholders of certain proceeds received from the Production Payments to pay the interest portion and reserve the balance in a Reserve Fund to repay the Trust Unit investment amount at the termination of the Production Payment. The Trustee will submit periodic financial reports to the Trust Unitholders as described under "Description of the Trust Units -- Periodic Reports." The Agreement provides that cash being held by the Trustee as a reserve for liabilities, the Reserve Fund, or for distribution at the next distribution date will be invested in interest-bearing obligations of the United States government, agreements secured by such obligations or certificates in certain banks or similar investment grade securities which may be recommended by National Energy, but the Trustee is otherwise prohibited from acquiring 24 27 any asset other than the Production Payments or engaging in any business or investment activity of any kind whatsoever. In the event the Trustee determines it to be in the best interest Trust Unitholders, the Trustee may sell or dispose of all or any part of the Production Payments only as authorized by a vote of holders of 80% or more of the Trust Units, or upon termination of the Trust. However, the Trustee is directed to effect such a sale (without any such vote) if National Energy exercises the option to repurchase the Production Payment after 2 years from the date of formation of the Trust. Any such sale must be for cash and the Trustee must distribute the net proceeds of such sale to the Trust Unitholders. The Agreement also provides that in the event of certain judicial or administrative proceedings seeking the cancellation or forfeiture of any property included in the Underlying Properties or asserting the invalidity of or otherwise challenging the Production Payments held by the Trust because of the nationality, or any other status, of any one or more Trust Unitholders, the Trustee will have the right to require such holder to dispose of his Trust Units, and if such person fails to dispose of his Trust Units, the Trustee will have the right to purchase such Trust Units. To achieve the purposes of the Trust, the Trustee is also authorized to agree to modifications of the terms of the Conveyances or to settle disputes with respect thereto, so long as such modifications or settlements do not alter the nature of the Production Payments as to rights to receive a share of the proceeds of oil or natural gas produced from the Underlying Properties, free of any expense or other cost. LIABILITIES OF THE TRUST Because of the passive nature of the Trust assets and the restrictions on the power of the Trustee to incur obligations, it is anticipated that the only liabilities the Trust will incur will be those for routine administrative expenses, such as the Trustee's fees, clerical expenses and accounting, legal and other professional fees. FIDUCIARY RESPONSIBILITY AND LIABILITY OF THE TRUSTEE The Trustee is a fiduciary with respect to the Trust Unitholders and under Oklahoma law, the Trustee is required to act in the best interests of the Trust Unitholders at all times and to exercise the judgment and care in supervising and managing the Trust's assets exercised by persons of ordinary prudence, discretion and intelligence. Under Oklahoma law, the Trustee's duties to the Trust Unitholders are similar to the duties of a director of a corporation to the shareholders of the corporation, except that the legal presumption protecting business decisions made by directors from challenge, generally referred to as the business judgment rule, is inapplicable to decisions by the Trustee. Due to the passive nature of the Trust, the Trustee is not expected to make business decisions affecting the assets of the Trust. Therefore, substantially all of the Trustee's functions under the Trust Agreement are anticipated to be ministerial in nature. See " -- Duties and Limited Powers of the Trustee," above. Under Oklahoma law, the Trustee may not profit from any transaction with the Trust except that the Trust Agreement permits the Trustee to charge for its services as trustee and as transfer agent (see "-- Compensation of the Trustee"), to retain funds to pay anticipated future expenses and to deposit such funds with the Trustee and to borrow funds at commercial rates from the Trustee to pay expenses of the Trust. The Trustee will also be entitled to receive reimbursement of out-of-pocket expenses incurred in administering the Trust. In discharging its fiduciary duty to the Trust Unitholders, the Trustee may act in its discretion and shall be personally or individually liable to the Trust Unitholders only for fraud or acts or omissions constituting bad faith and will not be liable for any act or omission of any agent or employee of the Trustee unless the Trustee has acted in bad faith in the selection and retention of such agent or employee. The Trustee will be indemnified for any liability, expense, claim, damage or other loss incurred by it individually or as Trustee in the administration of the Trust or for any act or omission on account of it being Trustee, unless resulting from fraud or bad faith, and the Trustee will have a lien upon the assets of the Trust as security for such indemnification and reimbursement and for compensation to be paid to the Trustee. The Trustee shall not be entitled to indemnification from Trust Unitholders. 25 28 See "Description of the Trust Units -- Liability of Trust Unitholders." The Trustee is required to ensure that all contractual liabilities of the Trust are limited to the assets of the Trust and will be liable to the Trust Unitholders if it fails to do so. Under Oklahoma law, if the Trustee, in bad faith, were to fail to collect amounts owed to the Trust or distribute cash held by the Trust for distribution, or otherwise, in bad faith, take or omit to take any action that is in the best interest of the Trust Unitholders, the Trustee would be liable to the Trust Unitholders for damages caused by any such act or omission, including any loss or depreciation in value of the Trust Assets or failure to make a profit from such assets caused by such act or omission. Oklahoma law permits Trust Unitholders to file an action seeking other remedies for such acts or omissions in addition to damages, including removal of the Trustee, specific performance, appointment of a receiver, an accounting by the Trustee to the Trust Unitholders, exemplary damages and other remedies. The availability of these remedies provided by Oklahoma law is explicitly incorporated into the Agreement. Under the Agreement, the Trustee may be removed by the Trust Unitholders, with or without cause, by the affirmative vote of the holders of a majority of the Trust Units. RESERVE FUND The Agreement requires the Trustee to establish a Reserve Fund for that portion of the payments received from the Production Payment which are allocable to the repayment of the Primary Sum or principal amount. The Trustee may also set aside sums in the Reserve Fund for contingent or future expenses of the Trust or the Trustee or to fund any account. The amounts included in the Reserve Fund are to be invested in U. S. government obligations, certificates of deposit of any bank having capital, surplus and undivided profits in excess of $100,000,000, including the bank affiliated with the Trustee or similar investment grade securities which may be recommended by National Energy to the Trustee. Upon termination of the Trust, the Reserve Fund, after payment of Trust liabilities, if any, will be distributed to the Unitholders as a return of their initial contributions. DURATION OF THE TRUST; SALE OF PRODUCTION PAYMENT The Trust will be terminated upon payment in full of the Production Payment or the sale by the Trust of all or substantially all of the Production Payments, which sale may be effected only as described under "-- Duties and Limited Powers of the Trustee," above. The Trust may also be terminated by a vote of holders of 80% or more of the Trust Units outstanding or upon operation of the provisions of the Agreement intended to permit the Trust to comply with the "rule against perpetuities." Upon termination of the Trust, the Trustee will sell for cash in one or more sales (which may be public auctions) all of the assets then constituting the Trust estate. After paying all liabilities of the Trust and establishing any reserves that the Trustee deems appropriate for contingent liabilities, the Trustee will distribute the proceeds of such sales and any other cash in the Trust estate to Trust Unitholders according to their respective interests. The Trustee will not be required to obtain approval of Trust Unitholders prior to conducting any sales upon termination of the Trust. The Trustee may cause the sale of the Production Payment held by a Trust if the holders of 80% or more of the Trust Unitholders of that Trust approve such sale or if National Energy exercises its option to repurchase the Production Payment at any time after 2 years from the formation of the Trust. The net proceeds of such sale will be distributed to the Trust Unitholders. Sale of the Production Payment will terminate the Trust. COMPENSATION OF THE TRUSTEE The Agreement provides that the Trustee will be compensated for its services, out of the Trust assets, in an annual amount of Twelve Hundred Dollars ($1200.00). The Trustee will also be entitled to reimbursement for its out-of- pocket expenses. 26 29 MISCELLANEOUS The Agreement provides that the Trustee may, but is not required to, consult with counsel (which may be counsel to National Energy or its successors), accountants, geologists, engineers and other parties deemed by the Trustee to be qualified as experts on the matters submitted to them, and the Trustee will be authorized and protected with respect to any action taken or suffered by the Trustee in good faith in reliance upon and in accordance with the opinion of any such party. DESCRIPTION OF THE TRUST UNITS GENERAL National Energy is the sponsor of a series of trusts offering up to 6,000 units of beneficial interests ("Trust Units"). The Trust Units will be issued on the Closing Date of each Trust. Each Trust Unit represents an undivided share of beneficial interest in a National Energy Trust and entitles its holder to the same rights as the holder of any other Trust Unit in that Trust. Trust-A will be the first trust formed and will have 500 Trust Units outstanding. Each Trust will offer a minimum of 500 Trust Units for a possible total of 12 grantor trusts to be formed during the 12 month period following the effective date of registration of the Trust Units. DISTRIBUTIONS AND INCOME COMPUTATIONS The amount received each month by the Trustee on behalf of Trust-A will be 78% of the Net Cash Flow from the Underlying Properties. Of this amount, $62,500.00 will be allocated to interest earned on the Production Payment, one- half of which will be distributed to Trust Unitholders semi-annually. Excess will be allocated to the repayment of the Primary Sum and will be added to the Reserve Fund. If at the end of any 12 month period following the date of the Conveyance of Production Payment the Reserve Fund does not meet or exceed a specified amount necessary to amortize the Primary Sum over 5 years, the percentage of Net Cash Flow will increase to 100% until the Reserve Fund meets or exceeds the required amount. Unless otherwise advised by counsel or the IRS, the income and expense of the Trust for each Semi-Annual Period will be reported by the Trustee for tax purposes as belonging to the Trust Unitholders of record on the Semi-Annual Record Date, to whom the Semi-Annual Distribution Amount for that Semi-Annual Period will be distributed. The income and expense will be recognized by the Trust Unitholders for tax purposes in the Semi-Annual Period received or paid by the Trust, rather than in the Semi-Annual Period distributed by the Trust. Net income, apart from any depletion to which a Trust Unitholder may be entitled, is expected to be essentially the same as the Semi-Annual Distribution Amount. However, there will be variances because of the establishment of the Reserve Fund and the possibility that, for example, a reserve will be established in one Semi-Annual Period that will not give rise to a tax deduction until a subsequent Semi-Annual Period or an expenditure paid in one Semi-Annual Period will have to be amortized for tax purposes over several monthly periods. See "Federal Income Tax Consequences." TRANSFER OF TRUST UNITS Trust Units will be transferable on the records of the Trustee upon the surrender of any Certificate in proper form for transfer as required by the Trustee. No service charge will be made to the transferor or transferee for any transfer of a Trust Unit, but the Trustee may require payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection with such transfer. Until any such transfer, the Trustee may treat the owner of any Trust Unit as shown by its records as the owner of the Trust Units evidenced thereby and the Trustee shall not be charged with notice of any claim or demand respecting such Certificate or the interest represented thereby by any other party. Any such transfer of a Trust Unit shall, as to the Trustee, transfer to the transferee as of the close of business on the date of transfer, all right, title and interest of the transferor in and to the Trust; provided, that a transfer of a Trust Unit after any Monthly Record Date shall not transfer to the transferee the right of the transferor to the Monthly Distribution Amount relating to such date. As to matters affecting the title, ownership, warranty or transfer of the Certificates and the Trust Units represented thereby, the law from time to time in force in the State of Oklahoma with respect to the transfer of securities shall govern. 27 30 PERIODIC REPORTS The Trustee will mail to the Trust Unitholders of record as of a date to be selected by the Trustee an annual report containing audited financial statements of the Trust. The Trustee will file such returns for Federal income tax purposes as in its judgment are required to comply with applicable law, and the Trustee will prepare and mail to the Trust Unitholders annually such reports as may be necessary to permit each Trust Unitholder to report correctly his share of the income and deductions of the Trust. The Trustee intends to treat all income and deductions recognized during each Semi-Annual Period as having been recognized by holders of record on the last business day of such Semi-Annual Period unless otherwise advised by counsel or the IRS. Each Trust Unitholder and his duly authorized agents and attorneys shall have the right during reasonable business hours to examine and inspect records of the Trust and the Trustee including a list of the Trust Unitholders. LIABILITY OF TRUST UNITHOLDERS The Trustee is under a duty not to incur any liability without ensuring that such liability will be satisfied only out of the Trust assets (regardless of whether the assets are adequate to satisfy the liability) and in no event out of amounts distributed to, or other assets owned by, Trust Unitholders. However, under the law of Oklahoma, it is unclear whether a Trust Unitholder would be jointly and severally liable for any liability of the Trust in the event that the following conditions were to occur: (a) the satisfaction of such liability was not by contract limited to the assets of the Trust; and (b) insurance proceeds and the assets of the Trust or Trustee were insufficient to discharge such liability. National Energy believes that because of the value and passive nature of the Trust assets and the restrictions on the power of the Trustee to incur liabilities, the imposition of any liability on a Trust Unitholder is remote. VOTING RIGHTS OF TRUST UNITHOLDERS While Trust Unitholders will have certain voting rights, such rights differ from and are more limited than those of stockholders of most public corporations. For example, there is no requirement for annual meetings of Trust Unitholders or for annual or other periodic reelection of the Trustee. Meetings of Trust Unitholders may be called by the Trustee and the Trust Unitholders owning not less than 15% of the Trust Units outstanding may direct the Trustee to call a meeting. All such meetings must be held in Encino, California, and written notice setting forth the time and place of such meeting and the matters proposed to be acted upon shall be given not more than 60 days nor less than 20 days before such meeting to all of the Trust Unitholders of record. The presence in person or by proxy of Trust Unitholders representing a majority of the Trust Units outstanding is necessary to constitute a quorum. Unless otherwise required by the Trust Indenture, any matter shall be deemed to have been approved by the Trust Unitholders if it is approved by the vote of a majority in interest of such Trust Unitholders constituting a quorum, although less than a majority of the Trust Units then outstanding. Each Trust Unitholder shall be entitled to one vote for each Trust Unit owned by such holder. The Trustee may be removed, with or without cause, by a vote of the holders of a majority of the outstanding Trust Units. The following matters require the affirmative vote of the holders of 80% of the outstanding Trust Units: (i) the termination of the Trust; (ii) the amendment of the Trust Indenture; and (iii) the approval of the sale of all or any part of the assets of the Trust. The sale of all or any part of the assets of the Trust requires the prior consent of the Trustee except in connection with the termination of the Trust. 28 31 PLAN OF DISTRIBUTION COMMISSIONS Trust Units will be offered on a best efforts basis by a group of member firms of the National Association of Securities Dealers, Inc. (the "NASD"), (such member firms hereafter are referred to as "Soliciting Dealers") which will be selected by National Energy. Each Soliciting Dealer will receive from the Trust a commission of up to 8% of the purchase price of Trust Units sold by such Soliciting Dealer on the Closing Date. INDEMNIFICATION National Energy, the Trust and the Soliciting Dealers have agreed to indemnify each other against certain civil liabilities, including liabilities arising under the 1933 Act. SUBSCRIPTION PROCEDURES AND PAYMENTS Persons intending to subscribe should send one signed Subscription Agreement with the number of Trust Units desired indicated thereon to Boatmen's Trust Company, Escrow Agent, at P. O. Box 25189, Oklahoma City, Oklahoma 73125- 0189, Attn: Corporate Trust Department, together with a check in the full amount subscribed payable to Boatmen's Trust Company, Escrow Agent." A subscription will be binding and enforceable upon a subscriber if within 15 days after the Escrow Agent's receipt of the Subscription Agreement, National Energy evidences its acceptance by countersigning said Subscription Agreement. National Energy will not knowingly accept subscriptions from persons who fail to meet the suitability standards. See "Plan of Distribution -- Suitability Standards." Each subscription payment will be held by the Escrow Agent in a trust account until either (1) deposited to the account of the Trust on the Closing Date or (2) refunded to the subscriber with any interest earned thereon as soon as possible should it be determined that the offering will not be consummated. SUITABILITY STANDARDS The investment offered hereby represent a long-term investment without liquidity, which investment involves significant risks, and should be considered only by persons with substantial financial means who have no need for liquidity in this investment. A potential investor will be required to furnish information in the Subscription Agreement sufficient to satisfy National Energy that the investment is suitable in light of his or her other security holdings and financial situation and needs, and that her or she, has such knowledge and experience in financial and business matters that he or she is capable of evaluating the merits and risks of the proposed investment. A potential investor must be able to represent that he or she: (i) has a net worth of at least $225,000 (exclusive of home, home furnishings and personal automobiles); or (ii) has a net worth of $75,000 (exclusive of home, home furnishings and personal automobiles) and has and anticipates that he or she will continue to have, in the future, annual taxable income of $75,000 or more, without regard to any taxable income which may be generated by the investment in the Trust and that the investment will not exceed 10% of his or her net worth. VALIDITY OF SECURITIES The validity of the Trust Units offered hereby will be passed upon for National Energy by Robertson & Williams, an Oklahoma Professional Corporation. 29 32 EXPERTS Certain information appearing in this Prospectus regarding the estimated quantities of reserves of the oil and gas properties owned by the Trust, the future net revenues from such reserves and the present values thereof is based on estimates of such reserves and present values prepared by F.W. Elton, Inc., an independent petroleum engineering firm. The audited financial statements included in this Prospectus have been audited by Museck & Museck, independent accountants, as stated in their reports appearing herein, and have been so included in reliance upon such reports given upon the authority of that firm as experts in accounting and auditing. 30 33 INDEX TO FINANCIAL STATEMENTS
PAGE ---- NATIONAL ENERGY RESOURCES, INC. Independent Auditor's Report . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-1 Balance Sheet as of July 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 Income Statement for Year Ended July 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-4 Statement of Stockholders' Equity . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-6 Statement of Retained Earnings for Year Ended July 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . F-7 Statement of Cash Flows for Year Ended July 31, 1995 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-8 Unaudited Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-9 Notes to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-14
31 34 [MUSECK & MUSECK LETTERHEAD] INDEPENDENT AUDITORS' REPORT To the Board of Directors National Energy Resources, Inc. We have audited the accompanying balance sheet of National Energy Resources, Inc. (a development stage company) as of July 31, 1995, and related statements of income, retained earnings, stockholders' equity, and cash flows for the year then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audit. We conducted our audit in accordance with generally accepted auditing standards. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audit provides a reasonable basis for our opinion. In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of National Energy Resources as of July 31, 1995, and the results of its operations and its cash flows for the year then ended in conformity with generally accepted accounting principles. /s/ MUSECK & MUSECK New Providence, New Jersey May 23, 1996 F-1 35 NATIONAL ENERGY RESOURCES, INC. BALANCE SHEET JULY 31, 1995 ASSETS CURRENT ASSETS PETTY CASH $ 420 --------- TOTAL CURRENT ASSETS $ 420 PROPERTY AND EQUIPMENT INTANGIBLE ASSETS $ 6,066 LESS-ACCUMULATED AMORTIZATION 708 5,358 -------- --------- TOTAL PROPERTY AND EQUIPMENT 5,358 OTHER ASSETS DEFERRED ISSUE COSTS 19,050 --------- TOTAL OTHER ASSETS 19,050 -------- TOTAL ASSETS $ 24,828 ========
SEE NOTES TO FINANCIAL STATEMENTS F-2 36 NATIONAL ENERGY RESOURCES, INC. BALANCE SHEET JULY 31, 1995 LIABILITIES CURRENT LIABILITIES ACCOUNTS PAYABLE $ 10,319 ACCRUED OTHER STATE TAXES 800 ------------- TOTAL CURRENT LIABILITIES $ 11,119 LONG-TERM LIABILITIES LOANS FROM STOCKHOLDERS 14,217 ------------- TOTAL LONG-TERM LIABILITIES 14,217 STOCKHOLDERS' EQUITY COMMON STOCK 1,000 RETAINED EARNINGS - UNAPPROPRIATED (1,508) ------------- TOTAL STOCKHOLDERS' EQUITY (508) --------- TOTAL LIABILITIES/STOCKHOLDERS' EQUITY $ 24,828 =========
SEE NOTES TO FINANCIAL STATEMENTS F-3 37 NATIONAL ENERGY RESOURCES, INC. STATEMENT OF INCOME FOR THE PERIOD ENDED JULY 31, 1995 GENERAL/ADMINISTRATIVE EXPENSES - SCHEDULE A $ 1,508 ----------- OPERATING PROFIT (1,508) ----------- NET INCOME $ (1,508) ===========
SEE NOTES TO FINANCIAL STATEMENTS F-4 38 NATIONAL ENERGY RESOURCES, INC. SUPPORTING SCHEDULES FOR THE PERIOD ENDED JULY 31, 1995 SCHEDULE A - GENERAL AND ADMINISTRATIVE AMORTIZATION $ 708 STATE FILING FEE 800 -------------- TOTAL GENERAL AND ADMINISTRATIVE EXP $ 1,508 ==============
SEE NOTES TO FINANCIAL STATEMENTS F-5 39 NATIONAL ENERGY RESOURCES, INC. (A Development Stage Company) STATEMENT OF STOCKHOLDERS' EQUITY
COMMON STOCK ------------------------- NUMBER OF SHARES VALUE -------- ------- DATE OF INCORPORATION, AUGUST 8, 1994 -0- $ -0- SHARES ISSUED FOR CASH ON AUGUST 15, 1994 1,000 1,000 ----- ------- BALANCE AT JULY 31, 1995 1,000 $ 1,000 ===== =======
SEE NOTES TO FINANCIAL STATEMENTS F-6 40 NATIONAL ENERGY RESOURCES, INC. STATEMENT OF RETAINED EARNINGS FOR THE PERIOD ENDED JULY 31, 1995 RETAINED EARNINGS - AUGUST 1, 1994 $ 0 ADD - NET INCOME FOR THE PERIOD ENDED JULY 31, 1995 (1,508) --------- RETAINED EARNINGS - JULY 31, 1995 $ (1,508) =========
SEE NOTES TO FINANCIAL STATEMENTS F-7 41 NATIONAL ENERGY RESOURCES, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED JULY 31, 1995 CASH FLOWS FROM OPERATING ACTIVITIES: NET INCOME, PER INCOME STATEMENT $ (1,508) ADD: AMORTIZATION $ 708 INCREASE IN ACCOUNTS PAYABLE 10,319 INCREASE IN CURRENT LIABILITIES 800 11,827 ---------- ---------- $ 10,319 NET CASH FLOW FROM OPERATING ACTIVITIES $ 10,319 CASH FLOWS FROM INVESTING ACTIVITIES: LESS: CASH PAID - EQUIPMENT AND OTHER ASSETS $ 6,066 ---------- NET CASH FLOW USED FOR INVESTING ACTIVITIES $ (6,066) CASH FLOWS FROM FINANCING ACTIVITIES: ADD: INCREASE IN STOCKHOLDERS $ 14,217 $ 15,217 INCREASE IN COMMON STOCK 1,000 ---------- ---------- DEDUCT: $ 19,050 INCREASE IN OTHER ASSETS $ 19,050 ---------- ---------- NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES $ (3,833) ----------- INCREASE IN CASH $ 420 CASH AT THE BEGINNING OF THE YEAR 0 ----------- CASH AT THE END OF THE YEAR $ 420 ===========
SEE NOTES TO FINANCIAL STATEMENTS F-8 42 NATIONAL ENERGY RESOURCES, INC. BALANCE SHEET APRIL 30, 1996 ASSETS CURRENT ASSETS CASH $ 4,754 PETTY CASH 420 ------------- TOTAL CURRENT ASSETS $ 5,174 INTANGIBLE ASSETS INTANGIBLE ASSETS $ 6,066 LESS-ACCUMULATED AMORTIZATION 1,618 4,448 ------------ ------------- TOTAL INTANGIBLE ASSETS 4,448 OTHER ASSETS DEFERRED ISSUE COSTS 24,721 ------------- TOTAL OTHER ASSETS 24,721 -------------- TOTAL ASSETS $ 34,343 ============== LIABILITIES CURRENT LIABILITIES ACCRUED INTEREST EXPENSE $ 1,781 ------------- TOTAL CURRENT LIABILITIES $1,781 LONG-TERM LIABILITIES LOANS FROM STOCKHOLDERS 35,878 ------------- TOTAL LONG-TERM LIABILITIES 35,878 STOCKHOLDERS' EQUITY COMMON STOCK 1,000 RETAINED EARNINGS - (DEFICIT) (4,316) ------------- TOTAL STOCKHOLDERS' EQUITY (3,316) -------------- TOTAL LIABILITIES/STOCKHOLDERS' EQUITY $ 34,343 ==============
UNAUDITED F-9 43 NATIONAL ENERGY RESOURCES, INC. STATEMENT OF INCOME NINE MONTHS ENDED APRIL 30, 1996 GENERAL/ADMINISTRATIVE EXPENSES - SCHEDULE A $ 2,808 ---------------- OPERATING PROFIT (2,808) NET LOSS $ (2,808) ===============
UNAUDITED F-10 44 NATIONAL ENERGY RESOURCES, INC. SUPPORTING SCHEDULES NINE MONTHS ENDED APRIL 30, 1996 SCHEDULE A - GENERAL AND ADMINISTRATIVE AMORTIZATION $ 910 INTEREST 1,790 STATE FILING FEE 108 ------------- TOTAL GENERAL AND ADMINISTRATIVE EXPENSE $ 2,808 =============
UNAUDITED F-11 45 NATIONAL ENERGY RESOURCES, INC. STATEMENT OF RETAINED EARNINGS NINE MONTHS ENDED APRIL 30, 1996 RETAINED EARNINGS - AUGUST 1, 1995 $ (1,508) ADD - NET LOSS FOR THE NINE MONTHS ENDED APRIL 30, 1996 (2,808) ------------- RETAINED EARNINGS - APRIL 30, 1996 - (DEFICIT) $ (4,316) =============
UNAUDITED F-12 46 NATIONAL ENERGY RESOURCES, INC. STATEMENT OF CASH FLOWS FOR THE PERIOD ENDED APRIL 30, 1996 CASH FLOWS FROM OPERATING ACTIVITIES: NET LOSS, PER INCOME STATEMENT $ (2,808) ADD: AMORTIZATION $ 910 INCREASE IN CURRENT LIABILITIES 981 1,891 ------------- --------------- $ (917) DEDUCT: DECREASE IN ACCOUNTS PAYABLE $ 10,319 $ 10,319 ------------- --------------- NET CASH FLOW FROM OPERATING ACTIVITIES (11,236) CASH FLOWS FROM FINANCING ACTIVITIES: ADD: INCREASE IN STOCKHOLDERS' LOANS $ 21,661 $ 21,661 ------------- --------------- DEDUCT: INCREASE IN OTHER ASSETS $ 5,671 $ 5,671 ------------- --------------- NET CASH FLOW PROVIDED BY FINANCING ACTIVITIES $ 15 ,990 ,990 ------------ INCREASE IN CASH $ 4,754 CASH AT THE BEGINNING OF THE YEAR 420 CASH AT THE END OF THE YEAR $ 5,174 =============
UNAUDITED-- F-13 47 NATIONAL ENERGY RESOURCES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS NOTE A - FORMATION AND OPERATIONS OF THE COMPANY National Energy Resources, Inc. (the Company) was incorporated under the laws of the state of California on August 8, 1994. The Company is considered to be in the development stage as defined in Financial Accounting Standard No. 7. National Energy Resources, Inc. intends to be in the business of purchasing producing oil and gas properties and the rights to a specified share of the production revenues from the minerals in place. NOTE B - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Accounting Accounting records of the Company and financial statements are maintained and prepared on the accrual basis. Year End The Company's year end for financial reporting and tax purposes is July 31. Cash Equivalents For financial statement purposes, with respect to the Statement of Cash Flows, cash equivalents include time deposits and all highly liquid instruments with original maturities of three months or less. The amount included on the Company's Statement of Cash Flows is comprised exclusively of cash. Income Taxes The Company, with the consent of its shareholders, has elected to be taxed as "C" corporation for Federal and State purposes. Federal and State taxes have been accrued. Deferred Issue Costs Direct costs incurred to register and issue the secured notes are deferred and amortized to interest expense over the lives of the loans using the actuarial method. Organizational Cost Direct costs incurred to set up the Corporation are capitalized and amortized over a sixty month period beginning January 1, 1995. F-14 48 NATIONAL ENERGY RESOURCES, INC. (A Development Stage Company) NOTES TO THE FINANCIAL STATEMENTS (Continued) NOTE C - STOCKHOLDERS' EQUITY The Company is authorized to issue 1,000 shares of common stock at $1 par value. On July 31, 1995 and April 30, 1996, there were 1,000 shares of common stock issued and outstanding. The holders of the common stock are entitled to one vote per share on all matters to voted on by shareholders. NOTE D - CONTRACT TO PURCHASE OIL AND GAS PROPERTIES The Company has entered into a $430,000 contract with Blackjack oil and Gas, Inc. for the purchase of six producing gas wells which have well-established production histories and are operated by Blackjack. Both parties are bound by the contract. The company plans to use the proceeds from the offering to settle the obligation. NOTE E - PROPOSED TRUST UNIT OFFERING The Company intends to offer a total of 6,000 trust units in the principle amount of $1,000 each. The trust units will bear a rate of return from 12% to 14% annum, payable semiannually. The notes will be secured by the oil and gas properties acquired with the proceeds of the offering and by the production revenues. The trust units are designed to pay back the trust unitholders their original investment in five years and may be terminated at any time after two years from the closing date upon the payment to the trust unitholders of 100% of their original investment. The trust units are being offered on a "best-effort" basis. There is a $500,000 minimum offering for the units per trust. NOTE F - LOANS FROM OFFICERS/SHAREHOLDERS Amounts due to officers/shareholders at July 31, 1995 and April 30, 1996 of $19,050. and $35,878., bear interest at 8% per annum. Included in accrued expenses is interest payable to officers/stockholders of $1781 at April 30, 1996. The officers/shareholders have agreed not to demand repayment of the loans for the period of five years starting on August 8, 1994, the date of inception. F-15 49 EXHIBIT A April 17, 1996 National Energy Resources, Inc. 16130 Ventura Blvd., Suite 310 Encino, CA 91436 Gentlemen: At your request, we have prepared an estimate of the proved producing reserves and income attributable to these leasehold interests to be acquired by National Energy Resources, Inc. as of October 1, 1996. The subject properties are located in Oklahoma. The income data have been estimated using the Securities and Exchange Commission ("S.E.C.") guidelines for future cost and price parameters. The results of this study are summarized below. S.E.C. CASE Estimated Proved Producing Net Reserves and Income Data Attributed to Certain Leasehold Interest to be Accquired by National Energy Resources, Inc. As of April 17, 1996 - -------------------------------------------------------------------------------- Proved Producing Net Remaining Reserves Gas MCF 1,743,808 Oil BBLS 5,821 Income Data Future Gross Revenue $ 2,081,552 Deductions $ 648,837 Future Net Income (FNI) $ 1,432,717 Discounted FNI @ 10% $ 874,544
All gas volumes are expressed in thousands of cubic feet (MCF) at the temperature and pressure of the areas where the gas reserves are located. The future gross revenue is before the deduction of production taxes. The future net income is after deductions of operating expense and production taxes. The deductions are based on current data and are comprised of normal direct cost of operating the wells, which include ad valorem taxes and any workover cost. The future gross income is before deductions of state and federal income taxes. The discounted future net income is based on a discount rate of 10 percent per annum. A-1 50 The proved producing reserves presented in this report comply with the Securities and Exchange Commission's Regulation S-X Part 210.4-10 Sec. (a) as clarified by the Commission's Staff Accounting Bulletin No. 40. All the reserves in this report are "Proved Producing" reserves. Proved producing reserves of crude oil, condensate, natural gas, and natural gas liquids are estimated quantities that geological, engineering, and historical production date demonstrate with reasonable certainty to be recoverable in the future from the present producing reservoirs under existing conditions. The relatively low weighted price of the natural gas for these properties is due to the Bryan #1 well having 30.62% Nitrogen in its gas stream. This has to be removed by processing through a plant. After deducting the Nitrogen, the fuel gas to run the plant and shrinkage, the well head has a price of 0.70 per MCF. Blackjack Oil & Gas furnished us with gas prices in effect at January, 1996. In accordance with S.E.C. guidelines, the future gas prices used in this report make no allowances for future gas price increases which may occur as a result of inflation nor do they make any allowance for seasonal variations in gas prices which are likely to cause future yearly average gas prices to be somewhat higher than January, 1996 gas prices. Operating costs for the leases and wells in this report are based on the operating expenses provided by Blackjack Oil & Gas and include only those costs directly applicable to the leases or wells. The current operating costs were held constant throughout the life of the properties. This study does not consider the salvage value of the lease equipment or the abandonment cost since both are relatively insignificant and tend to offset each other for properties located onshore. The reserve estimates presented herein are based upon our study of the subject properties; however, we have not made any field examination of the properties. No consideration was given in this report to potential environmental liabilities which may exist nor were any costs included for potential liability to restore and clean up damages, if any, caused by past operating practices. The ownership interest, prices, and other factual data furnished us by Blackjack Oil & Gas in connection with this investigation were accepted without independent verification. The reserves included in this report are estimates only and should not be construed as being exact quantities. They may or may not be actually recovered. Moreover, estimates of proved producing reserves may increase or decrease as a result of future operations of the operator. The future prices received by National Energy Resources for the sale of its production may be higher or lower than the prices used in this report as described above, and the operating costs and other costs relating to such production may also increase or decrease from existing levels; however, such possible changes in prices and costs were, in accordance with rules adopted by the S.E.C., omitted from consideration in preparing this report. A-2 51 Neither Fred W. Elton or any of his employees have any interest in the subject properties and neither the employment to make this study nor the compensation is contingent on our estimates of reserves and future cash inflows for the subject properties. Very truly yours, By: /s/ F.W. ELTON ------------------------------ F. W. Elton Petroleum Engineer A-3 52 TOTAL PROVED PRODUCING ALL FORMATIONS ALL WELLS ALL FIELDS VARIOUS COUNTIES, OK ONE LINE SUMMARY BY INDIVIDUAL PROPERTY RESERVES & ECONOMIC EVALUATION PREPARED BY: F.W. ELTON AS OF: 4/96
CASE LEASE SAND GROSS GROSS NET TOTAL NET NET TAXES BEFIT DISCOUNTED NO NAME NAME OIL GAS OIL GAS SALES & OP ESP CASH FLOW CASH FLOW - ---- ---------- ------- ------ --------- ----- ------- ------- --------- --------- ---------- MMBLS MMCF MMBLS MMCF M$ M$ M$ M$ 80 BRYAN #1-6 TONKAWA 1,165.226 897.224 628.056 152.561 475.496 283.445 85 ENOCH #1 MORROW 226.590 174.474 279.159 94.206 184.953 131.045 86 ACTION #2 HOOVER 370.295 285.127 456.204 98.368 357.836 188.620 87 DAVIS #1-A PRUE 12.391 426.422 5.821 200.330 419.488 198.513 220.976 144.348 83 PHILLIPS MORROW 242.406 186.653 298.645 105.189 193.456 127.086 - ---------------------------- ------ --------- ----- --------- --------- -------- --------- -------- TOTAL PROVED PRODUCING 12.391 2,430.939 5.821 1,743.808 2,081.552 648.837 1,432.717 874.544
A-4 53 EVALUATION ACTION2.1 EUREKA RUN DATE: 04-16-1996 PETROLEUM ECONOMICS SOFTWARE RUN TIME: 16:41:17 PACIFIC RESOURCES MANAGEMENT AS OF DATE: MAR 96 NPV 5.0% 293.737 BFIT NAME: ACTION2 NPV 10.0% 248.001 BFIT FIELD: NPV 15.0% 214.259 BFIT LOCATION: SEC 28-18N-4W/LOGAN CO NPV 20.0% 188.620 BFIT FORMATION: NPV 25.0% 168.626 BFIT OPERATOR: BLACKJACK OIL & GAS IRR LESS THAN 100% BFIT PAYOUT MAY 96 BFIT PI N/A BFIT
======== INTERESTS AND EFFECTIVE DATE ======= ========= PRICES ========= ============== GROSS RESERVES ============= COST OIL GAS COND PRODT DATE BEGINNING ENDING AVERAGE CUMULATIVE REMAINING ULTIMATE %REMAINING 1.00000 0.77000 0.77000 0.77000 0.77000 MAY96 OIL 0.00 0.00 0.00 0.000 0.000 0.000 0.00 OIL GAS 1.60 1.60 1.60 0.000 370.295 370.295 100.00 GAS COND 0.00 0.00 0.00 0.000 0.000 0.000 0.00 COND PRDT 0.00 0.00 0.00 0.000 0.000 0.000 0.00 PRDT GROSS AVERAGE GROSS OIL NET OIL NET AVERAGE AVERAGE NET GAS NET NET TOTAL YEAR WELLCOUNT OIL PRICE PRODUCTION PRODUCTION OIL SALES GOR GAS PRICE PRODUCTION GAS SALES REVENUE ========== = WELLS = == $/B == = MBBLS == = MBBLS == == M$ === = SCF/B = = $/MSCF = = MMSCF == == M$ === == M$ === 1996 1.000 0.000 0.000 0.000 0.000 0.000 1.600 34.027 54.433 54.443 1997 1.000 0.000 0.000 0.000 0.000 0.000 1.600 42.463 67.940 67.940 1998 1.000 0.000 0.000 0.000 0.000 0.000 1.600 35.263 56.420 56.420 1999 1.000 0.000 0.000 0.000 0.000 0.000 1.600 30.154 48.246 48.246 2000 1.000 0.000 0.000 0.000 0.000 0.000 1.600 26.340 42.144 42.144 2001 1.000 0.000 0.000 0.000 0.000 0.000 1.600 23.383 37.413 37.413 2002 1.000 0.000 0.000 0.000 0.000 0.000 1.600 21.024 33.638 33.638 2003 1.000 0.000 0.000 0.000 0.000 0.000 1.600 19.097 30.556 30.556 2004 1.000 0.000 0.000 0.000 0.000 0.000 1.600 17.494 27.991 27.991 2005 1.000 0.000 0.000 0.000 0.000 0.000 1.600 16.140 25.824 25.824 2006 1.000 0.000 0.000 0.000 0.000 0.000 1.600 14.980 23.968 23.968 2007(4 Mo) 1.000 0.000 0.000 0.000 0.000 0.000 1.600 4.763 7.621 7.621 2008 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2009 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2010 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 SUBTOTAL 1.000 0.000 0.000 0.000 0.000 0.000 1.600 285.127 456.204 456.204 REMAINING 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 TOT 11.2 Yr 1.000 0.000 0.000 0.000 0.000 0.000 1.600 285.127 456.204 456.204 INPUT LOE NET NET TOTAL NET TOTAL NET LEASE NET TOTAL NET BFIT CUM BFIT BFIT CF CUM BFIT CF YEAR -- WELL -- TOTAL LOE PROD TAX LOE+TAX REVENUE INVESTMENTS CASHFLOW CASHFLOW DISC 20.0% DISC 20.0% ========== =M$/WELLYR= === M$ == === M$ == === M$ == === M$ == ==== M$ === === M$ == == M$ == === M$ === === M$ ==== 1996 6.000 4.000 3.863 7.863 46.580 0.000 46.580 46.580 42.300 42.300 1997 6.000 6.000 4.820 10.820 57.120 0.000 57.120 103.700 44.666 86.967 1998 6.000 6.000 4.003 10.003 46.417 0.000 46.417 150.117 30.232 117.199 1999 6.000 6.000 3.423 9.423 38.823 0.000 38.823 188.940 21.064 138.263 2000 6.000 6.000 2.990 8.990 33.154 0.000 33.154 222.094 14.986 153.249 2001 6.000 6.000 2.654 8.654 28.759 0.000 28.759 250.852 10.831 164.079 2002 6.000 6.000 2.387 8.387 25.252 0.000 25.252 276.104 7.924 172.003 2003 6.000 6.000 2.168 8.168 22.388 0.000 22.388 298.492 5.853 177.856 2004 6.000 6.000 1.986 7.986 20.005 0.000 20.005 318.497 4.358 182.215 2005 6.000 6.000 1.832 7.832 17.991 0.000 17.991 336.488 3.266 185.480 2006 6.000 6.000 1.701 7.701 16.267 0.000 16.267 352.755 2.461 187.941 2007(4 Mo) 6.000 2.000 0.541 2.541 5.081 0.000 5.081 357.836 0.679 188.620 2008 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2009 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2010 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 SUBTOTAL 6.000 66.000 32.368 98.368 357.836 0.000 357.836 357.836 188.620 188.620 REMAINING 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 TOT 11.2 Yr 6.000 66.000 32.368 98.368 357.836 0.000 357.836 357.836 188.620 188.620
A-5 54 EVALUATION BRYAN.1 EUREKA RUN DATE: 04-16-1996 PETROLEUM ECONOMICS SOFTWARE RUN TIME: 16:39:25 PACIFIC RESOURCES MANAGEMENT AS OF DATE: MAR96 NPV 5.0% 358.253 BFIT NAME: BRYAN NPV 10.0% 283.445 BFIT FIELD: CHAD NPV 15.0% 233.112 BFIT LOCATION: SEC 6 20N 5E/PAWNEE CO NPV 20.0% 197.637 BFIT FORMATION: TONKAWA NPV 25.0% 171.611 BFIT OPERATOR: BLACKJACK OIL & GAS IRR LESS THAN 100% BFIT PAYOUT MAY96 BFIT PI N/A BFIT
======== INTERESTS AND EFFECTIVE DATE ======= ========= PRICES ========= ============== GROSS RESERVES ============= COST OIL GAS COND PRODT DATE BEGINNING ENDING AVERAGE CUMULATIVE REMAINING ULTIMATE %REMAINING 1.00000 0.77000 0.77000 0.77000 0.77000 MAY96 OIL 0.00 0.00 0.00 0.000 0.000 0.000 0.00 OIL GAS 0.70 0.70 0.70 0.000 1165.225 1165.225 100.00 GAS COND 0.00 0.00 0.00 0.000 0.000 0.000 0.00 COND PRDT 0.00 0.00 0.00 0.000 0.000 0.000 0.00 PRDT GROSS AVERAGE GROSS OIL NET OIL NET AVERAGE AVERAGE NET GAS NET NET TOTAL YEAR WELLCOUNT OIL PRICE PRODUCTION PRODUCTION OIL SALES GOR GAS PRICE PRODUCTION GAS SALES REVENUE ========== = WELLS = == $/B == = MBBLS == = MBBLS == == M$ === = SCF/B = = $/MSCF = = MMSCF == == M$ === == M$ === 1996 1.000 0.000 0.000 0.000 0.000 0.000 0.700 65.368 45.757 45.757 1997 1.000 0.000 0.000 0.000 0.000 0.000 0.700 90.049 63.034 63.034 1998 1.000 0.000 0.000 0.000 0.000 0.000 0.700 81.974 57.382 57.382 1999 1.000 0.000 0.000 0.000 0.000 0.000 0.700 75.228 52.660 52.660 2000 1.000 0.000 0.000 0.000 0.000 0.000 0.700 69.509 48.656 48.656 2001 1.000 0.000 0.000 0.000 0.000 0.000 0.700 64.598 45.219 45.219 2002 1.000 0.000 0.000 0.000 0.000 0.000 0.700 60.336 42.235 42.235 2003 1.000 0.000 0.000 0.000 0.000 0.000 0.700 56.601 39.621 39.621 2004 1.000 0.000 0.000 0.000 0.000 0.000 0.700 53.302 37.311 37.311 2005 1.000 0.000 0.000 0.000 0.000 0.000 0.700 50.367 35.257 35.257 2006 1.000 0.000 0.000 0.000 0.000 0.000 0.700 47.737 33.416 33.416 2007 1.000 0.000 0.000 0.000 0.000 0.000 0.700 45.369 31.759 31.759 2008 1.000 0.000 0.000 0.000 0.000 0.000 0.700 43.225 30.258 30.258 2009 1.000 0.000 0.000 0.000 0.000 0.000 0.700 41.274 28.892 28.892 2010 1.000 0.000 0.000 0.000 0.000 0.000 0.700 39.492 27.645 27.645 SUBTOTAL 1.000 0.000 0.000 0.000 0.000 0.000 0.700 884.429 619.101 619.101 REMAINING 1.000 0.000 0.000 0.000 0.000 0.000 0.700 12.794 8.956 8.956 TOT 15.2Yr 1.000 0.000 0.000 0.000 0.000 0.000 0.700 897.224 628.056 628.056 INPUT LOE NET NET TOTAL NET TOTAL NET LEASE NET TOTAL NET BFIT CUM BFIT BFIT CF CUM BFIT CF YEAR -- WELL -- TOTAL LOE PROD TAX LOE+TAX REVENUE INVESTMENTS CASHFLOW CASHFLOW DISC 20.0% DISC 20.0% ========== =M$/WELLYR= === M$ == === M$ == === M$ == === M$ == ==== M$ === === M$ == == M$ == === M$ === === M$ ==== 1996 7.200 4.800 3.246 8.046 37.711 0.000 37.711 37.711 34.213 34.213 1997 7.200 7.200 4.472 11.672 51.362 0.000 51.362 89.073 40.096 74.309 1998 7.200 7.200 4.071 11.271 46.110 0.000 46.110 135.183 29.993 104.302 1999 7.200 7.200 3.736 10.936 41.723 0.000 41.723 176.907 22.614 126.915 2000 7.200 7.200 3.452 10.652 38.004 0.000 38.004 214.911 17.163 144.079 2001 7.200 7.200 3.208 10.408 34.810 0.000 34.810 249.721 13.100 157.178 2002 7.200 7.200 2.997 10.197 32.038 0.000 32.038 281.760 10.047 167.225 2003 7.200 7.200 2.811 10.011 29.610 0.000 29.610 311.369 7.737 174.962 2004 7.200 7.200 2.647 9.847 27.464 0.000 27.464 338.834 5.980 180.942 2005 7.200 7.200 2.501 9.701 25.555 0.000 25.555 364.389 4.637 185.579 2006 7.200 7.200 2.371 9.571 23.845 0.000 23.845 388.234 3.605 189.184 2007 7.200 7.200 2.253 9.453 22.305 0.000 22.305 410.539 2.810 191.994 2008 7.200 7.200 2.147 9.347 20.911 0.000 20.911 431.450 2.195 194.190 2009 7.200 7.200 2.050 9.250 19.642 0.000 19.642 451.092 1.718 195.908 2010 7.200 7.200 1.961 9.161 18.483 0.000 18.483 469.575 1.348 197.256 SUBTOTAL 7.200 105.600 43.925 149.525 469.575 0.000 469.575 469.575 197.256 197.256 REMAINING 7.200 2.400 0.635 3.035 5.920 0.000 5.920 475.496 0.381 197.637 TOT 15.2Yr 7.200 108.000 44.561 152.561 475.496 0.000 475.496 475.496 197.637 197.637
A-6 55 EVALUATION DAVIS.1 EUREKA RUN DATE: 04-16-1996 PETROLEUM ECONOMICS SOFTWARE RUN TIME: 16:37:31 PACIFIC RESOURCES MANAGEMENT AS OF DATE: MAR 96 NPV 5.0% 175.569 BFIT NAME: DAVIS NPV 10.0% 144.348 BFIT FIELD: EDMOND WEST NPV 15.0% 122.027 BFIT LOCATION: SEC 22-14N-4W/OKLAHOMA CO NPV 20.0% 105.514 BFIT FORMATION: NPV 25.0% 95.925 BFIT OPERATOR: BLACKJACK OIL & GAS IRR LESS THAN 100% BFIT PAYOUT MAY 96 BFIT PI N/A BFIT
======== INTERESTS AND EFFECTIVE DATE ======= ========= PRICES ========= ============== GROSS RESERVES ============= COST OIL GAS COND PRODT DATE BEGINNING ENDING AVERAGE CUMULATIVE REMAINING ULTIMATE %REMAINING 0.75000 0.46980 0.46980 0.46980 0.46980 MAY96 OIL 17.00 17.00 17.00 0.000 12.391 12.391 100.00 OIL GAS 1.60 1.60 1.60 0.000 426.416 426.416 100.00 GAS COND 0.00 0.00 0.00 0.000 0.000 0.000 0.00 COND PRDT 0.00 0.00 0.00 0.000 0.000 0.000 0.00 PRDT GROSS AVERAGE GROSS OIL NET OIL NET AVERAGE AVERAGE NET GAS NET NET TOTAL YEAR WELLCOUNT OIL PRICE PRODUCTION PRODUCTION OIL SALES GOR GAS PRICE PRODUCTION GAS SALES REVENUE ========== = WELLS = == $/B == = MBBLS == = MBBLS == == M$ === = SCF/B = = $/MSCF = = MMSCF == == M$ === == M$ === 1996 1.000 17.000 1.035 0.486 8.266 31558.615 1.600 15.345 24.552 32.817 1997 1.000 17.000 1.448 0.680 11.568 31606.814 1.600 21.508 34.413 45.981 1998 1.000 17.000 1.333 0.626 10.643 31839.168 1.600 19.933 31.983 42.536 1999 1.000 17.000 1.226 0.576 9.791 32246.189 1.600 18.573 29.717 39.508 2000 1.000 17.000 1.128 0.530 9.008 32811.340 1.600 17.386 27.818 36.827 2001 1.000 17.000 1.038 0.488 8.288 33523.340 1.600 16.343 26.148 34.436 2002 1.000 17.000 0.955 0.449 7.625 34374.785 1.600 15.417 24.667 32.292 2003 1.000 17.000 0.878 0.413 7.015 35361.223 1.600 14.591 23.345 30.360 2004 1.000 17.000 0.808 0.380 6.453 36480.910 1.600 13.849 22.158 28.611 2005 1.000 17.000 0.743 0.349 5.937 37733.789 1.600 13.178 21.085 27.022 2006 1.000 17.000 0.684 0.321 5.462 39121.074 1.600 12.570 20.112 25.574 2007 1.000 17.000 0.629 0.296 5.025 40646.332 1.600 12.015 19.224 24.249 2008(10Mo) 1.000 17.000 0.486 0.228 3.879 42171.043 1.600 9.623 15.397 19.276 2009 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2010 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 SUBTOTAL 1.000 17.000 12.391 5.821 98.960 34413.887 1.600 200.330 320.528 419.488 REMAINING 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 TOT 12.7 Yr 1.000 17.000 12.391 5.821 98.960 34413.887 1.600 200.330 320.528 419.488 INPUT LOE NET NET TOTAL NET TOTAL NET LEASE NET TOTAL NET BFIT CUM BFIT BFIT CF CUM BFIT CF YEAR -- WELL -- TOTAL LOE PROD TAX LOE+TAX REVENUE INVESTMENTS CASHFLOW CASHFLOW DISC 20.0% DISC 20.0% ========== =M$/WELLYR= === M$ == === M$ == === M$ == === M$ == ==== M$ === === M$ == == M$ == === M$ === === M$ ==== 1996 18.000 9.000 2.328 11.328 21.489 0.000 21.489 21.489 19.496 19.496 1997 18.000 13.500 3.262 16.762 29.219 0.000 29.219 50.708 22.812 42.307 1998 18.000 13.500 3.018 16.518 26.018 0.000 26.018 76.726 16.926 59.234 1999 18.000 13.500 2.803 16.303 23.205 0.000 23.205 99.931 12.580 71.814 2000 18.000 13.500 2.613 16.113 20.714 0.000 20.714 120.645 9.358 81.172 2001 18.000 13.500 2.443 15.943 18.493 0.000 18.493 139.137 6.962 88.134 2002 18.000 13.500 2.291 15.791 16.501 0.000 16.501 155.638 5.177 93.311 2003 18.000 13.500 2.154 15.654 14.706 0.000 14.706 170.344 3.845 97.156 2004 18.000 13.500 2.030 15.530 13.081 0.000 13.081 183.425 2.850 100.006 2005 18.000 13.500 1.917 15.417 11.605 0.000 11.605 195.030 2.107 102.113 2006 18.000 13.500 1.814 15.314 10.259 0.000 10.259 205.289 1.552 103.665 2007 18.000 13.500 1.720 15.220 9.029 0.000 9.029 214.318 1.139 104.804 2008(10Mo) 18.000 11.250 1.368 12.618 6.658 0.000 6.658 220.976 0.710 105.514 2009 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2010 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 SUBTOTAL 18.000 168.750 29.763 198.513 220.976 0.000 220.976 220.976 105.514 105.514 REMAINING 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 TOT 12.7 Yr 18.000 168.750 29.763 198.513 220.976 0.000 220.976 220.976 105.514 105.514
A-7 56 EVALUATION ENOCH.1 EUREKA RUN DATE: 04-16-1996 PETROLEUM ECONOMICS SOFTWARE RUN TIME: 16:30:23 PACIFIC RESOURCES MANAGEMENT AS OF DATE: MAR 96 NPV 5.0% 153.755 BFIT NAME: ENOCH NPV 10.0% 131.045 BFIT FIELD: WATONGA-CHICKASHA NPV 15.0% 114.009 BFIT LOCATION: SEC 31-17N-10W/BLAINE CO NPV 20.0% 100.883 BFIT FORMATION: NPV 25.0% 90.531 BFIT OPERATOR: BLACKJACK OIL & GAS IRR LESS THAN 100% BFIT PAYOUT MAY 96 BFIT PI N/A BFIT
======== INTERESTS AND EFFECTIVE DATE ======= ========= PRICES ========= ============== GROSS RESERVES ============= COST OIL GAS COND PRODT DATE BEGINNING ENDING AVERAGE CUMULATIVE REMAINING ULTIMATE %REMAINING 1.00000 0.77000 0.77000 0.77000 0.77000 MAY96 OIL 0.00 0.00 0.00 0.000 0.000 0.000 0.00 OIL GAS 1.60 1.60 1.60 0.000 226.590 226.590 100.00 GAS COND 0.00 0.00 0.00 0.000 0.000 0.000 0.00 COND PRDT 0.00 0.00 0.00 0.000 0.000 0.000 0.00 PRDT GROSS AVERAGE GROSS OIL NET OIL NET AVERAGE AVERAGE NET GAS NET NET TOTAL YEAR WELLCOUNT OIL PRICE PRODUCTION PRODUCTION OIL SALES GOR GAS PRICE PRODUCTION GAS SALES REVENUE ========== = WELLS = == $/B == = MBBLS == = MBBLS == == M$ === = SCF/B = = $/MSCF = = MMSCF == == M$ === == M$ === 1996 1.000 0.000 0.000 0.000 0.000 0.000 1.600 20.121 32.194 32.194 1997 1.000 0.000 0.000 0.000 0.000 0.000 1.600 25.812 41.300 41.300 1998 1.000 0.000 0.000 0.000 0.000 0.000 1.600 21.957 35.131 35.131 1999 1.000 0.000 0.000 0.000 0.000 0.000 1.600 19.105 30.568 30.568 2000 1.000 0.000 0.000 0.000 0.000 0.000 1.600 16.910 27.055 27.055 2001 1.000 0.000 0.000 0.000 0.000 0.000 1.600 15.167 24.267 24.267 2002 1.000 0.000 0.000 0.000 0.000 0.000 1.600 13.750 22.000 22.000 2003 1.000 0.000 0.000 0.000 0.000 0.000 1.600 12.576 20.121 20.121 2004 1.000 0.000 0.000 0.000 0.000 0.000 1.600 11.586 18.538 18.538 2005 1.000 0.000 0.000 0.000 0.000 0.000 1.600 10.741 17.186 17.186 2006(8 Mo) 1.000 0.000 0.000 0.000 0.000 0.000 1.600 6.749 10.798 10.798 2007 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2008 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2009 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2010 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 SUBTOTAL 1.000 0.000 0.000 0.000 0.000 0.000 1.600 174.474 279.159 279.159 REMAINING 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 TOT 10.5 Yr 1.000 0.000 0.000 0.000 0.000 0.000 1.600 174.474 279.159 279.159 INPUT LOE NET NET TOTAL NET TOTAL NET LEASE NET TOTAL NET BFIT CUM BFIT BFIT CF CUM BFIT CF YEAR -- WELL -- TOTAL LOE PROD TAX LOE+TAX REVENUE INVESTMENTS CASHFLOW CASHFLOW DISC 20.0% DISC 20.0% ========== =M$/WELLYR= === M$ == === M$ == === M$ == === M$ == ==== M$ === === M$ == == M$ == === M$ === === M$ ==== 1996 7.200 4.800 2.284 7.084 25.110 0.000 25.110 25.110 22.799 22.799 1997 7.200 7.200 2.930 10.130 31.169 0.000 31.169 56.279 24.370 47.170 1998 7.200 7.200 2.493 9.693 25.439 0.000 25.439 81.718 16.569 63.738 1999 7.200 7.200 2.169 9.369 21.199 0.000 21.199 102.917 11.503 75.241 2000 7.200 7.200 1.920 9.120 17.936 0.000 17.936 120.853 8.109 83.350 2001 7.200 7.200 1.722 8.922 15.345 0.000 15.345 136.198 5.781 89.130 2002 7.200 7.200 1.561 8.761 13.240 0.000 13.240 149.438 4.156 93.286 2003 7.200 7.200 1.428 8.628 11.494 0.000 11.494 160.931 3.006 96.292 2004 7.200 7.200 1.315 8.515 10.023 0.000 10.023 170.954 2.184 98.477 2005 7.200 7.200 1.219 8.419 8.766 0.000 8.766 179.720 1.592 100.069 2006(8 Mo) 7.200 4.800 0.766 5.566 5.232 0.000 5.232 184.953 0.815 100.883 2007 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2008 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2009 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2010 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 SUBTOTAL 7.200 84.000 21.189 105.189 193.456 0.000 193.456 193.456 93.017 93.017 REMAINING 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 TOT 11.8 Yr 7.200 84.000 21.189 105.189 193.456 0.000 193.456 193.456 93.017 93.017
A-8 57 EVALUATION PHILLIPS.1 EUREKA RUN DATE: 04-19-1996 PETROLEUM ECONOMICS SOFTWARE RUN TIME: 13:50:56 PACIFIC RESOURCES MANAGEMENT AS OF DATE: MAR 96 NPV 5.0% 154.267 BFIT NAME: PHILLIPS #1 NPV 10.0% 127.086 BFIT FIELD: MOCANE-LAVERNE NPV 15.0% 107.537 BFIT LOCATION: SEC 13-24N-24W/ELLIS CO., OK NPV 20.0% 93.017 BFIT FORMATION: NPV 25.0% 81.922 BFIT OPERATOR: BLACKJACK OIL & GAS, INC. IRR LESS THAN 100% BFIT PAYOUT MAY 96 BFIT PI N/A BFIT
======== INTERESTS AND EFFECTIVE DATE ======= ========= PRICES ========= ============== GROSS RESERVES ============= COST OIL GAS COND PRODT DATE BEGINNING ENDING AVERAGE CUMULATIVE REMAINING ULTIMATE %REMAINING 1.00000 0.77000 0.77000 0.77000 0.77000 MAY96 OIL 0.00 0.00 0.00 0.000 0.000 0.000 0.00 OIL GAS 1.60 1.60 1.60 0.000 242.406 242.406 100.00 GAS COND 0.00 0.00 0.00 0.000 0.000 0.000 0.00 COND PRDT 0.00 0.00 0.00 0.000 0.000 0.000 0.00 PRDT GROSS AVERAGE GROSS OIL NET OIL NET AVERAGE AVERAGE NET GAS NET NET TOTAL YEAR WELLCOUNT OIL PRICE PRODUCTION PRODUCTION OIL SALES GOR GAS PRICE PRODUCTION GAS SALES REVENUE ========== = WELLS = == $/B == = MBBLS == = MBBLS == == M$ === = SCF/B = = $/MSCF = = MMSCF == == M$ === == M$ === 1996 1.000 0.000 0.000 0.000 0.000 0.000 1.600 16.045 25.672 25.672 1997 1.000 0.000 0.000 0.000 0.000 0.000 1.600 22.103 35.365 35.365 1998 1.000 0.000 0.000 0.000 0.000 0.000 1.600 20.121 32.193 32.193 1999 1.000 0.000 0.000 0.000 0.000 0.000 1.600 18.465 29.544 29.544 2000 1.000 0.000 0.000 0.000 0.000 0.000 1.600 17.061 27.298 27.298 2001 1.000 0.000 0.000 0.000 0.000 0.000 1.600 15.856 25.369 25.369 2002 1.000 0.000 0.000 0.000 0.000 0.000 1.600 14.810 23.695 23.695 2003 1.000 0.000 0.000 0.000 0.000 0.000 1.600 13.893 22.229 22.229 2004 1.000 0.000 0.000 0.000 0.000 0.000 1.600 13.083 20.933 20.933 2005 1.000 0.000 0.000 0.000 0.000 0.000 1.600 12.363 19.780 19.780 2006 1.000 0.000 0.000 0.000 0.000 0.000 1.600 11.717 18.748 18.748 2007(12 Mo) 1.000 0.000 0.000 0.000 0.000 0.000 1.600 11.136 17.818 17.818 2008 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2009 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2010 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 SUBTOTAL 1.000 0.000 0.000 0.000 0.000 0.000 1.600 186.653 298.645 298.645 REMAINING 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 TOT 11.8 Yr 1.000 0.000 0.000 0.000 0.000 0.000 1.600 186.653 298.645 298.645 INPUT LOE NET NET TOTAL NET TOTAL NET LEASE NET TOTAL NET BFIT CUM BFIT BFIT CF CUM BFIT CF YEAR -- WELL -- TOTAL LOE PROD TAX LOE+TAX REVENUE INVESTMENTS CASHFLOW CASHFLOW DISC 20.0% DISC 20.0% ========== =M$/WELLYR= === M$ == === M$ == === M$ == === M$ == ==== M$ === === M$ == == M$ == === M$ === === M$ ==== 1996 7.200 4.800 1.821 6.621 19.050 0.000 19.050 19.050 17.285 17.285 1997 7.200 7.200 2.509 9.709 25.656 0.000 25.656 44.706 20.032 37.317 1998 7.200 7.200 2.284 9.484 22.709 0.000 22.709 67.415 14.775 52.092 1999 7.200 7.200 2.096 9.296 20.248 0.000 20.248 87.663 10.977 63.068 2000 7.200 7.200 1.937 9.137 18.161 0.000 18.161 105.824 8.204 71.272 2001 7.200 7.200 1.800 9.000 16.369 0.000 16.369 122.194 6.162 77.434 2002 7.200 7.200 1.681 8.881 14.814 0.000 14.814 137.008 4.647 82.080 2003 7.200 7.200 1.577 8.777 13.452 0.000 13.452 150.460 3.516 85.596 2004 7.200 7.200 1.485 8.685 12.248 0.000 12.248 162.708 2.668 88.264 2005 7.200 7.200 1.403 8.603 11.177 0.000 11.177 173.885 2.029 90,292 2006 7.200 7.200 1.330 8.530 10.218 0.000 10.218 184.102 1.545 91.838 2007(12 Mo) 7.200 7.200 1.264 8.464 9.354 0.000 9.354 193.456 1.179 93.017 2008 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2009 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 2010 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 SUBTOTAL 7.200 84.000 21.189 105.189 193.456 0.000 193,456 193.456 93.017 93.017 REMAINING 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 0.000 TOT 11.8 Yr 7.200 84.000 21.189 105.189 193.456 0.000 193.456 193.456 93.017 93.017
A-9 58 =================================================== No person has been authorized to give any information or to make any representations other than those contained in this Prospectus, and, if given or made, such information or representations must not be relied upon as having been authorized. This Prospectus does not constitute an offer to sell or the solicitation of an offer to buy any securities other than the securities to which it relates or any offer to sell or the solicitation of an offer to buy such securities in any circumstances in which such offer or solicitation is unlawful. Neither the delivery of this Prospectus nor any sale made hereunder shall, under any circumstances, create any implication that there has been no change in the affairs of the Trust since the date hereof or imply that the information contained herein is correct as of any time subsequent to its date. ---------------------- Until ____________, 1996 (25 days after the date of this Prospectus), all dealers effecting transaction in the Trust Units, whether or not participating in this distribution, may be required to deliver a Prospectus. This is in addition to the obligation of the dealers to deliver a Prospectus when acting as underwriters and with respect to their unsold allotment or subscriptions. =================================================== =================================================== 500 TRUST UNITS NATIONAL ENERGY RESOURCES TRUST-A P R O S P E C T U S =================================================== 59 PART II INFORMATION NOT REQUIRED IN PROSPECTUS 13. EXPENSES OF ISSUANCE AND DISTRIBUTION(1). SEC Filing Fees . . . . . . . . . . . . . . . . . . . . . . . . . $ 2,068.97 Escrow . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7,700.00 Printing and Engraving . . . . . . . . . . . . . . . . . . . . . . 15,000.00 Legal Fees . . . . . . . . . . . . . . . . . . . . . . . . . . . . 22,500.00 Accounting Fees . . . . . . . . . . . . . . . . . . . . . . . . . 3,500.00 Miscellaneous Fees . . . . . . . . . . . . . . . . . . . . . . . . 3,750.00 ---------- Total . . . . . . . . . . . . . . . . . . . . . . . . . . . . $ 54,518.97 ===========
____________ (1) All amounts are estimated except SEC filing fees. 14. INDEMNIFICATION OF OFFICERS AND DIRECTORS. California Corporations Laws provide that a director, officer, employee or agent of the Corporation may be indemnified against suit or other proceeding whether it were civil, criminal, administrative or investigative if he becomes a party to said lawsuit or proceeding by reason of the fact that he is a director, officer, employee or agent of the corporation. The compensation for indemnification includes judgments, fines and amounts paid in settlement actual and reasonably incurred by him in connection with such action, suit or proceeding if he acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interest of the corporation. However, no indemnification shall be made in respect of any claim, issue or matter as to which such person shall have been judged liable for negligence or misconduct in the performance of his duty to the corporation, unless the court in which the action or suit is brought shall determine that despite his liability but in view of all the circumstances of the case, such person is fairly and reasonably entitled to be indemnified for expenses such court shall deem proper. The By-Laws of the corporation outline the conditions under which any director or officer of the registrant may be indemnified. The By-laws provide that to the extent and in the manner permitted by the laws of the State of California, the corporation shall indemnify any person who was or is a party or is threatened to be made a party to any threatened, pending or completed action, suit or proceeding, whether civil, criminal, administrative or investigative, other than an action by or in the right of the corporation, by reason of the fact that such person is or was a director, officer, employee or agent of the corporation, or is or was serving at the request of the corporation as a director, officer, employee or agent of another corporation, partnership, joint venture, trust or other enterprise against expenses, including attorneys' fees, judgments, fines and amounts paid in settlement. 15. RECENT SALES OF UNREGISTERED SECURITIES. None. II-1 60 16. EXHIBITS.
NUMBER DESCRIPTION OF EXHIBIT - ------ ---------------------- 3. (i) National Energy Articles of Incorporation (ii) National Energy By-Laws 4. Trust Agreement of National Energy Resources Trust-A (previously filed) 5. Legal Opinion of Robertson & Williams, Inc.* 8. Tax Opinion of Robertson & Williams, Inc.* 10. (i) Conveyance of Production Payment (previously filed) (ii) Form Operating Agreement (iii) Letter of Intent for Property Purchase 23. (i) Consent of Robertson & Williams, Inc. (ii) Consent of Museck & Museck (iii) Consent of F.W. Elton, Inc.
* To be filed by Amendment. 17. UNDERTAKINGS. 1. The undersigned registrant hereby undertakes: (a) To file, during any period in which offers or sales are being made, a post-effective amendment to this registration statement: (1) To include any prospectus required by Section 10(a)(3) of the Securities Act of 1933; (2) To reflect in the prospectus any facts or events arising after the effective date of the registration statement (or the most recent post-effective amendment thereof) which, individually or in the aggregate, represent a fundamental change in the information set forth in the registration statement. Notwithstanding the foregoing, any increase or decrease in volume of securities offered (if the total dollar value of securities offered would not exceed that which was registered) and any deviation from the low or high end of the estimated maximum offering range may be reflected in the form of prospectus filed with the Commission pursuant to Rule 424(b) (Section 230.424)(b) of this chapter) if, in the aggregate, the changes in volume and price represent no more than a 20% change in the maximum aggregate offering price set forth in the "Calculation of Registration Fee" table in the effective registration statement. (3) To include any material information with respect to the plan of distribution not previously disclosed in the registration statement or any material change to such information in the registration statement. II-2 61 2. For the purpose of determining any liability under the Securities Act of 1933, each such post-effective amendment shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of the securities at that time shall be deemed to be the initial bona fide offering. 3. To remove from registration by means of a post-effective amendment any of the securities being registered which remain unsold at the termination of the offering. 4. Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act and will be governed by the final adjudication of such issue. 5. The registrant will not identify to any third party any prospects which will go into or are likely to be placed into the investment program or are representative of prospects which may be placed into the program, whether such third party is a selling dealer or other party involved with making or directing investment decisions regarding the purchase of Trust Units, except to the extent such prospects have been identified in the prospectus, prospectus supplement or amendment thereto. 6. To the extent a review of prospects or lease inventory is permitted to third parties, it will be: (a) only incidental to an underwriter's due diligence examination; (b) no reference to any specific property (unless such property is described in the prospectus, prospectus supplement or an amendment) will appear in any analysis or report on the program prepared by such third party; and (c) any third party prior to receiving permission to examine properties will agree to the above conditions, and the registrant will file a copy of such agreement(s) as exhibit(s) to the registration statement. 7. No prospective investors or their representatives will be permitted to examine any prospects or reserve, inventory, or other data related thereto which is not described in the prospectus, prospectus supplement or amendment thereto. 8. The registrant will send to each investor at least on an annual basis a detailed statement of any transaction by the Trust(s) with the trustee(s) or affiliates of such trustee(s), and of fees, commissions, compensation and other benefits paid or accrued to the trustee(s) for the fiscal year completed, showing the amount paid or accrued to each recipient and the services performed. 9. An annual report on Form 10-K will be filed at the conclusion of the fiscal year following the year in which the registration statement is declared effective. 10. A Form 8-K or final SR to reflect the expenditure of the proceeds of the offering will be filed. 11. The prospectus will be supplemented at the close of formation of each Trust to state the number of participants in that Trust, the amount of Trust Units sold therein, the cumulative amount sold under all Trusts formed under the subject registration statement, the amount of Trust Units to be offered in the next Trust to be formed and in succeeding Trusts to be formed under the registration statement. 12. Any unsold Trust Units will be deregistered upon termination of the offering. II-3 62 13. National Energy hereby undertakes to provide the Trustee at the closing instructions as to the issuance of trust certificates in such denominations as required to permit prompt delivery to each purchaser. SIGNATURES Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereto duly authorized, in the City of Woodland Hills, State of California on June 11, 1996. (Registrant) NATIONAL ENERGY RESOURCES TRUST SERIES A THROUGH L By: NATIONAL ENERGY RESOURCES, INC.. Sponsor By: /s/ Marshall J. Field ----------------------------------- Marshall J. Field (Signature and Title ) President, Chief Financial Officer and Director II-4 63 INDEX TO EXHIBITS
EXHIBIT NUMBER DESCRIPTION - ------- ----------- 3.(i) National Energy Articles of Incorporation (ii) National Energy By-Laws 4. Trust Agreement of National Energy Resources Trust-A (previously filed) 5. Legal Opinion of Robertson & Williams, Inc.* 8. Tax Opinion of Robertson & Williams, Inc.* 10.(i) Conveyance of Production Payment (previously filed) (ii) Form Operating Agreement (iii) Letter of Intent for Property Purchase 23.(i) Consent of Robertson & Williams, Inc. (ii) Consent of Museck & Museck (iii) Consent of F.W. Elton, Inc.
* To be filed by Amendment. EX-3.(I) 2 ARTICLES OF INCORPORATION 1 State of California SECRETARY OF STATE'S OFFICE CORPORATION DIVISION I, TONY MILLER, Acting Secretary of State of the State of California, hereby certify: That the annexed transcript has been compared with the corporate record on file in this office, of which it purports to be a copy, and that same is full, true and correct. IN WITNESS WHEREOF, I execute this certificate and affix the Great Seal of the State of California this AUG 8 1994 ----------- /s/ TONY MILLER [SEAL] Acting Secretary of State 2 ENDORSED FILED in the office of the Secretary of State of the State of California AUG 8 - 1994 TONY MILLER, Acting Secretary of State ARTICLES OF INCORPORATION OF NATIONAL ENERGY RESOURCES, INC. I The name of this corporation is: NATIONAL ENERGY RESOURCES, INC. II The purpose of this corporation is to engage in any lawful act or activity for which a corporation may be organized under the General Corporation law of California, other than the banking business, the trust company business, or the practice of a profession permitted to be incorporated by the California Corporation's Code. III The name and address in the State of California for the corporation's initial agent for service of process is: MARSHALL J. FIELD 1875 CENTURY PARK EAST, SUITE 3100 LOS ANGELES, CA 90067 IV This corporation is authorized to issue only one class of stock, and the total number of shares which this corporation is authorized to issue is ten thousand (10,000) shares of no par value. V The liability of the directors of the corporation for monetary damages shall be eliminated to the fullest extent permissible under California law. ENDORSED FILED in the office of the Secretary of State of the State of California AUG 8 - 1994 TONY MILLER, Acting Secretary of State 3 VI The corporation is authorized to provide indemnification of agents (as defined in Section 317 of the Corporations Code) for breach of duty to the corporation and its stockholders through bylaw provisions of through agreements with the agents, or both, in excess of the indemnification otherwise permitted by Section 317 of the Corporations Code, subject to the limits on such excess indemnification set forth in Section 204 of the Corporations Code. Dated: August 5, 1994 /s/ Walter Weiss ---------------------------- WALTER WEISS, Incorporator I HEREBY DECLARE that I am the person who executed the foregoing Articles of Incorporaton, which execution is my act and deed. /s/ Walter Weiss ---------------------------- WALTER WEISS, Incorporator articles EX-3.(II) 3 BYLAWS 1 BYLAWS OF NATIONAL ENERGY RESOURCES, INC. (A California Corporation) ARTICLE I SHAREHOLDERS' MEETINGS Section 1. TIME. An annual meeting for the election of directors and for the transaction of any other proper business and any special meeting shall be held on the date and at the time as the Board of Directors shall from time to time fix. Time of Meeting: o'clock .M. Date of Meeting: The day of Section 2. PLACE. Annual meetings and special meetings shall be held at such place, within or without the State of California, as the Directors may, from time to time, fix. Whenever the Directors shall fail to fix such place, the meetings shall be held at the principal executive office of the corporation. Section 3. CALL. Annual meetings may be called by the Directors, by the Chairman of the Board, if any, Vice Chairman of the Board, if any, the President, if any, the Secretary, or by any officer instructed by the Directors to call the meeting. Special meetings may be called in like manner and by the holders of shares entitled to cast not less than ten percent of the votes at the meeting being called. Section 4. NOTICE. Written notice stating the place, day and hour of each meeting, and, in the case of a special meeting, the general nature of the business to be transacted or, in the case of an Annual Meeting, those matters which the Board of Directors, at the time of mailing of the notice, intends to present for action by the shareholders, shall by given not less than ten days (or not less than any such other minimum period of days as may be prescribed by the General Corporation Law) or more than sixty days (or more than any such maximum period of days as may be prescribed by the General Corporation Law) before the date of the meeting, by mail, personally, or by other means of written communication, charges prepaid by or at the direction of the Directors, the President, if any, the Secretary or the officer or persons calling the meeting, addressed to each shareholder at his address appearing on the books of the corporation or given by him to the corporation for the purpose of notice, or, if no such address appears or is given, at the place where the principal executive office of the corporation is located or by publication at least once in a newspaper of general circulation in the county in which the said principal executive office is located. BYLAWS - 1 - 2 Such notice shall be deemed to be delivered when deposited in the United States mail with first class postage therein prepaid, or sent by other means of written communication addressed to the shareholder at his address as it appears on the stock transfer books of the corporation. The notice of any meeting at which directors are to be elected include the names of nominees intended at the time of notice to be presented by management for election. At an annual meeting of shareholders, any matter relating to the affairs of the corporation, whether or not stated in the notice of the meeting, may be brought up for action except matters which the General Corporation Law requires to be stated in the notice of the meeting. The notice of any annual or special meeting shall also include, or be accompanied by, any additional statements, information, or documents prescribed by the General Corporation Law. When a meeting is adjourned to another time or place, notice of the adjourned meeting need not be given if the time and place thereof are announce at the meeting at which the adjournment is taken; provided that, if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given to each shareholder. At the adjourned meeting, the corporation may transact any business which might have been transacted at the original meeting. Section 5. CONSENT. The transaction of any meeting, however called and noticed, and wherever held, shall be as valid as though had 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 shareholders or his proxy signs a written waiver of notice or a consent to the holding of the meeting or an approval of the minutes thereof. All such waivers, consents and approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Attendance of a person at a meeting constitutes a waiver of notice of such meeting, except when the person objects, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened and except that attendance at a meeting shall not constitute a waiver of any right to object to the consideration of matters required by the General Corporation Law to be included in the notice if such objection is expressly made at the meeting. Except as otherwise provided in subdivision (f) of Section 601 of the General Corporation Law, neither the business to be transacted at nor the purpose of any regular or special meeting need be specified in any written waiver of notice. Section 6. CONDUCT OF MEETING. Meetings of the shareholders shall be presided over by one of the following officers in the order of seniority and if present and acting -- the Chairman of the Board, if any, the Vice-Chairman of the Board, if any, the President, if any, a Vice-President, or, if none of the foregoing is in office and present and acting, by a chairman to be chosen by the shareholders. The Secretary of the corporation, or in his absence, an Assistant Secretary, shall BYLAWS - 2 - 3 act as secretary of every meeting, but, if neither the Secretary nor an Assistant Secretary is present, the Chairman of the meeting shall appoint a secretary of the meeting. Section 7. PROXY REPRESENTATION. Every shareholder may authorize another person or persons to act as his proxy at a meeting or by written action. No proxy shall be valid the expiration of eleven months from the date of its execution unless otherwise provided in the proxy. Every proxy shall be revocable at the pleasure of the person executing it prior to the vote or written action pursuant thereto, except as otherwise provided by the General Corporation Law. As used herein, a proxy shall be deemed to mean a written authorization signed by a shareholder or a shareholder's attorney in fact giving another person or persons power to vote or consent in writing with respect to the shares of such shareholder, and "Signed" as used herein shall be deemed to me an the placing of such shareholder's name on the proxy, whether by manual signature, typewriting, telegraphic transmission or otherwise by such shareholder or such shareholder's attorney in fact. Where applicable, the form of any proxy shall comply with the provisions of Section 604 of the General Corporation Law. Section 8. INSPECTORS - APPOINTMENT. In advance of any meeting, the Board of Directors may appoint inspectors of election to act at the meeting and any adjournment thereof. If inspectors of election are not so appointed, or, if any persons so appointed fail to appear or refuse to act, the Chairman of any meeting of shareholders may, and on the request of any shareholder or a shareholder's proxy shall, appoint inspectors of election, or persons to replace any of those who so fail or refuse, 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 represented shall determine whether one or three inspectors are to be appointed. 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 votes, ballots, if any, 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 when the polls shall close, determine the result, and do such acts as may be proper to conduct the election or vote with fairness to all shareholders. If there are three inspectors of election, the decision, act, or certificate of a majority shall be effective in ail respects as the decision, Section 9. SUBSIDIARY CORPORATIONS. Shares of this corporation owned by a subsidiary shall not be entitled to vote on any matter. A subsidiary for these purposes is BYLAWS - 3 - 4 defined as a corporation, the shares of which possessing more than 25% of the total combined voting power of all classes of shares entitled to vote, are owned directly or indirectly through one or more subsidiaries. Section 10. QUORUM; VOTE; WRITTEN CONSENT. The holders of a majority of the voting shares shall constitute a quorum at a meeting of shareholders for the transaction of any business. The shareholders present at a duly called or held meeting at which a quorum is present may continue to do business until adjournment notwithstanding the withdrawal of enough shareholders to leave less than a quorum if any action taken, other than adjournment, is approved by at least a majority of the shares required to constitute a quorum. In the absence of a quorum, any meeting of shareholders may be adjourned from time to time by the vote of a majority of the shares represented thereat, but no other business may be transacted except as hereinbefore provided. In the election of directors, a plurality of the votes cast shall elect. No shareholder shall be entitled to exercise the right of cumulative voting at a meeting for the election of directors unless the candidate's name or the candidates' names have been placed in nomination prior to the voting and the shareholder has given notice at the meeting prior to the voting of the shareholder's intention to cumulate the shareholder's votes. If any one shareholder has given such notice, all shareholders may cumulate their votes for such candidates in nomination. Except As otherwise provided by the General Corporation Law, the Articles of Incorporation or these Bylaws, any action required or permitted to be taken at a meeting at which a quorum is present shall be authorized by the affirmative vote of a majority of the shares represented at the meeting. Except in the election of directors by written consent in lieu of a meeting, and except as may otherwise be provided by the General Corporation Law, the Articles of Incorporation or these Bylaws, any action which may be taken at any annual or special meeting may be taken without a meeting and without prior notice, if a consent in writing, setting forth the action so taken, shall be signed by holders of shares having not less than the minimum number of votes that would be necessary to authorize or take such action at a meeting at which all shares entitled to vote thereon were present and voted. Directors may not be elected by written consent except by unanimous written consent of all shares entitled to vote for the election of directors. Notice of any shareholder approval pursuant to Section 310, 317, 1201 or 2007 without a meeting by less than unanimous written consent shall be given at least ten days before the consummation of the action authorized by such approval, and prompt notice shall be given of the taking of any other corporate action approved by shareholders without a meeting by less than unanimous written BYLAWS - 4 - 5 consent to those shareholders entitled to vote who have not consented in writing. Section 11. BALLOT. Elections of directors at a meeting need not be by ballot unless a shareholder demands election by ballot at the election and before the voting begins. In all other matters, voting need not be by ballot. Section 12. SHAREHOLDERS' AGREEMENTS. Notwithstanding the above provisions in the event this corporation elects to become a close corporation, an agreement between two or more shareholders thereof, if in writing and signed by the parties thereof, may provide that in exercising any voting rights the shares held by them shall be voted as provided therein or in Section 706, and may otherwise modify these provisions as to shareholders' meetings and actions. ARTICLE II BOARD OF DIRECTORS Section 1. FUNCTIONS. The business and affairs of the corporation shall be managed and all corporate powers shall be exercised by or under the direction of its Board of Directors. The Board of Directors may delegate the management of the day-to-day operation of the business of the corporation to a management company or other person, provided that the business and affairs of the corporation shall be managed and all corporate powers shall be exercised under the ultimate:direction of the Board of Directors. The Board of Directors shall have authority to fix the compensation of directors for services in any lawful capacity. Each director shall exercise such powers and otherwise perform such duties in good faith, in the manner such director believes to be in the best interests of the corporation, and with care, including reasonable inquiry, using ordinary prudence, as a person in a like position would use under similar circumstances. (Section 309). Section 2. EXCEPTION FOR CLOSE CORPORATION. Notwithstanding the provisions of Section 1, in the event that this corporation shall elect to become a close corporation as defined in Section 186, its shareholders may enter into a Shareholders' Agreement as provided in Section 300 (b). Said Agreement may provide for the exercise of corporate powers and the management of the business and affairs of this corporation by the shareholders, provided however such agreement shall, to the extent and so long as the discretion or the powers of the Board in its management of corporate affairs is controlled by such agreement, impose upon each shareholder who is a party thereof, liability for managerial acts performed or omitted by such person pursuant thereto otherwise imposed upon Directors as provided in Section 300 (d). BYLAWS - 5 - 6 Section 3. QUALIFICATIONS AND NUMBER. A director need not be a shareholder of the corporation, a citizen, of the United States, or a resident of the State of California. The authorized number of directors constituting the Board of Directors until further changed shall be ______________. Thereafter, the authorized number of directors constituting the Board shall be at least three provided that, whenever corporation shall have only two shareholders, the number directors may be at least two, and, whenever the corporation shall have only one shareholder, the number of directors may be at least one. Subject to the foregoing provisions, the number of directors may be changed from time to time by an amendment of these Bylaws adopted by the shareholders. Any such amendment reducing the number of directors to fewer than five cannot be adopted if the votes cast against its adoption at a meeting or the shares not consenting in writing in the case of action by written consent are equal to more than sixteen and two-thirds percent of the outstanding shares. No decrease in the authorized number of directors shall have the effect of shortening the term of any incumbent director. Section 4. ELECTION AND TERM. The initial Board of Directors shall consist of the persons elected at the meeting of the incorporator, all of whom shall hold office until the first annual meeting of shareholders and until their successors have been elected and qualified, or until their earlier resignation or removal from office. Thereafter, directors who are elected to replace any or all of the members of the initial Board of Directors or who are elected at an annual meeting of shareholders, and directors who are elected in the interim to fill vacancies, shall hold office until the next annual meeting of shareholders and until their successors have been elected and qualified, or until their earlier resignation, removal from office, or death. In the interim between annual meetings of shareholders or of special meetings of shareholders called for the election of directors, any vacancies in the Board of Directors, including vacancies resulting from an increase in the authorized number of directors which have not been filled by the shareholders, including any other vacancies which the General Corporation Law authorizes directors to fill, and including vacancies resulting from the removal of directors which are not filled at the meeting of shareholders at which any such removal has been effected, if the Articles of Incorporation or a By-Law adopted by the shareholders so provides, may be filled by the vote of a majority of the directors then in office or of the sole remaining director, although less than a quorum exists. Any director may resign effective upon giving written notice to the Chairman of the Board, if any, the President, the Secretary or the Board of Directors, unless the notice specifies a later time for the effectiveness of such resignation. If the resignation is effective at a future time, a successor may be elected to the office when the resignation becomes effective. BYLAWS - 6 - 7 The shareholders may elect a director at any time to fill any vacancy which the directors are entitled to fill, but which they, have not filled. Any such election by written consent shall require the consent of a majority of the shares. Section 5. INDEMNIFICATION OF DIRECTORS, OFFICERS, EMPLOYEES AND AGENTS. The corporation may indemnify any Director, Officer, agent or employee as to those liabilities and on those terms and conditions as are specified in Section 317 In any event, the corporation shall have the right to purchase and maintain insurance on behalf of any such persons whether or not the corporation would have the power to indemnify such person against the liability insured against. Section 6. MEETINGS. TIME. Meetings shall be held at such time as the Board shall fix, except that the first meeting of a newly elected Board shall be held as soon after its election as the directors may conveniently assemble. PLACE. Meetings may be held at any place, within or without the State of California, which has been designated in any notice of the meeting, or, if not stated in said notice, or, if there is no notice given, at the place designated by resolution of the Board of Directors. CALL. Meetings may be called by the Chairman of the Board, if any and acting, by the Vice Chairman of the Board, if any, by the President, if any, by any vice President or Secretary, or by any two directors. NOTICE AND WAIVER THEREOF. No notice shall be required for regular meetings for which the time and place have been fixed by the Board of Directors. Special meetings shall be held upon at least four days' notice by mail or upon at least forty-eight hours' notice delivered personally or by telephone or telegraph. Notice of a meeting need not be given to any director who signs a waiver of notice, whether before or after the meeting, or who attends the meeting without protesting, prior thereto or at its commencement, the lack of notice to such director. A notice or waiver of notice need not specify the purpose of any regular or special meeting of the Board of Directors. Section 7. SOLE DIRECTOR PROVIDED BY ARTICLES OF INCORPORATION. In the event only one director is required by the Bylaws or Articles of Incorporation, then any reference herein to notices, waivers, consents, meetings or other actions by a majority or quorum of the directors shall be deemed to refer to such notice, waiver, etc., by such sole director, who shall have all the rights and duties and shall be entitled to exercise all of the powers and shall assume all the responsibilities otherwise herein described as given to a Board of Directors. BYLAWS - 7 - 8 Section 8. QUORUM AND ACTION. A majority of the authorized number of directors shall constitute a quorum except when a vacancy or vacancies prevents such majority, whereupon a majority of the directors in office shall constitute a quorum, provided such majority shall constitute at least either one-third of the authorized number of directors or at least two directors, whichever is larger, or unless the authorized number of directors is only one. A majority of the directors present, whether or not a quorum is present, may adjourn any meeting to another time and place. If the meeting is adjourned for more than twenty-four hours, notice of any adjournment to another time or place shall be given prior to the time of the adjourned meeting to the directors, if any, who were not present at the time of the adjournment. Except as the Articles of Incorporation, these Bylaws and the General Corporation Law may otherwise provide, the act or decision done or made by a majority of the Directors present at a meeting duly held at which a quorum is present shall be the act of the Board of Directors. Members of the Board of Directors may participate in a meeting through use of conference telephone or similar communications equipment, so long as all members participating in such meeting can hear one another, and participation by such use shall be deemed to constitute presence in person at any such meeting. A meeting at which a quorum is initially present may continue to transact business notwithstanding the withdrawal of directors, provided that any action which may be taken is approved by at least a majority of the required quorum for such meeting. Section 9. CHAIRMAN OF THE MEETING. The Chairman of the Board, if any and if present and acting, the Vice Chairman of the Board, if any and if present and acting, shall preside at all meetings. Otherwise, the President, if any and present and acting, or any director chosen by the Board, shall preside. Section 10. REMOVAL OF DIRECTORS. The entire Board of Directors or any individual director may be removed from office without cause by approval of the holders of at least a majority of the shares provided, that unless the entire Board is removed, an individual director shall not be removed when the votes cast against such removal, or not consenting in writing to such removal, would be sufficient to elect such director if voted cumulatively at an election of directors at which the same total number of votes were cast, or, if such action is taken by written consent, in lieu of a meeting, all shares entitled to vote were voted, and the entire number of directors authorized at the time of the director's most recent election were then being elected. If any or all directors are so removed, new directors may be elected at the same meeting or by such written consent. The Board of Directors may declare vacant the office of any director who has been declared of unsound mind by an order of court or convicted of a felony. BYLAWS - 8 - 9 Section 11. COMMITTEES. The Board of Directors, by resolution adopted by a majority of the authorized number of directors, may designate one or more committees, each consisting of two or more directors to serve at the pleasure of the Board of Directors. The Board of Directors may designate one or more directors as alternate members of any such committee, who may replace any absent member at any meeting of such committee. Any such committee, to the extent provided in the resolution of the Board of Directors, shall have all the authority of the Board of Directors except such authority as may not be delegated by the provisions of the General Corporation Law. Section 12. INFORMAL ACTION. The transactions of any meeting of the Board of Directors, however called and noticed or wherever held, shall be 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 written waiver of notice, a consent to holding the meeting, or an approval of the minutes thereof. All such waivers, consents, or approvals shall be filed with the corporate records or made a part of the minutes of the meeting. Section 13. WRITTEN ACTION. Any action required or permitted to be taken may be taken without a meeting if all of the members of the Board of Directors shall individually or collectively consent in writing to such action. Any such written consent or consents shall be filed with the minutes of the proceedings of the Board. Such action by written consent shall have the same force and effect as a unanimous vote of such directors. ARTICLE III OFFICERS Section 1. OFFICERS. The officers of the corporation shall be a Chairman of the Board or a President or both, a Secretary and a Chief Financial Officer. The corporation may also have, at the discretion of the Board of Directors, one or more Vice Presidents, one or more Assistant Secretaries and such other officers as may be appointed in accordance with the provisions of Section 3 of this Article. One person may hold two or more offices. Section 2. ELECTION. The officers of the corporation, except such officers as may be appointed in accordance with the provisions of Section 3 or Section 5 of this Article shall be chosen annually by the Board of Directors, and each shall hold his office until he shall resign or shall be removed or otherwise disqualified to serve, or his successor shall be elected and qualified. BYLAWS - 9 - 10 Section 3. SUBORDINATE OFFICERS, ETC. The Board of Directors may appoint such other officers as the business of the corporation may require, each of whom shall hold office for such period, have such authority and perform such duties as are provided in the Bylaws or as the Board of Directors may from time to time determine. Section 4. REMOVAL AND RESIGNATION. Any officer may be removed, either with or without cause, by a majority of the directors at the time in office, at any regular or special meeting of the Board, or, except in case of an officer chosen by the Board of Directors, by any officer upon whom such power of removal may be conferred by the Board of Directors. Any officer may resign at any time by giving written notice to the Board of Directors, or to the President, or to the Secretary of the corporation. Any such resignation shall take effect at the date of the receipt of such notice or at any later time specified therein; and, unless otherwise specified therein, the acceptance of such resignation shall not be necessary to make it effective. Section 5. VACANCIES. A vacancy in any office because of death, resignation, removal, disqualification or any other cause shall be filled in the manner prescribed in the Bylaws for regular appointments to such office. Section 6. CHAIRMAN OF THE BOARD. The Chairman of the Board, if there shall be such an officer, shall, if present, preside at all meetings of the Board of Directors, and exercise and perform such other powers and duties as may be from time to time assigned to him by the Board of Directors or prescribed by the Bylaws. Section 7. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Directors to the Chairman of the Board, if there be such an officer, the President shall be the Chief Executive Officer of the corporation and shall, subject to the control of the Board of Directors, have general supervision, direction and control of the business and officers of the corporation. He shall preside at all meetings of the shareholders and in the absence of the Chairman of the Board, or if there be none, at all meetings of the Board of Directors. He shall be ex officio a member of all the standing committees, including the Executive Committee, if any, and shall have the general powers and duties of management usually vested in the office of President of a corporation, and shall have such other powers and duties as may be prescribed by the Board of Directors or the Bylaws. Section 8. VICE PRESIDENT. In the absence or disability of the President, the Vice Presidents, in order of their rank as fixed by the Board of Directors, or if not ranked, the Vice President designated by the Board of Directors, shall perform all the duties of the President, and when so acting shall have BYLAWS - 10 - 11 all the powers of, and be subject to, all the restrictions upon, the President. The Vice Presidents shall have such other powers and perform such other duties as from time to time may be prescribed for them respectively by the Board of Directors or the Bylaws. Section 9. SECRETARY. The Secretary shall keep, or cause to be kept, a book of minutes at the principal office or such other place as the Board of Directors may order, of all meetings of Directors and Shareholders, with the time and place of holding, whether regular or special, and if special, how authorized, the notice thereof given, the names of those present at Directors' meetings, the number of shares present or represented at Shareholders' meetings and the proceedings thereof. The Secretary shall keep, or cause to be kept, at the principal office or at the office of the corporation's transfer agent, a share register, or duplicate share register, showing the names of the shareholders and their addresses; the number and classes of shares held by each; the number and date of certificates issued for the same; and the number and date of cancellation of every certificate surrendered for cancellation. The Secretary shall give, or cause to be given, notice of all the meetings of the shareholders and of the Board of Directors required by the Bylaws or by law to be given, and he shall keep the seal of the corporation in safe custody, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or by the Bylaws. Section 10. CHIEF FINANCIAL OFFICER. This officer shall keep and maintain, or cause to be kept and maintained in accordance with generally accepted accounting principles, adequate and correct accounts of the properties and business transactions of the corporation, including accounts of its assets, liabilities, receipts, disbursements, gains, losses, capital, earnings (or surplus) and shares. The books of account shall at all reasonable times be open to inspection by any director. This officer shall deposit all monies and other valuables in the name and to the credit of the corporation with such depositories as may be designated by the Board of Directors. He shall disburse the funds of the corporation as may be ordered by the Board of Directors, shall render to the President and directors, whenever they request it, an account of all his transactions and of the financial condition of the corporation, and shall have such other powers and perform such other duties as may be prescribed by the Board of Directors or the Bylaws. BYLAWS - 11 - 12 ARTICLE IV CERTIFICATES AND TRANSFERS OF SHARES Section 1. CERTIFICATES FOR SHARES. Each certificate for shares of the corporation shall set forth therein the name of the record holder of the shares represented thereby, the number of shares and the class or series of shares owned by said holder, the par value, if any, of the shares represented thereby, and such other statements, as applicable, prescribed by Sections 416 - 419, inclusive, and other relevant Sections of the General Corporation Law of the State of California (the "General Corporation Law") and such other statements, as applicable, which may be prescribed by the Corporate Securities Law of the State of California and any other applicable provision of the law. Each such certificate issued shall be signed in the name of the corporation by the Chairman of the Board of Directors, if any, or the Vice Chairman of the Board of Directors, if any, the President, if any, or a Vice President, if any, and by the Chief Financial Officer or an Assistant Treasurer or the Secretary or an Assistant Secretary. Any or all of the signatures on a certificate for shares may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate for shares shall have ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the corporation with the same effect as if such person were an officer, transfer agent or registrar at the date of issue. In the event that the corporation shall issue the whole or any part of its shares as partly paid and subject to call for the remainder of the consideration to be paid therefor, any such certificate for shares shall set forth thereon the statements prescribed by Section 409 of the General Corporation Law. Section 2. LOST OR DESTROYED CERTIFICATES FOR SHARES. The corporation may issue a new certificate for shares or for any other security in the place of any other certificate theretofore issued by it, which is alleged to have been lost, stolen or destroyed. As a condition to such issuance, the corporation may require any such owner of the allegedly lost, stolen or destroyed certificate or any such owner's legal representative to give the corporation a bond, or other adequate security, sufficient to indemnify it against any claim that may be made against it, including any expense or liability, on account of the alleged loss, theft or destruction of any such certificate or the issuance of such new certificate. Section 3. SHARE TRANSFERS. Upon compliance with any provisions of the General Corporation Law and/or the Corporate Securities Law of 1968 which may restrict the transferability of shares, transfers of shares of the corporation shall be made only on the record of shareholders of the corporation by BYLAWS - 12 - 13 the registered holder thereof, or by his attorney thereunto authorized by power of attorney duly executed and filed with the Secretary of the corporation or with a transfer agent or a registrar, if any, and on surrender of the certificate or certificates for such shares properly endorsed and the payment of all taxes, if any, due thereon. Section 4. RECORD DATE FOR SHAREHOLDERS. In order that the corporation may determine the shareholders entitled to notice of any meeting or to vote or be entitled to receive payment of any dividend or other distribution or allotment of any rights or entitled to exercise any rights in respect of any other lawful action, the Board of Directors may fix, in advance a record date, which shall not be more than sixty days or fewer than ten days prior to the date of such meeting or more than sixty days prior to any other action. If the Board of Directors shall not have fixed a record date as aforesaid, the record date for determining shareholders entitled to notice of or to vote at a meeting of shareholders shall be at the close of business on the business day next preceding the day on which notice is given or, if notice is waived, at the close of business on the business day next preceding the day on which the meeting is held; the record date for determining shareholders entitled to give consent to corporate action in writing without a meeting, when no prior action by the Board of Directors has been taken, shall be the day on which the first written consent is given; and the record date for determining shareholders for any other purpose shall be at the close of business on the day on which the Board of Directors adopts the resolution relating thereto, or the sixtieth day prior to the day of such other action, whichever is later. A determination of shareholders of record entitled to notice of or to vote at a meeting of shareholders shall apply to any adjournment of the meeting unless the Board of Directors fixes a new record date for the adjourned meeting, but the Board of Directors shall fix a new record date if the meeting is adjourned for more than forty-five days from the date set for the original meeting. Except as may be otherwise provided by the General Corporation Law, shareholders on the record date shall be entitled to notice and to vote or to receive any dividend, distribution or allotment of rights or to exercise the rights, as the case may be, notwithstanding any transfer of any shares on the books of the corporation after the record date. BYLAWS - 13 - 14 Section 5. REPRESENTATION OF SHARES IN OTHER CORPORATIONS. Shares of other corporations standing in the name of this corporation may be voted or represented and all incidents thereto may be exercised on behalf of the corporation by the Chairman of the Board, the President or any Vice President or any other person authorized by resolution of the Board of Directors. Section 6. MEANING OF CERTAIN TERMS. As used in these Bylaws in respect of the right to notice of a meeting of shareholders or a waiver thereof or to participate or vote thereat or to assent or consent or dissent in writing in lieu of a meeting, as the case may be, the term "share" or "shares" or "shareholder" or "shareholders" refers to an outstanding share or shares and to a holder or holders record or outstanding shares when the corporation is authorized to issue only one class of shares, and said reference is also intended to include any outstanding share or shares and any holder or holders of record of outstanding shares of any class upon which or upon whom the Articles of Incorporation confer such rights here there are two or more classes or series of shares or upon which or upon whom the General Corporation Law confers such rights notwithstanding that the Articles of Incorporation may provide for more than one class or series of shares, one or more of which are limited or denied such rights thereunder. Section 7. CLOSE CORPORATION CERTIFICATES. All certificates representing shares of this corporation, in the event it shall elect to become a close corporation, shall contain the legend required by Section 418(c). ARTICLE V EFFECT OF SHAREHOLDERS' AGREEMENT-CLOSE CORPORATION Any Shareholders' Agreement authorized by Section 300(b) shall only be effective to modify the terms of these Bylaws if this corporation elects to become a close corporation with appropriate filing of or amendment to its Articles as required by Section 202 and shall terminate when this corporation ceases to be a close corporation. Such an agreement cannot waive or alter Sections 158 (defining close corporations), 202 (requirements of Articles of Incorporation), 500 and 501 relative to distributions, 111 (merger), 1201(e) (reorganization) or Chapters 15 (Records and Reports, 16 (Rights of Inspection), 18 (Involuntary Dissolution) or 2 (Crimes and Penalties). Any other provisions of the Code or these Bylaws may be altered or waived thereby, but to the extent they are not so altered or waived, these Bylaws shall be applicable. BYLAWS - 14 - 15 ARTICLE VI CORPORATE CONTRACTS AND INSTRUMENTS - HOW EXECUTED The Board of Directors, except as in the Bylaws otherwise provided, may authorize any officer or officers, agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the corporation. Such authority may be general or confined to specific instances. Unless so authorized by the Board of Directors, no officer, agent or employee shall have any power or authority to bind the corporation by any contract or agreement, or to pledge its credit, or to render it liable for any purposes or any amount, except as provided in Section 313 of the Corporations Code. ARTICLE VII CONTROL OVER BYLAWS After the initial Bylaws of the corporation shall have been adopted by the incorporator or incorporators of the corporation, the Bylaws may be amended or repealed or new Bylaws may be adopted by the shareholders entitled to exercise a majority of the voting power or by the Board of Directors; provided, however, that the Board of Directors shall have no control over any By-Law which fixes or changes the authorized number of directors of the corporation; provided, further, than any control over the Bylaws herein vested in the Board of Directors shall be subject to the authority of the aforesaid shareholders to amend or repeal the Bylaws or to adopt new Bylaws; and provided further that any By-Law amendment or new By-Law which changes the minimum number of directors to fewer than five shall require authorization by the greater proportion of voting power of the shareholders as hereinbefore set forth. ARTICLE VIII BOOKS AND RECORDS Section 1. RECORDS: STORAGE AND INSPECTION. The corporation shall keep at its principal executive office in the State of California, or, if its principal executive office is not in the State of California, the original or a copy of the Bylaws as amended to date, which shall be open to inspection by the shareholders at all reasonable times during office hours. If the principal executive office of the corporation is outside the State of California, and, if the corporation has no principal business office in the State of California, it shall upon request of any shareholder furnish a copy of the Bylaws as amended to date. The corporation shall keep adequate and correct books and records of account and shall keep minutes of the proceedings of its shareholders, Board of Directors and committees, if any, of the Board of Directors. The corporation shall keep at its principal executive office, or at the office of its transfer agent or registrar, a record of its shareholders, BYLAWS - 15 - 16 giving the names and addresses of all shareholders and the number and class of shares held by each. Such minutes shall be in written form. Such other books and records shall be kept either in written form or in any other form capable of being converted into written form. Section 2. RECORD OF PAYMENTS. All checks, drafts or other orders or payment of money, notes or other evidences of indebtedness, issued in the name of or payable to the corporation, shall be signed or endorsed by such person or persons and in such manner as shall be determined from time to time by resolution of the Board of Directors. Section 3. ANNUAL REPORT. Whenever the corporation shall have fewer than one hundred shareholders, the Board of Directors shall not be required to cause to be sent to the shareholders of the corporation the annual report prescribed by Section 1501 of the General Corporation Law unless it shall determine that a useful purpose would be served by causing the same to be sent or unless the Department of Corporations, pursuant to the provisions of the Corporate Securities Law of 1968, shall direct the sending of the same. BYLAWS - 16 - 17 CERTIFICATE OF ADOPTION OF BYLAWS ADOPTION BY FIRST DIRECTOR(S). The undersigned person(s) appointed in the Articles of Incorporation to act as the Incorporator(s) or First Director(s) of the above-named corporation hereby adopt the same as the Bylaws of said corporation. Executed this 15th day of August, 1994. ----------------------------------- MARSHALL FIELD Name THIS IS TO CERTIFY: That I am the duly-elected, qualified and acting Secretary of the above-named corporation; that the foregoing Bylaws were adopted as the Bylaws of said corporation on the date set forth above by the person(s) appointed in the Articles of Incorporation to act as the Incorporator(s) or First Director(s) of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand and affixed the corporate seal this 15th day of August 1994. ----------------------------------- MARSHALL FIELD, Secretary (SEAL) CERTIFICATE BY SECRETARY OF ADOPTION BY SHAREHOLDERS' VOTE. THIS IS TO CERTIFY: That I am the duly elected, qualified and acting Secretary of the above-named corporation and that the above and foregoing Code of Bylaws was submitted to the shareholders at their first meeting held on the date set forth in the Bylaws and recorded in the minutes thereof, was ratified by the vote of shareholders entitled to exercise the majority of the voting power of said corporation. IN WITNESS WHEREOF, I have hereunto set my hand this 15th day of August, 1994. ----------------------------------- MARSHALL FIELD, Secretary BYLAWS - 17 - EX-10.(II) 4 OPERATING AGREEMENT 1 A.A.P.L. FORM 610-1982 MODEL FORM OPERATING AGREEMENT [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] OPERATING AGREEMENT DATED MAY 1, 1996 OPERATOR BLACKJACK OIL & GAS, INC. ------------------------------------------------------------------------ CONTRACT AREA OKLAHOMA, TEXAS, KANSAS ------------------------------------------------------------------- - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- COUNTY OR PARISH OF STATE OF -------------------------------------- --------------- COPYRIGHT 1982 - ALL RIGHTS RESERVED AMERICAN ASSOCIATION OF PETROLEUM LANDMEN, 4100 FOSSIL CREEK BLVD. FORT WORTH, TEXAS 76137, APPROVED FORM. A.A.P.L. NO. 610 - 1982 REVISED 2 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 GUIDANCE IN THE PREPARATION OF THIS AGREEMENT: 1. Title Page - Fill in blanks as applicable. 2. Preamble, Page I - Enter name of Operator. 3. Article II - Exhibits: (a) Indicate Exhibits to be attached. (b) If it is desired that no reference be made to non-discrimination, the reference to Exhibit "F" should be deleted. 4. Article III.B. - Interests of Parties in Costs and Production - Enter royalty fraction as agreed to by parties. 5. Article IV.A. - Title Examination - Select option as agreed to by the parties. 6. Article IV.B. - Loss of Title - If "Joint Loss" of Title is desired, the following changes should be made: (a) Delete Articles IV.B.1 and IV.B.2. (b) Article IV.B.3 - Delete phrase "other than those set forth in Articles IV.B.1 and IV.B.2 above." (c) Article VII.E. - Change reference at end of the first grammatical paragraph from "Article IV.B.2" to "Article IV,B.3." (d) Article X. - Add as the concluding sentence - "All claims or suits involving title to any interest subject to this agreement shall be treated as a claim or a suit against all parties hereto." 7. Article V - Operator - Enter name of Operator. 8. Article VI.A. - Initial Well: (a) Date of commencement of drilling. (b) Location of well. (c) Obligation depth. 9. Article VI.B.2.(b) - Subsequent Operations - Enter penalty percentage as agreed to by parties. 10. Article VI.C. - Taking Production in Kind - If a Gas Balancing Agreement is not in existence nor attached hereto as Exhibit "E", then use Alternate Page 8. 11. Article VII.D.1. - Limitation of Expenditures - Select option as agreed to by parties. 12. Article VII.D.3. - Limitation of Expenditures - Enter limitation of expenditure of Operator for single project and amount above which Operator may furnish information AFE. 13. Article IX. - Internal Revenue Code Election - Delete this article in the event the agreement is a Tax Partnership and Exhibit "G" is attached. 14. Article X. - Claims and Lawsuits - Enter claim limit as agreed to by parties. 15. Article XIII. - Term of Agreement: (a) Select Option as agreed to by parties. (b) If Option No. 2 is selected, enter agreed number of days in two (2) blanks. 16. Article XIV.B - Governing Law - Enter state as agreed to by parties. 17. Signature Page - Enter effective date. [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] I 3 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 TABLE OF CONTENTS
Article Title Page - ------- ----- ---- I. DEFINITIONS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 II. EXHIBITS . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 1 III. INTERESTS OF PARTIES . . . . . . . . . . . . . . . . . . . . . . . . 2 A. OIL AND GAS INTERESTS . . . . . . . . . . . . . . . . . . . . . . 2 B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION . . . . . . . . . . 2 C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS . . . . 2 D. SUBSEQUENTLY CREATED INTERESTS . . . . . . . . . . . . . . . . . 2 IV. TITLES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 2 A. TITLE EXAMINATION . . . . . . . . . . . . . . . . . . . . . . . . 2-3 B. LOSS OF TITLE . . . . . . . . . . . . . . . . . . . . . . . . . . 3 1. Failure of Title . . . . . . . . . . . . . . . . . . . . . . 3 2. Loss by Non-Payment or Erroneous Payment of Amount Due . . . . 3 3. Other Losses . . . . . . . . . . . . . . . . . . . . . . . . 3 V. OPERATOR . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR . . . . . . . . . . 4 B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR . . 4 1. Resignation or Removal of Operator . . . . . . . . . . . . . 4 2. Selection of Successor Operator . . . . . . . . . . . . . . . 4 C. EMPLOYEES . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4 D. DRILLING CONTRACTS . . . . . . . . . . . . . . . . . . . . . . . 4 VI. DRILLING AND DEVELOPMENT . . . . . . . . . . . . . . . . . . . . . . 4 A. INITIAL WELL . . . . . . . . . . . . . . . . . . . . . . . . . . 4-5 B. SUBSEQUENT OPERATIONS . . . . . . . . . . . . . . . . . . . . . . 5 1. Proposed Operations . . . . . . . . . . . . . . . . . . . . . 5 2. Operations by Less than All Parties . . . . . . . . . . . . . 5-6-7 3. Stand-By Time . . . . . . . . . . . . . . . . . . . . . . . . 7 4. Sidetracking . . . . . . . . . . . . . . . . . . . . . . . . 7 C. TAKING PRODUCTION IN KIND . . . . . . . . . . . . . . . . . . . . 7 D. ACCESS TO CONTRACT AREA AND INFORMATION . . . . . . . . . . . . . 8 E. ABANDONMENT OF WELLS . . . . . . . . . . . . . . . . . . . . . . 8 1. Abandonment of Dry Holes . . . . . . . . . . . . . . . . . . 8 2. Abandonment of Wells that have Produced . . . . . . . . . . . 8-9 3. Abandonment of Non-Consent Operations . . . . . . . . . . . . 9 VII. EXPENDITURES AND LIABILITY OF PARTIES . . . . . . . . . . . . . . . . 9 A. LIABILITY OF PARTIES . . . . . . . . . . . . . . . . . . . . . . 9 B. LIENS AND PAYMENT DEFAULTS . . . . . . . . . . . . . . . . . . . 9 C. PAYMENTS AND ACCOUNTING . . . . . . . . . . . . . . . . . . . . . 9 D. LIMITATION OF EXPENDITURES . . . . . . . . . . . . . . . . . . . 9-10 1. Drill or Deepen . . . . . . . . . . . . . . . . . . . . . . . 9-10 2. Rework or Plug Back . . . . . . . . . . . . . . . . . . . . . 10 3. Other Operations . . . . . . . . . . . . . . . . . . . . . . 10 E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES . . . . . . 10 F. TAXES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 10 G. INSURANCE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 11 VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST . . . . . . . . . . 11 A. SURRENDER OF LEASES . . . . . . . . . . . . . . . . . . . . . . . 11 B. RENEWAL OR EXTENSION OF LEASES . . . . . . . . . . . . . . . . . 11 C. ACREAGE OR CASH CONTRIBUTIONS . . . . . . . . . . . . . . . . . . 11-12 D. MAINTENANCE OF UNIFORM INTEREST . . . . . . . . . . . . . . . . . 12 E. WAIVER OF RIGHTS TO PARTITION . . . . . . . . . . . . . . . . . . 12 F. PREFERENTIAL RIGHT TO PURCHASE . . . . . . . . . . . . . . . . . 12 IX. INTERNAL REVENUE CODE ELECTION . . . . . . . . . . . . . . . . . . . 12 X. CLAIMS AND LAWSUITS . . . . . . . . . . . . . . . . . . . . . . . . . 13 XI. FORCE MAJEURE . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 XII. NOTICES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 13 XIII. TERM OF AGREEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . 13 XIV. COMPLIANCE WITH LAWS AND REGULATIONS . . . . . . . . . . . . . . . . 14 A. LAWS, REGULATIONS AND ORDERS . . . . . . . . . . . . . . . . . . 14 B. GOVERNING LAW . . . . . . . . . . . . . . . . . . . . . . . . . . 14 C. REGULATORY AGENCIES . . . . . . . . . . . . . . . . . . . . . . . 14 XV. OTHER PROVISIONS . . . . . . . . . . . . . . . . . . . . . . . . . . 14 XVI. MISCELLANEOUS . . . . . . . . . . . . . . . . . . . . . . . . . . . . 15
[AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] II 4 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 OPERATING AGREEMENT THIS AGREEMENT entered into by and between Blackjack Oil & Gas, Inc. P.O. Box 5127 Enid, OK 73702, hereinafter designated and referred to as "Operator", and the signatory party or parties other than Operator, sometimes hereinafter referred to individually herein as "Non-Operator", and collectively as "Non-Operators". WITNESSETH: WHEREAS, the parties to this agreement are owners of oil and gas leases and/or oil and gas interests in the land identified in Exhibit "A", and the parties hereto have reached an agreement to explore and develop these leases and/or oil and gas interests for the production of oil and gas to the extent and as hereinafter provided, NOW, THEREFORE, it is agreed as follows: ARTICLE I. DEFINITIONS As used in this agreement, the following words and terms shall have the meanings here ascribed to them: A. The term "oil and gas" shall mean oil, gas, casinghead gas, gas condensate, and all other liquid or gaseous hydrocarbons and other marketable substances produced therewith, unless an intent to limit the inclusiveness of this term is specifically stated. B. The terms "oil and gas lease", "lease" and "leasehold" shall mean the oil and gas leases covering tracts of land lying within the Contract Area which are owned by the parties to this agreement. C. The term "oil and gas interests" shall mean unleased fee and mineral interests in tracts of land lying within the Contract Area which are owned by parties to this agreement. D. The term "Contract Area" shall mean all of the lands, oil and gas leasehold interests and oil and gas interests intended to be developed and operated for oil and gas purposes under this agreement. Such lands, oil and gas leasehold interests and oil and gas interests are described in Exhibit "A". E. The term "drilling unit" shall mean the area fixed for the drilling of one well by order or rule of any state or federal body having authority. If a drilling unit is not fixed by any such rule or order, a drilling unit shall be the drilling unit as established by the pattern of drilling in the Contract Area or as fixed by express agreement of the Drilling Parties. F. The term "drillsite" shall mean the oil and gas lease or interest on which a proposed well is to be located. G. The terms "Drilling Party" and "Consenting Party" shall mean a party who agrees to join in and pay its share of the cost of any operation conducted under the provisions of this agreement. H. The terms "Non-Drilling Party" and "Non-Consenting Party" shall mean a party who elects not to participate in a proposed operation. Unless the context otherwise clearly indicates, words used in the singular include the plural, the plural includes the singular, and the neuter gender includes the masculine and the feminine. ARTICLE II. EXHIBITS The following exhibits, as indicated below and attached hereto, are incorporated in and made a part hereof: [ ] A. Exhibit "A", shall include the following information: (1) Identification of lands subject to this agreement, (2) Restrictions, if any, as to depths, formations, or substances, (3) Percentages or fractional interests of parties to this agreement, (4) Oil and gas leases and/or oil and gas interests subject to this agreement, (5) Addresses of parties for notice purposes. [ ] B. Exhibit "B", Form of Lease. [X] C. Exhibit "C", Accounting Procedure. [ ] D. Exhibit "D", Insurance. [ ] E. Exhibit "E", Gas Balancing Agreement. [ ] F. Exhibit "F", Non-Discrimination and Certification of Non-Segregated Facilities. [ ] G. Exhibit "G", Tax Partnership. If any provision of any exhibit, except Exhibits "E" and "G", is inconsistent with any provision contained in the body of this agreement, the provisions in the body of this agreement shall prevail. [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -1- 5 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE III. INTERESTS OF PARTIES A. OIL AND GAS INTERESTS: If any party owns an oil and gas interest in the Contract Area, that interest shall be treated for all purposes of this agreement and during the term hereof as if it were covered by the form of oil and gas lease attached hereto as Exhibit "B", and the owner thereof shall be deemed to own both the royalty interest reserved in such lease and the interest of the lessee thereunder. B. INTERESTS OF PARTIES IN COSTS AND PRODUCTION: Unless changed by other provisions, all costs and liabilities incurred in operations under this agreement shall be borne and paid, and all equipment and materials acquired in operations on the Contract Area shall be owned, by the parties as their interests are set forth in Exhibit "A". In the same manner, the parties shall also own all production of oil and gas from the Contract Area subject to the payment of royalties which shall be borne as hereinafter set forth. Regardless of which party has contributed the lease(s) and/or oil and gas interest(s) hereto on which royalty is due and payable, each party entitled to receive a share of production of oil and gas from the Contract Area shall bear and shall pay or deliver, or cause to be paid or delivered, to the extent of its interest in such production, all royalties on its share of production and shall hold the other parties free from any liability therefor. No party shall ever be responsible, however, on a price basis higher than the price received by such party, to any other party's lessor or royalty owner, and if any such other party's lessor or royalty owner should demand and receive settlement on a higher price basis, the party contributing the affected lease shall bear the additional royalty burden attributable to such higher price. Nothing contained in this Article III.B. shall be deemed an assignment or cross-assignment of interests covered hereby. C. EXCESS ROYALTIES, OVERRIDING ROYALTIES AND OTHER PAYMENTS: Unless changed by other provisions, if the interest of any party in any lease covered hereby is subject to any royalty, overriding royalty, production payment or other burden on production in excess of the amount stipulated in Article III.B., such party so burdened shall assume and alone bear all such excess obligations and shall indemnify and hold the other parties hereto harmless from any and all claims and demands for payment asserted by owners of such excess burden. D. SUBSEQUENTLY CREATED INTERESTS: If any party should hereafter create an overriding royalty, production payment or other burden payable out of production attributable to its working interest hereunder, or if such a burden existed prior to this agreement and is not set forth in Exhibit "A", or was not disclosed in writing to all other parties prior to the execution of this agreement by all parties, or is not a jointly acknowledged and accepted obligation of all parties (any such interest being hereinafter referred to as "subsequently created interest" irrespective of the timing of its creation and the party out of whose working interest the subsequently created interest is derived being hereinafter referred to as "burdened party"), and: 1. If the burdened party is required under this agreement to assign or relinquish to any other party, or parties, all or a portion of its working interest and/or the production attributable thereto, said other party, or parties, shall receive said assignment and/or production free and clear of said subsequently created interest and the burdened party shall indemnify and save said other party, or parties, harmless from any and all claims and demands for payment asserted by owners of the subsequently created interest; and, 2. If the burdened party fails to pay, when due, its share of expenses chargeable hereunder, all provisions of Article VII.B. shall be enforceable against the subsequently created interest in the same manner as they are enforceable against the working interest of the burdened party. ARTICLE IV. TITLES A. TITLE EXAMINATION: Title examination shall be made on the drillsite of any proposed well prior to commencement of drilling operations or, if the Drilling Parties so request, title examination shall be made on the leases and/or oil and gas interests included, or planned to be included, in the drilling unit around such well. The opinion will include the ownership of the working interest, minerals, royalty, overriding royalty and production payments under the applicable leases. At the time a well is proposed, each party contributing leases and/or oil and gas interests to the drillsite, or to be included in such drilling unit, shall furnish to Operator all abstracts (including federal lease status reports), title opinions, title papers and curative material in its possession free of charge. All such information not in the possession of or made available to Operator by the parties, but necessary for the examination of the title, shall be obtained by Operator. Operator shall cause title to be examined by attorneys on its staff or by outside attorneys. Copies of all title opinions shall be furnished to each party hereto. The cost incurred by Operator in this title program shall be borne as follows: [ ] Option No. 1: Costs incurred by Operator in procuring abstracts and title examination (including preliminary, supplemental, shut-in gas royalty opinions and division order title opinions) shall be a part of the administrative overhead as provided in Exhibit "C", and shall not be a direct charge, whether performed by Operator's staff attorneys or by outside attorneys. [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -2- 6 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE IV CONTINUED [X] Option No. 2: Costs incurred by Operator in procuring abstracts and fees paid outside attorneys for title examination (including preliminary, supplemental, shut-in gas royalty opinions and division order title opinions) shall be borne by the Drilling Parties in the proportion that the interest of each Drilling Party bears to the total interest of all Drilling Parties as such interests appear in Exhibit "A". Operator shall make no charge for services rendered by its staff attorneys or other personnel in the performance of the above functions. Each party shall be responsible for securing curative matter and pooling amendments or agreements required in connection with leases or oil and gas interests contributed by such party. Operator shall be responsible for the preparation and recording of pooling designations or declarations as well as the conduct of hearings before governmental agencies for the securing of spacing or pooling orders. This shall not prevent any party from appearing on its own behalf at any such hearing. No well shall be drilled on the Contract Area until after (1) the title to the drillsite or drilling unit has been examined as above provided, and (2) the title has been approved by the examining attorney or title has been accepted by all of the parties who are to participate in the drilling of the well. B. LOSS OF TITLE: 1. Failure of Title: Should any oil and gas interest or lease, or interest therein, be lost through failure of title, which loss results in a reduction of interest from that shown on Exhibit "A", the party contributing the affected lease or interest shall have ninety (90) days from final determination of title failure to acquire a new lease or other instrument curing the entirety of the title failure, which acquisition will not be subject to Article VIII.B., and failing to do so, this agreement, nevertheless, shall continue in force as to all remaining oil and gas leases and interests: and, (a) The party whose oil and gas lease or interest is affected by the title failure shall bear alone the entire loss and it shall not be entitled to recover from Operator or the other parties any development or operating costs which it may have theretofore paid or incurred, but there shall be no additional liability on its part to the other parties hereto by reason of such title failure; (b) There shall be no retroactive adjustment of expenses incurred or revenues received from the operation of the interest which has been lost, but the interests of the parties shall be revised on an acreage basis, as of the time it is determined finally that title failure has occurred, so that the interest of the party whose lease or interest is affected by the title failure will thereafter be reduced in the Contract Area by the amount of the interest lost; (c) If the proportionate interest of the other parties hereto in any producing well theretofore drilled on the Contract Area is increased by reason of the title failure, the party whose title has failed shall receive the proceeds attributable to the increase in such interest (less costs and burdens attributable thereto) until it has been reimbursed for unrecovered costs paid by it in connection with such well; (d) Should any person not a party to this agreement, who is determined to be the owner of any interest in the title which has failed, pay in any manner any part of the cost of operation, development, or equipment, such amount shall be paid to the party or parties who bore the costs which are so refunded; (e) Any liability to account to a third party for prior production of oil and gas which arises by reason of title failure shall be borne by the party or parties whose title failed in the same proportions in which they shared in such prior production; and, (f) No charge shall be made to the joint account for legal expenses, fees or salaries, in connection with the defense of the interest claimed by any party hereto, it being the intention of the parties hereto that each shall defend title to its interest and bear all expenses in connection therewith. 2. Loss by Non-Payment or Erroneous Payment of Amount Due: If, through mistake or oversight, any rental, shut-in well payment, minimum royalty or royalty payment, is not paid or is erroneously paid, and as a result a lease or interest therein terminates, there shall be no monetary liability against the party who failed to make such payment. Unless the party who failed to make the required payment secures a new lease covering the same interest within ninety (90) days from the discovery of the failure to make proper payment, which acquisition will not be subject to Article VIII.B., the interests of the parties shall be revised on an acreage basis, effective as of the date of termination of the lease involved, and the party who failed to make proper payment will no longer be credited with an interest in the Contract Area on account of ownership of the lease or interest which has terminated. In the event the party who failed to make the required payment shall not have been fully reimbursed, at the time of the loss, from the proceeds of the sale of oil and gas attributable to the lost interest, calculated on an acreage basis, for the development and operating costs theretofore paid on account of such interest, it shall be reimbursed for unrecovered actual costs theretofore paid by it (but not for its share of the cost of any dry hole previously drilled or wells previously abandoned) from so much of the following, as is necessary to effect reimbursement: (a) Proceeds of oil and gas, less operating expenses, theretofore accrued to the credit of the lost interest, on in acreage basis, up to the amount of unrecovered costs; (b) Proceeds, less operating expenses, thereafter accrued attributable to the lost interest on an acreage basis, of that portion of oil and gas thereafter produced and marketed (excluding production from any wells thereafter drilled) which, in the absence of such lease termination, would be attributable to the lost interest on an acreage basis, up to the amount of unrecovered costs, the proceeds of said portion of the oil and gas to be contributed by the other parties in proportion to their respective interests; and, (c) Any monies, up to the amount of unrecovered costs, that may be paid by any party who is, or becomes, the owner of the interest lost, for the privilege of participating in the Contract Area or becoming a party to this agreement. 3. Other Losses: All losses incurred, other than those set forth in Articles IV.B.1. and IV.B.2. above, shall be joint losses and shall be borne by all parties in proportion to their interests. There shall be no readjustment of interests in the remaining portion of the Contract Area. [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -3- 7 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE V. OPERATOR A. DESIGNATION AND RESPONSIBILITIES OF OPERATOR: BLACKJACK OIL & GAS, INC. P.O. BOX 5127 ENID, OK 73702 shall be the Operator of the Contract Area, and shall conduct and direct and have full control of all operations on the Contract Area as permitted and required by, and within the limits of this agreement. It shall conduct all such operations in a good and workmanlike manner, but it shall have no liability as Operator to the other parties for losses sustained or liabilities incurred, except such as may result from gross negligence or willful misconduct. B. RESIGNATION OR REMOVAL OF OPERATOR AND SELECTION OF SUCCESSOR: 1. Resignation or Removal of Operator: Operator may resign at any time by giving written notice thereof to Non-Operators. If Operator terminates its legal existence, no longer owns an interest hereunder in the Contract Area, or is no longer capable of serving as Operator, Operator shall be deemed to have resigned without any action by Non-Operators, except the selection of a successor. Operator may be removed if it fails or refuses to carry out its duties hereunder, or becomes insolvent, bankrupt or is placed in receivership, by the affirmative vote of two (2) or more Non-Operators owning a majority interest based on ownership as shown on Exhibit "A" remaining after excluding the voting interest of Operator. Such resignation or removal shall not become effective until 7:00 o'clock A.M. on the first day of the calendar month following the expiration of ninety (90) days after the giving of notice of resignation by Operator or action by the Non-Operators to remove Operator, unless a successor Operator has been selected and assumes the duties of Operator at an earlier date. Operator, after effective date of resignation or removal, shall be bound by the terms hereof as a Non-Operator. A change of a corporate name or structure of Operator or transfer of Operator's interest to any single subsidiary, parent or successor corporation shall not be the basis for removal of Operator. 2. Selection of Successor Operator: Upon the resignation or removal of Operator, a successor Operator shall be selected by the parties. The successor Operator shall be selected from the parties owning an interest in the Contract Area at the time such successor Operator is selected. The successor Operator shall be selected by the affirmative vote of two (2) or more parties owning a majority interest based on ownership as shown on Exhibit "A"; provided, however, if an Operator which has been removed fails to vote or votes only to succeed itself, the successor Operator shall be selected by the affirmative vote of two (2) or more parties owning a majority interest based on ownership as shown on Exhibit "A" remaining after excluding the voting interest of the Operator that was removed. C. EMPLOYEES: The number of employees used by Operator in conducting operations hereunder, their selection, and the hours of labor and the compensation for services performed shall be determined by Operator, and all such employees shall be the employees of Operator. D. DRILLING CONTRACTS: All wells drilled on the Contract Area shall be drilled on a competitive contract basis at the usual rates prevailing in the area. If it so desires, Operator may employ its own tools and equipment in the drilling of wells, but its charges therefor shall not exceed the prevailing rates in the area and the rate of such charges shall be agreed upon by the parties in writing before drilling operations are commenced, and such work shall be performed by Operator under the same terms and conditions as are customary and usual in the area in contracts of independent contractors who are doing work of a similar nature. ARTICLE VI. DRILLING AND DEVELOPMENT A. INITIAL WELL: N/A On or before the ____ day of ____________________, 19_____, Operator shall commence the drilling of a well for oil and gas at the following location: and shall thereafter continue the drilling of the well with due diligence to unless granite or other practically impenetrable substance or condition in the hole, which renders further drilling impractical is encountered at a lesser depth, or unless all parties agree to complete or abandon the well at a lesser depth. Operator shall make reasonable tests of all formations encountered during drilling which give indication of containing oil and gas in quantities sufficient to test, unless this agreement shall be limited in its application to a specific formation or formations, in which event Operator shall be required to test only the formation or formations to which this agreement may apply. [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -4- 8 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE VI CONTINUED If, in Operator's judgment, the well will not produce oil or gas in paying quantities, and it wishes to plug and abandon the well as a dry hole, the provisions of Article VI.E.1. shall thereafter apply. B. SUBSEQUENT OPERATIONS: 1. Proposed Operations: Should any party hereto desire to drill any well on the Contract Area other than the well provided for in Article VI.A., or to rework, deepen or plug back a dry hole drilled at the joint expense of all parties or a well jointly owned by all the parties and not then producing in paying quantities, the party desiring to drill, rework, deepen or plug back such a well shall give the other parties written notice of the proposed operation, specifying the work to be performed, the location, proposed depth, objective formation and the estimated cost of the operation. The parties receiving such a notice shall have thirty (30) days after receipt of the notice within which to notify the party wishing to do the work whether they elect to participate in the cost of the proposed operation. If a drilling rig is on location, notice of a proposal to rework, plug back or drill deeper may be given by telephone and the response period shall be limited to forty-eight (48) hours, exclusive of Saturday, Sunday and legal holidays. Failure of a party receiving such notice to reply within the period above fixed shall constitute an election by that party not to participate in the cost of the proposed operation. Any notice or response given by telephone shall be promptly confirmed in writing. If all parties elect to participate in such a proposed operation, Operator shall, within ninety (90) days after expiration of the notice period of thirty (30) days (or as promptly as possible after the expiration of the forty-eight (48) hour period when a drilling rig is on location, as the case may be), actually commence the proposed operation and complete it with due diligence at the risk and expense of all parties hereto; provided, however, said commencement date may be extended upon written notice of same by Operator to the other parties, for a period up to thirty (30) additional days if, in the sole opinion of Operator, such additional time is reasonably necessary to obtain permits from governmental authorities, surface rights (including rights-of-way) or appropriate drilling equipment, or to complete title examination or curative matter required for title approval or acceptance. Notwithstanding the force majeure provisions of Article XI, if the actual operation has not been commenced within the time provided (including any extension thereof as specifically permitted herein) and if any party hereto still desires to conduct said operation, written notice proposing same must be resubmitted to the other parties in accordance with the provisions hereof as if no prior proposal had been made. 2. Operations by Less than All Parties: If any party receiving such notice as provided in Article VI.B.1. or VII.D.1. (Option No. 2) elects not to participate in the proposed operation, then, in order to be entitled to the benefits of this Article, the party or parties giving the notice and such other parties as shall elect to participate in the operation shall, within ninety (90) days after the expiration of the notice period of thirty (30) days (or as promptly as possible after the expiration of the forty-eight (48) hour period when a drilling rig is on location, as the case may be) actually commence the proposed operation and complete it with due diligence. Operator shall perform all work for the account of the Consenting Parties; provided, however, if no drilling rig or other equipment is on location, and if Operator is a Non-Consenting Party, the Consenting Parties shall either: (a) request Operator to perform the work required by such proposed operation for the account of the Consenting Parties, or (b) designate one (1) of the Consenting Parties as Operator to perform such work. Consenting Parties, when conducting operations on the Contract Area pursuant to this Article VI.B.2., shall comply with all terms and conditions of this agreement. If less than all parties approve any proposed operation, the proposing party, immediately after the expiration of the applicable notice period, shall advise the Consenting Parties of the total interest of the parties approving such operation and its recommendation as to whether the Consenting Parties should proceed with the operation as proposed. Each Consenting Party, within forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after receipt of such notice, shall advise the proposing party of its desire to (a) limit participation to such party's interest as shown on Exhibit "A" or (b) carry its proportionate part of Non-Consenting Parties' interests, and failure to advise the proposing party shall be deemed an election under (a). In the event a drilling rig is on location, the time permitted for such a response shall not exceed a total of forty-eight (48) hours (inclusive of Saturday, Sunday and legal holidays). The proposing party, at its election, may withdraw such proposal if there is insufficient participation and shall promptly notify all parties of such decision. The entire cost and risk of conducting such operations shall be borne by the Consenting Parties in the proportions they have elected to bear same under the terms of the preceding paragraph. Consenting Parties shall keep the leasehold estates involved in such operations free and clear of all liens and encumbrances of every kind created by or arising from the operations of the Consenting Parties. If such an operation results in a dry hole, the Consenting Parties shall plug and abandon the well and restore the surface location at their sole cost, risk and expense. If any well drilled, reworked, deepened or plugged back under the provisions of this Article results in a producer of oil and/or gas in paying quantities, the Consenting Parties shall complete and equip the well to produce at their sole cost and risk, [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -5- 9 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE VI CONTINUED and the well shall then be turned over to Operator and shall be operated by it at the expense and for the account of the Consenting Parties. Upon commencement of operations for the drilling, reworking, deepening or plugging back of any such well by Consenting Parties in accordance with the provisions of this Article, each Non-Consenting Party shall be deemed to have relinquished to Consenting Parties, and the Consenting Parties shall own and be entitled to receive, in proportion to their respective interests, all of such Non-Consenting Party's interest in the well and share of production therefrom until the proceeds of the sale of such share, calculated at the well, or market value thereof if such share is not sold, (after deducting production taxes, excise taxes, royalty, overriding royalty and other interests not excepted by Article III.D. payable out of or measured by the production from such well accruing with respect to such interest until it reverts) shall equal the total of the following: (a) 100% of each such Non-Consenting Party's share of the cost of any newly acquired surface equipment beyond the wellhead connections (including, but not limited to, stock tanks, separators, treaters, pumping equipment and piping), plus 100% of each such Non-Consenting Party's share of the cost of operation of the well commencing with first production and continuing until each such Non-Consenting Party's relinquished interest shall revert to it under other provisions of this Article, it being agreed that each Non-Consenting Party's share of such costs and equipment will be that interest which would have been chargeable to Such Non-Consenting Party had it participated in the well from the beginning of the operations; and (b) 300% of that portion of the costs and expenses of drilling, reworking, deepening, plugging back, testing and completing, after deducting any cash contributions received under Article VIII.C., and 300% of that portion of the cost of newly acquired equipment in the well (to and including the wellhead connections), which would have been chargeable to such Non-Consenting Party if it had participated therein. An election not to participate in the drilling or the deepening of a well shall be deemed an election not to participate in any reworking or plugging back operation proposed in such a well, or portion thereof, to which the initial Non-Consent election applied that is conducted at any time prior to full recovery by the Consenting Parties of the Non-Consenting Party's recoupment account. Any such reworking or plugging back operation conducted during the recoupment period shall be deemed part of the cost of operation of said well and there shall be added to the sums to be recouped by the Consenting Parties one hundred percent (100%) of that portion of the costs of the reworking or plugging back operation which would have been chargeable to such Non-Consenting Party had it participated therein. If such a reworking or plugging back operation is proposed during such recoupment period, the provisions of this Article VI.B. shall be applicable as between said Consenting Parties in said well. During the period of time Consenting Parties are entitled to receive Non-Consenting Party's share of production, or the proceeds therefrom, Consenting Parties shall be responsible for the payment of all production, severance, excise, gathering and other taxes, and all royalty, overriding royalty and other burdens applicable to Non-Consenting Party's share of production not excepted by Article III.D. In the case of any reworking, plugging back or deeper drilling operation, the Consenting Parties shall be permitted to use, free of cost, all casing, tubing and other equipment in the well, but the ownership of all such equipment shall remain unchanged; and upon abandonment of a well after such reworking, plugging back or deeper drilling, the Consenting Parties shall account for all such equipment to the owners thereof, with each party receiving its proportionate part in kind or in value, less cost of salvage. Within sixty (60) days after the completion of any operation under this Article, the party conducting the operations for the Consenting Parties shall furnish each Non-Consenting Party with an inventory of the equipment in and connected to the well, and an itemized statement of the cost of drilling, deepening, plugging back, testing, completing, and equipping the well for production; or, at its option, the operating party, in lieu of an itemized statement of such costs of operation, may submit a detailed statement of monthly billings. Each month thereafter, during the time the Consenting Parties are being reimbursed as provided above, the party conducting the operations for the Consenting Parties shall furnish the Non-Consenting Parties with an itemized statement of all costs and liabilities incurred in the operation of the well, together with a statement of the quantity of oil and gas produced from it and the amount of proceeds realized from the sale of the well's working interest production during the preceding month. In determining the quantity of oil and gas produced during any month, Consenting Parties shall use industry accepted methods such as, but not limited to, metering or periodic well tests. Any amount realized from the sale or other disposition of equipment newly acquired in connection with any such operation which would have been owned by a Non- Consenting Party had it participated therein shall be credited against the total unreturned costs of the work done and of the equipment purchased in determining when the interest of such Non-Consenting Party shall revert to it as above provided; and if there is a credit balance, it shall be paid to such Non-Consenting Party. [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -6- 10 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE VI CONTINUED If and when the Consenting Parties recover from a Non-Consenting Party's relinquished interest the amounts provided for above, the relinquished interests of such Non-Consenting Party shall automatically revert to it, and, from and after such reversion, such Non-Consenting Party shall own the same interest in such well, the material and equipment in or pertaining thereto, and the production therefrom as such Non-Consenting Party would have been entitled to had it participated in the drilling, reworking, deepening or plugging back of said well. Thereafter, such Non-Consenting Party shall be charged with and shall pay its proportionate part of the further costs of the operation of said well in accordance with the terms of this agreement and the Accounting Procedure attached hereto. Notwithstanding the provisions of this Article VI.B.2., it is agreed that without the mutual consent of all parties, no wells shall be completed in or produced from a source of supply from which a well located elsewhere on the Contract Area is producing, unless such well conforms to the then-existing well spacing pattern for such source of supply. The provisions of this Article shall have no application whatsoever to the drilling of the initial well described in Article VI.A. except (a) as to Article VII.D.1. (Option No. 2), if selected, or (b) as to the reworking, deepening and plugging back of such initial well after it has been drilled to the depth specified in Article VI.A. if it shall thereafter prove to be a dry hole or, if initially completed for production, ceases to produce in paying quantities. 3. Stand-By Time: When a well which has been drilled or deepened has reached its authorized depth and all tests have been completed, and the results thereof furnished to the parties, stand-by costs incurred pending response to a party's notice proposing a reworking, deepening, plugging back or completing operation in such a well shall be charged and borne as part of the drilling or deepening operation just completed. Stand-by costs subsequent to all parties responding, or expiration of the response time permitted, whichever first occurs, and prior to agreement as to the participating interests of all Consenting Parties pursuant to the terms of the second grammatical paragraph of Article VI.B.2, shall be charged to and borne as part of the proposed operation, but if the proposal is subsequently withdrawn because of insufficient participation, such stand-by costs shall be allocated between the Consenting Parties in the proportion each Consenting Party's interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit "A" of all Consenting Parties. 4. Sidetracking: Except as hereinafter provided, those provisions of this agreement applicable to a "deepening" operation shall also be applicable to any proposal to directionally control and intentionally deviate a well from vertical so as to change the bottom hole location (herein called "sidetracking"), unless done to straighten the hole or to drill around junk in the hole or because of other mechanical difficulties. Any party having the right to participate in a proposed sidetracking operation that does not own an interest in the affected well bore at the time of the notice shall, upon electing to participate, tender to the well bore owners its proportionate share (equal to its interest in the sidetracking operation) of the value of that portion of the existing well bore to be utilized as follows: (a) If the proposal is for sidetracking an existing dry hole, reimbursement shall be on the basis of the actual costs incurred in the initial drilling of the well down to the depth at which the sidetracking operation is initiated. (b) If the proposal is for sidetracking a well which has previously produced, reimbursement shall be on the basis of the well's salvable materials and equipment down to the depth at which the sidetracking operation is initiated, determined in accordance with the provisions of Exhibit "C", less the estimated cost of salvaging and the estimated cost of plugging and abandoning. In the event that notice for a sidetracking operation is given while the drilling rig to be utilized is on location, the response period shall be limited to forty-eight (48) hours, exclusive of Saturday, Sunday and legal holidays; provided, however, any party may request and receive up to eight (8) additional days after expiration of the forty-eight (48) hours within which to respond by paying for all stand-by time incurred during such extended response period. If more than one party elects to take such additional time to respond to the notice, stand-by costs shall be allocated between the parties taking additional time to respond on a day-to-day basis in the proportion each electing party's interest as shown on Exhibit "A" bears to the total interest as shown on Exhibit "A" of all the electing parties. In all other instances the response period to a proposal for sidetracking shall be limited to thirty (30) days. C. TAKING PRODUCTION IN KIND: Each party shall take in kind or separately dispose of its proportionate share of all oil and gas produced from the Contract Area, exclusive of production which may be used in development and producing operations and in preparing and treating oil and gas for marketing purposes and production unavoidably lost. Any extra expenditure incurred in the taking in kind or separate disposition by any party of its proportionate share of the production shall be borne by such party. Any party taking its share of production in kind shall be [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -7- 11 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE VI CONTINUED required to pay for only its proportionate share of such part of Operator's surface facilities which it uses. Each party shall execute such division orders and contracts as may be necessary for the sale of its interest in production from the Contract Area, and, except as provided in Article VII.B., shall be entitled to receive payment directly from the purchaser thereof for its share of all production. In the event any party shall fail to make the arrangements necessary to take in kind or separately dispose of its proportionate share of the oil and gas produced from the Contract Area, Operator shall have the right, subject to the revocation at will by the party owning it, but not the obligation, to purchase such oil and gas or sell it to others at any time and from time to time, for the account of the non-taking party at the best price obtainable in the area for such production. Any such purchase or sale by Operator shall be subject always to the right of the owner of the production to exercise at any time its right to take in kind, or separately dispose of, its share of all oil and gas not previously delivered to a purchaser. Any purchase or sale by Operator of any other party's share of oil and gas shall be only for such reasonable periods of time as are consistent with the minimum needs of the industry under the particular circumstances, but in no event for a period in excess of one (1) year. Notwithstanding the foregoing, Operator shall not make a sale, including one into interstate commerce, of any other party's share of gas production without first giving such other party thirty (30) days notice of such intended sale. D. ACCESS TO CONTRACT AREA AND INFORMATION: Each party shall have access to the Contract at all reasonable times, at its sole cost and risk to inspect or observe operations, and shall have access at reasonable times to information pertaining to the development or operation thereof, including Operator's books and records relating thereto. Operator, upon request, shall furnish each of the other parties with copies of all forms or reports filed with governmental agencies, daily drilling reports, well logs, tank tables, daily gauge and run tickets and reports of stock on hand at the first of each month, and shall make available samples of any cores or cuttings taken from any well drilled on the Contract Area. The cost of gathering and furnishing information to Non-Operator, other than that specified above, shall be charged to the Non-Operator that requests the information. E. ABANDONMENT OF WELLS: 1. Abandonment of Dry Holes: Except for any well drilled or deepened pursuant to Article VI.B.2., any well which has been drilled or deepened under the terms of this agreement and is proposed to be completed as a dry hole shall not be plugged and abandoned without the consent of all parties. Should Operator, after diligent effort, be unable to contact any party, or should any party fail to reply within forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) after receipt of notice of the proposal to plug and abandon such well, such party shall be deemed to have consented to the proposed abandonment. All such wells shall be plugged and abandoned in accordance with applicable regulations and at the cost, risk and expense of the parties who participated in the cost of drilling or deepening such well. Any party who objects to plugging and abandoning such well shall have the right to take over the well and conduct further operations in search of oil and/or gas subject to the provisions of Article VI.B. 2. Abandonment of Wells that have Produced: Except for any well in which a Non-Consent operation has been conducted hereunder for which the Consenting Parties have not been fully reimbursed as herein provided, any well which has been completed as a producer shall not be plugged and abandoned without the consent of all parties. If all parties consent to such abandonment, the well shall be plugged and abandoned in accordance with applicable regulations and at the cost, risk and expense of all the parties hereto. If, within thirty (30) days after receipt of notice of the proposed abandonment of any well, all parties do not agree to the abandonment of such well, those wishing to continue its operation from the interval(s) of the formation(s) then open to production shall tender to each of the other parties its proportionate share of the value of the well's salvable material and equipment, determined in accordance with the provisions of Exhibit "C", less the estimated cost of salvaging and the estimated cost of plugging and abandoning. Each abandoning party shall assign the non-abandoning parties, without warranty, express or implied, as to title or as to quantity, or fitness for use of the equipment and material, all of its interest in the well and related equipment, together with its interest in the leasehold estate as to, but only as to, the interval or intervals of the formation or formations then open to production. If the interest of the abandoning party is or includes an oil and gas interest, such party shall execute and deliver to the non-abandoning party or parties an oil and gas lease, limited to the interval or intervals of the formation or formations then open to production, for a term of one (1) year and so long thereafter as oil and/or gas is produced from the interval or intervals of the formation or formations covered thereby, such lease to be on the form attached as Exhibit [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -8- 12 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE VI CONTINUED "B". The assignments or leases so limited shall encompass the "drilling unit" upon which the well is located. The payments by, and the assignments or leases to, the assignees shall be in a ratio based upon the relationship of their respective percentage of participation in the Contract Area to the aggregate of the percentages of participation in the Contract Area of all assignees. There shall be no readjustment of interests in the remaining portion of the Contract Area. Thereafter, abandoning parties shall have no further responsibility, liability, or interest in the operation of or production from the well in the interval or intervals then open other than the royalties retained in any lease made under the terms of this Article. Upon request, Operator shall continue to operate the assigned well for the account of the non-abandoning parties at the rates and charges contemplated by this agreement, plus any additional cost and charges which may arise as the result of the separate ownership of the assigned well. Upon proposed abandonment of the producing interval(s) assigned or leased, the assignor or lessor shall then have the option to repurchase its prior interest in the well (using the same valuation formula) and participate in further operations therein subject to the provisions hereof. 3. Abandonment of Non-Consent Operations: The provisions of Article VI.E.1. or VI.E.2. above shall be applicable as between Consenting Parties in the event of the proposed abandonment of any well excepted from said Articles; provided, however, no well shall be permanently plugged and abandoned unless and until all parties having the right to conduct further operations therein have been notified of the proposed abandonment and afforded the opportunity to elect to take over the well in accordance with the provisions of this Article VI.E. ARTICLE VII. EXPENDITURES AND LIABILITY OF PARTIES A. LIABILITY OF PARTIES: The liability of the parties shall be several, not joint or collective. Each party shall be responsible only for its obligations, and shall be liable only for its proportionate share of the costs of developing and operating the Contract Area. Accordingly, the liens granted among the parties in Article VII.B. are given to secure only the debts of each severally. It is not the intention of the parties to create, nor shall this agreement be construed as creating, a mining or other partnership or association, or to render the parties liable as partners. B. LIENS AND PAYMENT DEFAULTS: Each Non-Operator grants to Operator a lien upon its oil and gas rights in the Contract Area, and a security interest in its share of oil and/or gas when extracted and its interest in all equipment, to secure payment of its share of expense, together with interest thereon at the rate provided in Exhibit "C". To the extent that Operator has a security interest under the Uniform Commercial Code of the state, Operator shall be entitled to exercise the rights and remedies of a secured party tinder the Code. The bringing of a suit and the obtaining of judgment by Operator for the secured indebtedness shall not be deemed an election of remedies or otherwise affect the lien rights or security interest as security for the payment thereof. In addition, upon default by any Non-Operator in the payment of its share of expense, Operator shall have the right, without prejudice to other rights or remedies, to collect from the purchaser the proceeds from the sale of such Non-Operator's share of oil and/or gas until the amount owed by such Non-Operator, plus interest, has been paid. Each purchaser shall be entitled to rely upon Operator's written statement concerning the amount of any default. Operator grants a like lien and security interest to the Non-Operators to secure payment of Operator's proportionate share of expense. If any party fails or is unable to pay its share of expense within sixty (60) days after rendition of a statement therefor by Operator, the non-defaulting parties, including Operator, shall, upon request by Operator, pay the unpaid amount in the proportion that the interest of each such party bears to the interest of all such parties. Each party so paying its share of the unpaid amount shall, to obtain reimbursement thereof, be subrogated to the security rights described in the foregoing paragraph, C. PAYMENTS AND ACCOUNTING: Except as herein otherwise specifically provided, Operator shall promptly pay and discharge expenses incurred in the development and operation of the Contract Area pursuant to this Agreement and shall charge each of the parties hereto with their respective proportionate shares upon the expense basis provided in Exhibit "C". Operator shall keep an accurate record of the joint account hereunder, showing expenses incurred and charges and credits made and received. Operator, at its election, shall have the right from time to time to demand and receive from the other parties payment in advance of their respective shares of the estimated amount of the expense to be incurred in operations hereunder during the next succeeding month, which right may be exercised only by submission to each such party of an itemized statement of such estimated expense, together with an invoice for its share thereof. Each such statement and invoice for the payment in advance of estimated expense shall be submitted on or before the 20th day of the next preceding month. Each party shall pay to Operator its proportionate share of such estimate within fifteen (15) days after such estimate and invoice is received. If any party fails to pay its share of said estimate within said time, the amount due shall bear interest as provided in Exhibit "C" until paid. Proper adjustment shall be made monthly between advances and actual expense to the end that each party shall bear and pay its proportionate share of actual expenses incurred, and no more. D. LIMITATION OF EXPENDITURES: 1. Drill or Deepen: Without the consent of all parties, no well shall be drilled or deepened, except any well drilled or deepened pursuant to the provisions of Article VI.B.2. of this agreement. Consent to the drilling or deepening shall include: [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -9- 13 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE VII CONTINUED [ ] Option No. 1: All necessary expenditures for the drilling or deepening, testing, completing and equipping of the well, including necessary tankage and/or surface facilities. [ ] Option No. 2: All necessary expenditures for the drilling or deepening and testing of the well. When such well has reached its authorized depth, and all tests have been completed, and the results thereof furnished to the parties, Operator shall give immediate notice to the Non-Operators who have the right to participate in the completion costs. The parties receiving such notice shall have forty-eight (48) hours (exclusive of Saturday, Sunday and legal holidays) in which to elect to participate in the setting of casing and the completion attempt. Such election, when made, shall include consent to all necessary expenditures for the completing and equipping of such well, including necessary tankage and/or surface facilities. Failure of any party receiving such notice to reply within the period above fixed shall constitute an election by that party not to participate in the cost of the completion attempt. If one or more, but less than all of the parties, elect to set pipe and to attempt a completion, the provisions of Article VI.B.2. hereof (the phrase "reworking, deepening or plugging back" as contained in Article VI.B.2. shall be deemed to include "completing") shall apply to the operations thereafter conducted by less than all parties. 2. Rework or Plug Back: Without the consent of all parties, no well shall be reworked or plugged back except a well reworked or plugged back pursuant to the provisions of Article VI.B.2. of this agreement. Consent to the reworking or plugging back of a well shall include all necessary expenditures in conducting such operations and completing and equipping of said well, including necessary tankage and/or surface facilities. 3. Other Operations: Without the consent of all parties, Operator shall not undertake any single project reasonably estimated to require an expenditure in excess of Fifteen thousand Dollars ($15,000.00) except in connection with a well, the drilling, reworking, deepening, completing, recompleting, or plugging back of which has been previously authorized by or pursuant to this agreement; provided, however, that, in case of explosion, fire, flood or other sudden emergency, whether of the same or different nature, Operator may take such steps and incur such expenses as in its opinion are required to deal with the emergency to safeguard life and property but Operator, as promptly as possible, shall report the emergency to the other parties. If Operator prepares an authority for expenditure (AFE) for its own use, Operator shall furnish any Non-Operator so requesting an information copy thereof for any single project costing in excess of Fifteen thousand Dollars ($15,000.00) but less than the amount first set forth above in this paragraph. E. RENTALS, SHUT-IN WELL PAYMENTS AND MINIMUM ROYALTIES: Rentals, shut-in well payments and minimum royalties which may be required under the terms of any lease shall be paid by the party or parties who subjected such lease to this agreement at its or their expense. In the event two or more parties own and have contributed interests in the same lease to this agreement, such parties may designate one of such parties to make said payments for and on behalf of all such parties. Any party may request, and shall be entitled to receive, proper evidence of all such payments. In the event of failure to make proper payment of any rental, shut-in well payment or minimum royalty through mistake or oversight where such payment is required to continue the lease in force, any loss which results from such non-payment shall be borne in accordance with the provisions of Article IV.B.2. Operator shall notify Non-Operator of the anticipated completion of a shut-in gas well, or the shutting in or return to production of a producing gas well, at least five (5) days (excluding Saturday, Sunday and legal holidays), or at the earliest opportunity permitted by circumstances, prior to taking such action, but assumes no liability for failure to do so. In the event of failure by Operator to so notify Non-Operator, the loss of any lease contributed hereto by Non-Operator for failure to make timely payments of any shut-in well payment shall be borne jointly by the parties hereto under the provisions of Article IV.B.3. F. TAXES: Beginning with the first calendar year after the effective date hereof, Operator shall render for ad valorem taxation all property subject to this agreement which by law should be rendered for such taxes, and it shall pay all such taxes assessed thereon before they become delinquent. Prior to the rendition date, each Non-Operator shall furnish Operator information as to burdens (to include, but not be limited to, royalties, overriding royalties and production payments) oil leases and oil and gas interests contributed by such Non-Operator. If the assessed valuation of any leasehold estate is reduced by reason of its being subject to outstanding excess royalties, overriding royalties or production payments, the reduction in ad valorem taxes resulting therefrom shall inure to the benefit of the owner or owners of such leasehold estate, and Operator shall adjust the charge to such owner or owners so as to reflect the benefit of such reduction. If the ad valorem taxes are based in whole or in part upon separate valuations of each party's working interest, then notwithstanding anything to the contrary herein, charges to the joint account shall be made and paid by the parties hereto in accordance with the tax value generated by each party's working interest. Operator shall bill the other parties for their proportionate shares of all tax payments in the manner provided in Exhibit "C". If Operator considers any tax assessment improper, Operator may, at its discretion, protest within the time and manner prescribed by law, and prosecute the protest to a final determination, unless all parties agree to abandon the protest prior to final determination. During the pendency of administrative or judicial proceedings, Operator may elect to pay, under protest, all such taxes any interest and penalty. When any such protested assessment shall have been finally determined, Operator shall pay the tax for the joint account, together with any interest and penalty accrued, and the total cost shall then be assessed against the parties, and be paid by them, as provided in Exhibit "C". Each party shall pay or cause to be paid all production, severance, excise, gathering and other taxes imposed upon the production or handling of such party's share of oil and/or gas produced under the terms of this agreement. [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -10- 14 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE VII CONTINUED G. INSURANCE: At all times while operations are conducted hereunder, Operator shall comply with the workmen's compensation law of the state where the operations are being conducted; provided, however, that Operator may be a self-insurer for liability under said compensation laws in which event the only charge that shall be made to the joint account shall be as provided in Exhibit "C". Operator shall also carry or provide insurance for the benefit of the joint account of the parties as outlined in Exhibit "D", attached to and made a part hereof. Operator shall require all contractors engaged in work on or for the Contract Area to comply with the workmen's compensation law of the state where the operations are being conducted and to maintain such other insurance as Operator may require. In the event automobile public liability insurance is specified in said Exhibit "D", or subsequently receives the approval of the parties, no direct charge shall be made by Operator for premiums paid for such insurance for Operator's automotive equipment. ARTICLE VIII. ACQUISITION, MAINTENANCE OR TRANSFER OF INTEREST A. SURRENDER OF LEASES: The leases covered by this agreement, insofar as they embrace acreage in the Contract Area, shall not be surrendered in whole or in part unless all parties consent thereto. However, should any party desire to surrender its interest in any lease or in any portion thereof, and the other parties do not agree or consent thereto, the party desiring to surrender shall assign, without express or implied warranty of title, all of its interest in such lease, or portion thereof, and any well, material and equipment which may be located thereon and any rights in production thereafter secured, to the parties not consenting to such surrender. If the interest of the assigning party is or includes an oil and gas interest, the assigning party shall execute and deliver to the party or parties not consenting to such surrender an oil and gas lease covering such oil and gas interest for a term of one (1) year and so long thereafter as oil and/or gas is produced from the land covered thereby, such lease to be on the form attached hereto as Exhibit "B". Upon such assignment or lease, the assigning party shall be relieved from all obligations thereafter accruing, but not theretofore accrued, with respect to the interest assigned or leased and the operation of any well attributable thereto, and the assigning party shall have no further interest in the assigned or leased premises and its equipment and production other than the royalties retained in any lease made under the terms of this Article. The party assignee or lessee shall pay to the party assignor or lessor the reasonable salvage value of the latter's interest in any wells and equipment attributable to the assigned or leased acreage. The value of all material shall be determined in accordance with the provisions of Exhibit "C", less the estimated cost of salvaging and the estimated cost of plugging and abandoning. If the assignment or lease is in favor of more than one party, the interest shall be shared by such parties in the proportions that the interest of each bears to the total interest of all such parties. Any assignment, lease or surrender made under this provision shall not reduce or change the assignor's, lessor's or surrendering party's interest as it was immediately before the assignment, lease or surrender in the balance of the Contract Area; and the acreage assigned, leased or surrendered, and subsequent operations thereon, shall not thereafter be subject to the terms and provisions of this agreement. B. RENEWAL OR EXTENSION OF LEASES: If any party secures a renewal of any oil and gas lease subject to this agreement, all other parties shall be notified promptly, and shall have the right for a period of thirty (30) days following receipt of such notice in which to elect to participate in the ownership of the renewal lease, insofar as such lease affects lands within the Contract Area, by paying to the party who acquired it their several proper proportionate shares of the acquisition cost allocated to that part of such lease within the Contract Area, which shall be in proportion to the interests held at that time by the parties in the Contract Area. If some, but less than all, of the parties elect to participate in the purchase of a renewal lease, it shall be owned by the parties who elect to participate therein, in a ratio based upon the relationship of their respective percentage of participation in the Contract Area to the aggregate of the percentages of participation in the Contract Area of all parties participating in the purchase of such renewal lease. Any renewal lease in which less than all parties elect to participate shall not be subject to this agreement. Each party who participates in the purchase of a renewal lease shall be given an assignment of its proportionate interest therein by the acquiring party. The provisions of this Article shall apply to renewal leases whether they are for the entire interest covered by the expiring lease or cover only a portion of its area or an interest therein. Any renewal lease taken before the expiration of its predecessor lease, or taken or contracted for within six (6) months after the expiration of the existing lease shall be subject to this provision; but any lease taken or contracted for more than six (6) months after the expiration of an existing lease shall not be deemed a renewal lease and shall not be subject to the provisions of this agreement. The provisions in this Article shall also be applicable to extensions of oil and gas leases. C. ACREAGE OR CASH CONTRIBUTIONS: While this agreement is in force, if any party contracts for a contribution of cash towards the drilling of a well or any other operation on the Contract Area, such contribution shall be paid to the party who conducted the drilling or other operation and shall be applied by it against the cost of such drilling or other operation. If the contribution be in the form of acreage, the party to whom the contribution is made shall promptly tender an assignment of the acreage, without warranty of title, to the Drilling Parties in the proportions [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -11- 15 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE VIII CONTINUED said Drilling Parties shared the cost of drilling the well. Such acreage shall become a separate Contract Area and, to the extent possible, be governed by provisions identical to this agreement. Each party shall promptly notify all other parties of any acreage or cash contributions it may obtain in support of any well or any other operation on the Contract Area. The above provisions shall also be applicable to optional rights to earn acreage outside the Contract Area which are in support of a well drilled inside the Contract Area. If any party contracts for any consideration relating to disposition of such party's share of substances produced hereunder, such consideration shall not be deemed a contribution as contemplated in this Article VIII.C. D. MAINTENANCE OF UNIFORM INTEREST: For the purpose of maintaining uniformity of ownership in the oil and gas leasehold interests covered by this agreement, no party shall sell, encumber, transfer or make other disposition of its interest in the leases embraced within the Contract Area and in wells, equipment and production unless such disposition covers either: 1. the entire interest of the party in all leases and equipment and production; or 2. an equal undivided interest in all leases and equipment and production in the Contract Area. Every such sale, encumbrance, transfer or other disposition made by any party shall be made expressly subject to this agreement and shall be made without prejudice to the right of the other parties. If, at any time the interest of any party is divided among and owned by four or more co-owners, Operator, at its discretion, may require such co-owners to appoint a single trustee or agent with full authority to receive notices, approve expenditures, receive billings for and approve and pay such party's share of the joint expenses, and to deal generally with, and with power to bind, the co-owners of such party's interest within the scope of the operations embraced in this agreement; however, all such co-owners shall have the right to enter into and execute all contracts or agreements for the disposition of their respective shares of the oil and gas produced from the Contract Area and they shall have the right to receive, separately, payment of the sale proceeds thereof. E. WAIVER OF RIGHTS TO PARTITION: If permitted by the laws of the state or states in which the property covered hereby is located, each party hereto owning an undivided interest in the Contract Area waives any and all rights it may have to partition and have set aside to it in severalty its undivided interest therein. F. PREFERENTIAL RIGHT TO PURCHASE: Should any party desire to sell all or any part of its interests under this agreement, or its rights and interests in the Contract Area, it shall promptly give written notice to the other parties, with full information concerning its proposed sale, which shall include the name and address of the prospective purchaser (who must be ready, willing and able to purchase), the purchase price, and all other terms of the offer. The other parties shall then have an optional prior right, for a period of ten (10) days after receipt of the notice, to purchase on the same terms and conditions the interest which the other party proposes to sell; and, if this optional right is exercised, the purchasing parties shall share the purchased interest in the proportions that the interest of each bears to the total interest of all purchasing parties. However, there shall be no preferential right to purchase in those cases where any party wishes to mortgage its interests, or to dispose of its interests by merger, reorganization, consolidation, or sale of all or substantially all of its assets to a subsidiary or parent company or to a subsidiary of a parent company, or to any company in which any one party owns a majority of the stock. ARTICLE IX. INTERNAL REVENUE CODE ELECTION This agreement is not intended to create, and shall not be construed to create, a relationship of partnership or an association for profit between or among the parties hereto. Notwithstanding any provision herein that the rights and liabilities hereunder are several and not joint or collective, or that this agreement and operations hereunder shall not constitute a partnership, if, for federal income tax purposes, this agreement and the operations hereunder are regarded as a partnership, each party hereby affected elects to be excluded from the application of all the provisions of Subchapter "K", Chapter 1, Subtitle "A", of the Internal Revenue Code of 1954, as permitted and authorized by Section 761 of the Code and the regulations promulgated thereunder. Operator is authorized and directed to execute on behalf of each party hereby affected such evidence of this election as may be required by the Secretary of the Treasury of the United States or the Federal Internal Revenue Service, including specifically, but not by way of limitation, all of the returns, statements, and the data required by Federal Regulations 1.761. Should there be any requirement that each party hereby affected give further evidence of this election, each such party shall execute such documents and furnish such other evidence as may be required by the Federal Internal Revenue Service or as may be necessary to evidence this election. No such party shall give any notices or take any other action inconsistent with the election made hereby. If any present or future income tax laws of the state or states in which the Contract Area is located or any future income tax laws of the United States contain provisions similar to those in Subchapter "K", Chapter 1, Subtitle "A", of the Internal Revenue Code of 1954, under which an election similar to that provided by Section 761 of the Code is permitted, each party hereby affected shall make such election as may be permitted or required by such laws. In making the foregoing election, each such party states that the income derived by such party from operations hereunder can be adequately determined without the computation of partnership taxable income. [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -12- 16 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE X. CLAIMS AND LAWSUITS Operator may settle any single uninsured third party damage claim or suit arising from operations hereunder if the expenditure does not exceed Five thousand and no/100 Dollars ($5,000.00) and if the payment is in complete settlement of such claim or suit. If the amount required for settlement exceeds the above amount, the parties hereto shall assume and take over the further handling of the claim or suit, unless such authority is delegated to Operator. All costs and expenses of handling, settling, or otherwise discharging such claim or suit shall be at the joint expense of the parties participating in the operation from which the claim or suit arises. If a claim is made against any party or if any party is sued on account of any matter arising from operations hereunder over which such individual has no control because of the rights given Operator by this agreement, such party shall immediately notify all other parties, and the claim or suit shall be treated as any other claim or suit involving operations hereunder. ARTICLE XI. FORCE MAJEURE If any party is rendered unable, wholly or in part, by force majeure to carry out its obligations under this agreement, other than the obligation to make money payments, that party shall give to all other parties prompt written notice of the force majeure with reasonably full particulars concerning it; thereupon, the obligations of the party giving the notice, so far as they are affected by the force majeure, shall be suspended during, but no longer than, the continuance of the force majeure. The affected party shall use all reasonable diligence to remove the force majeure situation as quickly as practicable. The requirement that any force majeure shall be remedied with all reasonable dispatch shall not require the settlement of strikes, lockouts, or other labor difficulty by the party involved, contrary to its wishes; how all such difficulties shall be handled shall be entirely within the discretion of the party concerned. The term "force majeure", as here employed, shall mean an act of God, strike, lockout, or other industrial disturbance, act of the public enemy, war, blockade, public riot, lightning, fire, storm, flood, explosion, governmental action, governmental delay, restraint or inaction, unavailability of equipment, and any other cause, whether of the kind specifically enumerated above or otherwise, which is not reasonably within the control of the party claiming suspension. ARTICLE XII. NOTICES All notices authorized or required between the parties and required by any of the provisions of this agreement, unless otherwise specifically provided, shall be given in writing by mail or telegram, postage or charges prepaid, or by telex or telecopier and addressed to the parties to whom the notice is given at the addresses listed on Exhibit "A". The originating notice given under any provision hereof shall be deemed given only when received by the party to whom such notice is directed, and the time for such party to give any notice in response thereto shall run from the date the originating notice is received. The second or any responsive notice shall be deemed given when deposited in the mail or with the telegraph company, with postage or charges prepaid, or sent by telex or telecopier. Each party shall have the right to change its address at any time, and from time to time, by giving written notice thereof to all other parties. ARTICLE XIII. TERM OF AGREEMENT This agreement shall remain in full force and effect as to the oil and gas leases and/or oil and gas interests subject hereto for the period of time selected below; provided, however, no party hereto shall ever be construed as having any right, title or interest in or to any lease or oil and gas interest contributed by any other party beyond the term of this agreement. [X] Option No. 1: So long as any of the oil and gas leases subject to this agreement remain or are continued in force as to any part of the Contract Area, whether by production, extension, renewal or otherwise. [ ] Option No. 2: In the event the well described in Article VI.A., or any subsequent well drilled under any provision of this agreement, results in production of oil and/or gas in paying quantities, this agreement shall continue in force so long as any such well or wells produce, or are capable of production, and for an additional period of _____ days from cessation of all production; provided, however, if, prior to the expiration of such additional period, one or more of the parties hereto are engaged in drilling, reworking, deepening, plugging back, testing or attempting to complete a well or wells hereunder, this agreement shall continue in force until such operations have been completed and if production results therefrom, this agreement shall continue in force as provided herein. In the event the well described in Article VI.A., or any subsequent well drilled hereunder, results in a dry hole, and no other well is producing, or capable of producing oil and/or gas from the Contract Area, this agreement shall terminate unless drilling, deepening, plugging back or reworking operations are commenced within _____ days from the date of abandonment of said well. It is agreed, however, that the termination of this agreement shall not relieve any party hereto from any liability wnich has accrued or attached prior to the date of such termination. [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -13- 17 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE XIV. COMPLIANCE WITH LAWS AND REGULATIONS A. LAWS, REGULATIONS AND ORDERS: This agreement shall be subject to the conservation laws of the state in which the Contract Area is located, to the valid rules, regulations, and orders of any duly constituted regulatory body of said state; and to all other applicable federal, state, and local laws, ordinances, rules, regulations, and orders. B. GOVERNING LAW: This agreement and all matters pertaining thereto, including, but not limited to, matters of performance, non-performance, breach, remedies, procedures, rights, duties and interpretation or construction, shall be governed and determined by the law of the state in which the Contract Area is located. If the Contract Area is in two or more states, the law of the state of ________________ shall govern. C. REGULATORY AGENCIES: Nothing herein contained shall grant, or be construed to grant, Operator the right or authority to waive or release any rights, privileges, or obligations which Non-Operators may have under federal or state laws or under rules, regulations or orders promulgated under such laws in reference to oil, gas and mineral operations, including the location, operation, or production of wells, on tracts offsetting or adjacent to the Contract Area. With respect to operations hereunder, Non-Operators agree to release Operator from any and all losses, damages, injuries, claims and causes action arising out of, incident to or resulting directly or indirectly from Operator's interpretation or application of rules, rulings, regulations or orders of the Department of Energy or predecessor or Successor agencies to the extent such interpretation or application was made in good faith. Each Non-Operator further agrees to reimburse Operator for any amounts applicable to such Non-Operator's share of production that Operator may be required to refund, rebate or pay as a result of such an incorrect interpretation or application, together with interest and penalties thereon owing by Operator as a result of such incorrect interpretation or application. Non-Operators authorize Operator to prepare and submit such documents as may be required to be submitted to the purchaser of any crude oil sold hereunder or to any other person or entity pursuant to the requirements of the "Crude Oil Windfall Profit Tax Act of 1980", as same may be amended from time to time ("Act"), and any valid regulations or rules which may be issued by the Treasury Department from time to time pursuant to said Act. Each party hereto agrees to furnish any and all certifications or other information which is required to be furnished by said Act in a timely manner and in sufficient detail to permit compliance with said Act. ARTICLE XV. OTHER PROVISIONS [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -14- 18 A.A.P.L. FORM 610 - MODEL FORM OPERATING AGREEMENT - 1982 ARTICLE XVI. MISCELLANEOUS This agreement shall be binding upon and shall inure to the benefit of the parties hereto and to their respective heirs, devisees, legal representatives, successors and assigns. This instrument may be executed in any number of counterparts, each of which shall be considered an original for all purposes. IN WITNESS WHEREOF, this agreement shall be effective as of 1st day of May, 1996. OPERATOR ATTEST: BLACKJACK OIL & GAS, INC. /s/ KAREN BEAMAN /s/ GARY FOSTER - ------------------------------ ------------------------------ Karen Beaman, Secretary Gary Foster, President NON-OPERATORS NATIONAL ENERGY RESOURCES, INC. - ------------------------------ ------------------------------ - ------------------------------ ------------------------------ [AMERICAN ASSOCIATION OF PETROLEUM LANDMEN LOGO] -15- 19 COPAS - 1984 - ONSHORE Recommended by the Council [LOGO] 601, Box 800 of Petroleum Accountants TULSA OK 74101 Societies EXHIBIT "C" Attached to and made a part of that certain Operating Agreement dated May 1, 1996 covering Oklahoma, Texas, and Kansas properties. ACCOUNTING PROCEDURE JOINT OPERATIONS I. GENERAL PROVISIONS 1. DEFINITIONS "Joint Property" shall mean the real and personal property subject to the agreement to which this Accounting Procedure is attached. "Joint Operations" shall mean all operations necessary or proper for the development, operation, protection and maintenance of the Joint Property. "Joint Account" shall mean the account showing the charges paid and credits received in the conduct of the Joint Operations and which are to be shared by the Parties. "Operator" shall mean the party designated to conduct the Joint Operations. "Non-Operators" shall mean the Parties to this agreement other than the Operator. "Parties" shall mean Operator and Non-Operators. "First Level Supervisors" shall mean those employees whose primary function in Joint Operations is the direct supervision of other employees and/or contract labor directly employed on the Joint Property in a field operating capacity. "Technical Employees" shall mean those employees having special and specific engineering, geological or other professional skills, and whose primary function in Joint Operations is the handling of specific operating conditions and problems for the benefit of the Joint Property. "Personal Expenses" shall mean travel and other reasonable reimbursable expenses of Operator's employees. "Material" shall mean personal property, equipment or supplies acquired or held for use on the Joint Property. "Controllable Material" shall mean Material which at the time is so classified in the Material Classification Manual as most recently recommended by the Council of Petroleum Accountants Societies. 2. STATEMENT AND BILLINGS Operator shall bill Non-Operators on or before the last day of each month for their proportionate share of the Joint Account for the preceding month. Such bills will be accompanied by statements which identify the authority for expenditure, lease or facility, and all charges and credits summarized by appropriate classifications of investment and expense except that items of Controllable Material and unusual charges and credits shall be separately identified and fully described in detail. 3. ADVANCES AND PAYMENTS BY NON-OPERATORS A. Unless otherwise provided for in the agreement, the Operator may require the Non-Operators to advance their share of estimated cash outlay for the succeeding month's operation within fifteen (15) days after receipt of the billing or by the first day of the month for which the advance is required, whichever is later. Operator shall adjust each monthly billing to reflect advances received from the Non-Operators. B. Each Non-Operator shall pay its proportion of all bills within fifteen (15) days after receipt. If payment is not made within such time, the unpaid balance shall bear interest monthly at the prime rate in effect at 1% on the first day of the month in which delinquency occurs plus 1% or the maximum contract rate permitted by the applicable usury laws in the state in which the Joint Property is located, whichever is the lesser, plus attorney's fees, court costs, and other costs in connection with the collection of unpaid amounts. 4. ADJUSTMENTS Payment of any such bills shall not prejudice the right of any Non-Operator to protest or question the correctness thereof; provided, however, all bills and statements rendered to Non-Operators by Operator during any calendar year shall conclusively be presumed to be true and correct after twenty-four (24) months following the end of any such calendar year, unless within the said twenty-four (24) month period a Non-Operator takes written exception thereto and makes claim on Operator for adjustment. No adjustment favorable to Operator shall be made unless it is made within the same prescribed period. The provisions of this paragraph shall not prevent adjustments resulting from a physical inventory of Controllable Material as provided for in Section V. COPYRIGHT(C) 1985 by the Council of Petroleum Accountants Societies. -1- 20 COPAS - 1984 - ONSHORE Recommended by the Council of Petroleum Accountants Societies 5. AUDITS A. A Non-Operator, upon notice in writing to Operator and all other Non-Operators, shall have the right to audit Operator's accounts and records relating to the Joint Account for any calendar year within the twenty-four (24) month period following the end of such calendar year; provided, however, the making of an audit shall not extend the time for the taking of written exception to and the adjustments of accounts as provided for in Paragraph 4 of this Section I. Where there are two or more Non-Operators, the Non-Operators shall make every reasonable effort to conduct a joint audit in a manner which will result in a minimum of inconvenience to the Operator. Operator shall bear no portion of the Non-Operators' audit cost incurred under this paragraph unless agreed to by the Operator. The audits shall not be conducted more than once each year without prior approval of Operator, except upon the resignation or removal of the Operator, and shall be made at the expense of those Non-Operators approving such audit. B. The Operator shall reply in writing to an audit report within 180 days after receipt of such report. 6. APPROVAL BY NON-OPERATORS Where an approval or other agreement of the Parties or Non-Operators is expressly required under other sections of this Accounting Procedure and if the agreement to which this Accounting Procedure is attached contains no contrary provisions in regard thereto, Operator shall notify all Non-Operators of the Operator's proposal, and the agreement or approval of a majority in interest of the Non-Operators shall be controlling on all Non-Operators. II. DIRECT CHARGES Operator shall charge the Joint Account with the following items: 1. ECOLOGICAL AND ENVIRONMENTAL Costs incurred for the benefit of the Joint Property as a result of governmental or regulatory requirements to satisfy environmental considerations applicable to the Joint Operations. Such costs may include surveys of an ecological or archaeological nature and pollution control procedures as required by applicable laws and regulations. 2. RENTALS AND ROYALTIES Lease rentals and royalties paid by Operator for the Joint Operations. 3. LABOR A. (1) Salaries and wages of Operator's field employees directly employed on the Joint Property in the conduct of Joint Operations. (2) Salaries of First Level Supervisors in the field. (3) Salaries and wages of Technical Employees directly employed on the Joint Property if such charges are excluded from the overhead rates. (4) Salaries and wages of Technical Employees either temporarily or permanently assigned to and directly employed in the operation of the Joint Property if such charges are excluded from the overhead rates. B. Operator's cost of holiday, vacation, sickness and disability benefits and other customary allowances paid to employees whose salaries and wages are chargeable to the Joint Account under Paragraph 3A of this Section II. Such costs under this Paragraph 3B may be charged on a "when and as paid basis" or by "percentage assessment" on the amount of salaries and wages chargeable to the Joint Account under Paragraph 3A of this Section II. If percentage assessment is used, the rate shall be based on the Operator's cost experience. C. Expenditures or contributions made pursuant to assessments imposed by governmental authority which are applicable to Operator's costs chargeable to the Joint Account under Paragraphs 3A and 3B of this Section II. D. Personal Expenses of those employees whose salaries and wages are chargeable to the joint Account under Paragraph 3A of this Section II. 4. EMPLOYEE BENEFITS Operator's current costs of established plans for employees' group life insurance, hospitalization, pension, retirement, stock purchase, thrift, bonus, and other benefit plans of a like nature, applicable to Operator's labor cost chargeable to the Joint Account under Paragraphs 3A and 3B of this Section II shall be Operator's actual cost not to exceed the percent most recently recommended by the Council of Petroleum Accountants Societies. -2- 21 COPAS - 1984 - ONSHORE Recommended by the Council of Petroleum Accountants Societies 5. MATERIAL Material purchased or furnished by Operator for use on the Joint Property as provided under Section IV. Only such Material shall be purchased for or transferred to the Joint Property as may be required for immediate use and is reasonably practical and consistent with efficient and economical operations. The accumulation of surplus stocks shall be avoided. 6. TRANSPORTATION Transportation of employees and Material necessary for the Joint Operations but subject to the following limitations: A. If Material is moved to the Joint Property from the Operator's warehouse or other properties, no charge shall be made to the Joint Account for a distance greater than the distance from the nearest reliable supply store where like material is normally available or railway receiving point nearest the Joint Property unless agreed to by the Parties. B. If surplus Material is moved to Operator's warehouse or other storage point, no charge shall be made to the Joint Account for a distance greater than the distance to the nearest reliable supply store where like material is normally available, or railway receiving point nearest the Joint Property unless agreed to by the Parties. No charge shall be made to the Joint Account for moving Material to other properties belonging to Operator, unless agreed to by the Parties. C. In the application of subparagraphs A and B above, the option to equalize or charge actual trucking cost is available when the actual charge is $400 or less excluding accessorial charges. The $400 will be adjusted to the amount most recently recommended by the Council of Petroleum Accountants Societies. 7. SERVICES The cost of contract services, equipment and utilities provided by outside sources, except services excluded by Paragraph 10 of Section II and Paragraph i, ii, and iii, of Section III. The cost of professional consultant services and contract services of technical personnel directly engaged on the Joint Property if such charges are excluded from the overhead rates. The cost of professional consultant services or contract services of technical personnel not directly engaged on the Joint Property shall not be charged to the Joint Account unless previously agreed to by the Parties. 9. DAMAGES AND LOSSES TO JOINT PROPERTY All costs or expenses necessary for the repair or replacement of Joint Property made necessary because of damages or losses incurred by fire, flood, storm, theft, accident, or other cause, except those resulting from Operator's gross negligence or willful misconduct. Operator shall furnish Non-Operator written notice of damages or losses incurred as soon as practicable after a report thereof has been received by Operator. 10. LEGAL EXPENSE Expense of handling, investigating and settling litigation or claims, discharging of liens, payment of judgements and amounts paid for settlement of claims incurred in or resulting from operations under the agreement or necessary to protect or recover the Joint Property, except that no charge for services of Operator's legal staff or fees or expense of outside attorneys shall be made unless previously agreed to by the Parties. All other legal expense is considered to be covered by the overhead provisions of Section III unless otherwise agreed to by the Parties, except as provided in Section I, Paragraph 3. 11. TAXES All taxes of every kind and nature assessed or levied upon or in connection with the Joint Property, the operation thereof, or the production therefrom, and which taxes have been paid by the Operator for the benefit of the Parties. If the ad valorem taxes are based in whole or in part upon separate valuations of each party's working interest, then notwithstanding anything to the contrary herein, charges to the Joint Account shall be made and paid by the Parties hereto in accordance with the tax value generated by each party's working interest. -3- 22 COPAS - 1984 - ONSHORE Recommended by the Council of Petroleum Accountants Societies - -------------------------------------------------------------------------- COPAS 12. INSURANCE Net premiums paid for insurance required to be carried for the Joint Operations for the protection of the Parties. In the event Joint Operations are conducted in a state in which Operator may act as self-insurer for Worker's Compensation and/or Employers Liability under the respective state's laws, Operator may, at its election, include the risk under its self-insurance program and in that event, Operator shall include a charge at Operator's cost not to exceed manual rates. 13. ABANDONMENT AND RECLAMATION Costs incurred for abandonment of the Joint Property, including costs required by governmental or other regulatory authority. 14. COMMUNICATIONS Cost of acquiring, leasing, installing, operating, repairing and maintaining communication systems, including radio and microwave facilities directly serving the Joint Property. In the event communication facilities/systems serving the Joint Property are Operator owned, charges to the Joint Account shall be made as provided in Paragraph 8 of this Section II. 15. OTHER EXPENDITURES Any other expenditure not covered or dealt with in the foregoing provisions of this Section II, or in Section III and which is of direct benefit to the Joint Property and is incurred by the Operator in the necessary and proper conduct of the Joint Operations. III. OVERHEAD 1. Overhead - Drilling and Producing Operations i. As compensation for administrative, supervision, office services and warehousing costs, Operator shall charge drilling and producing operations on either: (X) Fixed Rate Basis, Paragraph 1A, or ( ) Percentage Basis, Paragraph 1B Unless otherwise agreed to by the Parties, such charge shall be in lieu of costs and expenses of all offices and salaries or wages plus applicable burdens and expenses of all personnel, except those directly chargeable under Paragraph 3A, Section II. The cost and expense of services from outside sources in connection with matters of taxation, traffic, accounting or matters before or involving governmental agencies shall be considered as included in the overhead rates provided for in the above selected Paragraph of this Section III unless such cost and expense are agreed to by the Parties as a direct charge to the Joint Account. ii. The salaries, wages and Personal Expenses of Technical Employees and/or the cost of professional consultant services and contract services of technical personnel directly employed on the Joint Property: ( ) shall be covered by the overhead rates, or (X) shall not be covered by the overhead rates. iii. The salaries, wages and Personal Expenses of Technical Employees and/or costs of professional consultant services and contract services of technical personnel either temporarily or permanently assigned to and directly employed in the operation of the Joint Property: ( ) shall be covered by the overhead rates, or (X) shall not be covered by the overhead rates. A. Overhead - Fixed Rate Basis (1) Operator shall charge the Joint Account at the following rates per well per month: Drilling Well Rate $N/A (Prorated for less than a full month) Producing WELL Rate $350.00 per month (2) Application of Overhead - Fixed Rate Basis shall be as follows: (a) Drilling Well Rate (1) Charges for drilling wells shall begin on the date the well is spudded and terminate on the date the drilling rig, completion rig, or other units used in completion of the well is released, whichever -4- 23 COPAS - 1984 - ONSHORE Recommended by the Council of Petroleum Accountants Societies is later, except that no charge shall be made during suspension of drilling or completion operations for fifteen (15) or more consecutive calendar days. (2) Charges for wells undergoing any type of workover or recompletion for a period of five (5) consecutive work days or more shall be made at the drilling well rate. Such charges shall be applied for the period from date workover operations, with rig or other units used in workover, commence through date of rig or other unit release, except that no charge shall be made during suspension of operations for fifteen (15) or more consecutive calendar days. (b) Producing Well Rates (1) An active well either produced or injected into for any portion of the month shall be considered as a one-well charge for the entire month. (2) Each active completion in a multi-completed well in which production is not commingled down hole shall be considered as a one-well charge providing each completion is considered a separate well by the governing regulatory authority. (3) An inactive gas well shut in because of overproduction or failure of purchaser to take the production shall be considered as a one-well charge providing the gas well is directly connected to a permanent sales outlet. (4) A one-well charge shall be made for the month in which plugging and abandonment operations are completed on any well. This one-well charge shall be made whether or not the well has produced except when drilling well rate applies. (5) All other inactive wells (including but not limited to inactive wells covered by unit allowable, lease allowable, transferred allowable, etc.) shall not qualify for an overhead charge. (3) The well rates shall be adjusted as of the first day of April each year following the effective date of the agreement to which this Accounting Procedure is attached. The adjustment shall be computed by multiplying the rate currently in use by the percentage increase or decrease in the average weekly earnings of Crude Petroleum and Gas Production Workers for the last calendar year compared to the calendar year preceding as shown by the index of average weekly earnings of Crude Petroleum and Gas Production Workers as published by the United States Department of Labor, Bureau of Labor Statistics, or the equivalent Canadian index as published by Statistics Canada, as applicable. The adjusted rates shall be the rates currently in use, plus or minus the computed adjustment. 2. OVERHEAD - MAJOR CONSTRUCTION To compensate Operator for overhead costs incurred in the construction and installation of fixed assets, the expansion of fixed assets, and any other project clearly discernible as a fixed asset required for the development and operation of the Joint Property, Operator shall either negotiate a rate prior to the beginning of construction, or shall charge the Joint -5- 24 COPAS - 1984 - ONSHORE Recommended by the Council of Petroleum Accountants Societies 4. AMENDMENT OF RATES The overhead rates provided for in this Section III may be amended from time to time only by mutual agreement between the Parties hereto if, in practice, the rates are found to be insufficient or excessive. IV. PRICING OF JOINT ACCOUNT MATERIAL PURCHASES, TRANSFERS AND DISPOSITIONS Operator is responsible for Joint Account Material and shall make proper and timely charges and credits for all Material movements affecting the Joint Property. Operator shall provide all Material for use on the Joint Property; however, at Operator's option, such Material may be supplied by the Non-Operator. Operator shall make timely disposition of idle and/or surplus Material, such disposal being made either through sale to Operator or Non-Operator, division in kind, or sale to outsiders. Operator may purchase, but shall be under no obligation to purchase, interest of Non-Operators in surplus condition A or B Material. The disposal of surplus Controllable Material not purchased by the Operator shall be agreed to by the Parties. 1. PURCHASES Material purchased shall be charged at the price paid by Operator after deduction of all discounts received. In case of Material found to be defective or returned to vendor for any other reasons, credit shall be passed to the Joint Account when adjustment has been received by the Operator. 2. TRANSFERS AND DISPOSITIONS Material furnished to the Joint Property and Material transferred from the Joint Property or disposed of by the Operator, unless otherwise agreed to by the Parties, shall be priced on the following basis exclusive of cash discounts: A. New Material (Condition A) (1) Tubular Goods Other than Line Pipe (a) Tubular goods, sized 2-3/8 inches OD and larger, except line pipe, shall be priced at Eastern mill published carload base prices effective as of date of movement plus transportation cost using the 80,000 pound carload weight basis to the railway receiving point nearest the Joint Property for which published rail rates for tubular goods exist. If the 80,000 pound rail rate is not offered, the 70,000 pound or 90,000 pound rail rate may be used. Freight charges for tubing will be calculated from Lorain, Ohio and casing from Youngstown, Ohio. (b) For grades which are special to one mill only, prices shall be computed at the mill base of that mill plus transportation cost from that mill to the railway receiving point nearest the Joint Property as provided above in Paragraph 2.A.(1)(a). For transportation cost from points other than Eastern mills, the 30,000 -6- 25 COPAS - 1984 - ONSHORE Recommended by the Council of Petroleum Accountants Societies pound Oil Field Haulers Association interstate truck rate shall be used. (c) Special end finish tubular goods shall be priced at the lowest published out-of-stock price, f.o.b. Houston, Texas, plus transportation cost, using Oil Field Haulers Association interstate 30,000 pound truck rate, to the railway receiving point nearest the Joint Property. (d) Macaroni tubing (size less than 2-3/8% inch OD) shall be priced at the lowest published out-of-stock prices f.o.b. the supplier plus transportation costs, using the Oil Field Haulers Association interstate truck rate per weight of tubing transferred, to the railway receiving point nearest the Joint Property. (2) Line Pipe (a) Line pipe movements (except size 24 inch OD and larger with walls 3/4 inch and over) 30,000 pounds or more shall be priced under provisions of tubular goods pricing in Paragraph A.(1)(a) as provided above. Freight charges shall be calculated from Lorain, Ohio. (b) Line pipe movements (except size 24 inch OD and larger with walls 3/4 inch and over) less than 30,000 pounds shall be priced at Eastern mill published carload base prices effective as of date of shipment, plus 20 percent, plus transportation costs based on freight rates as set forth under provisions of tubular goods pricing in Paragraph A.(1)(a) as provided above. Freight charges shall be calculated from Lorain, Ohio. (c) Line pipe 24 inch OD and over and 3/4 inch wall and larger shall be priced f.o.b. the point of manufacture at current new published prices plus transportation cost to the railway receiving point nearest the Joint Property. (d) Line pipe, including fabricated line pipe, drive pipe and conduit not listed on published price lists shall be priced at quoted prices plus freight to the railway receiving point nearest the Joint Property or at prices agreed to by the Parties. (3) Other Material shall be priced at the current new price, in effect at date of movement, as listed by a reliable supply store nearest the Joint Property, or point of manufacture, plus transportation costs, if applicable, to the railway receiving point nearest the Joint Property. (4) Unused new Material, except tubular goods, moved from the Joint Property shall be priced at the current new price, in effect on date of movement, as listed by a reliable supply store nearest the Joint Property, or point of manufacture, plus transportation costs, if applicable, to the railway receiving point nearest the Joint Property. Unused new tubulars will be priced as provided above in Paragraph 2.A.(l) and (2). B. Good Used Material (Condition B) Material in sound and serviceable condition and suitable for reuse without reconditioning: (1) Material moved to the Joint Property At seventy-five percent (75%) of current new price, as determined by Paragraph A. (2) Material used on and moved from the Joint Property (a) At seventy-five percent (75%) of current new price, as determined by Paragraph A, if Material was originally charged to the Joint Account as new Material or (b) At sixty-five percent (65%) of current new price, as determined by Paragraph A, if Material was originally charged to the Joint Account as used Material. (3) Material not used on and moved from the Joint Property At seventy-five percent (75%) of current new price as determined by Paragraph A. The cost of reconditioning, if any, shall be absorbed by the transferring property. C. Other Used Material (1) Condition C Material which is not in sound and serviceable condition and not suitable for its original function until after reconditioning shall be priced at fifty percent (50%) of current new price as determined by Paragraph A. The cost of reconditioning shall be charged to the receiving property, provided Condition C value plus cost of reconditioning does not exceed Condition B value. -7- 26 COPAS - 1984 - ONSHORE Recommended by the Council of Petroleum Accountants Societies (2) Condition D Material, excluding junk, no longer suitable for its original purpose, but usable for some other purpose shall be priced on a basis commensurate with its use. Operator may dispose of Condition D Material under procedures normally used by Operator without prior approval of Non-Operators. (a) Casing, tubing, or drill pipe used as line pipe shall be priced as Grade A and B seamless line pipe of comparable size and weight. Used casing, tubing or drill pipe utilized as line pipe shall be priced at used line pipe prices. (b) Casing, tubing or drill pipe used as higher pressure service lines than standard line pipe, e.g. power oil lines, shall be priced under normal pricing procedures for casing, tubing, or drill pipe. Upset tubular goods shall be priced on a non upset basis. (3) Condition E Junk shall be priced at prevailing prices. Operator may dispose of Condition E Material under procedures normally utilized by Operator without prior approval of Non-Operators. D. Obsolete Material Material which is serviceable and usable for its original function but condition and/or value of such Material is not equivalent to that which would justify a price as provided above may be specially priced as agreed to by the Parties. Such price should result in the Joint Account being charged with the value of the service rendered by such Material. E. Pricing Conditions (1) Loading or unloading costs may be charged to the Joint Account at the rate of twenty-five cents (25 cents per hundred weight on all tubular goods movements, in lieu of actual loading or unloading costs sustained at the stocking point. The above rate shall be adjusted as of the first day of April each year following January 1, 1985 by the same percentage increase or decrease used to adjust overhead rates in Section III, Paragraph I.A.(3). Each year, the rate calculated shall be rounded to the nearest cent and shall be the rate in effect until the first day of April next year. Such rate shall be published each year by the Council of Petroleum Accountants Societies. (2) Material involving erection costs shall be charged at applicable percentage of the current knocked-down price of new Material. 3. PREMIUM PRICES Whenever Material is not readily obtainable at published or listed prices because of national emergencies, strikes or other unusual causes over which the Operator has no control, the Operator may charge the Joint Account for the required Material at the Operator's actual cost incurred in providing such Material, in making it suitable for use, and in moving it to the Joint Property; provided notice in writing is furnished to Non-Operators of the proposed charge prior to billing Non-Operators for such Material. Each Non-Operator shall have the right, by so electing and notifying Operator within ten days after receiving notice from Operator, to furnish in kind all or part of his share of such Material suitable for use and acceptable to Operator. 4. WARRANTY OF MATERIAL FURNISHED BY OPERATOR Operator does not warrant the Material furnished. In case of defective Material, credit shall not be passed to the Joint Account until adjustment has been received by Operator from the manufacturers or their agents. V. INVENTORIES The Operator shall maintain detailed records of Controllable Material. 1. PERIODIC INVENTORIES, NOTICE AND REPRESENTATION At reasonable intervals, inventories shall be taken by Operator of the Joint Account Controllable Material. Written notice of intention to take inventory shall be given by Operator at least thirty (30) days before any inventory is to begin so that Non-Operators may be represented when any inventory is taken. Failure of Non-Operators to be represented at an inventory shall bind Non-Operators to accept the inventory taken by Operator. 2. RECONCILIATION AND ADJUSTMENT OF INVENTORIES Adjustments to the Joint Account resulting from the reconciliation of a physical inventory shall be made within six months following the taking of the inventory. Inventory adjustments shall be made by Operator to the Joint Account for -8- 27 COPAS - 1984 - ONSHORE Recommended by the Council of Petroleum Accountants Societies overages and shortages, but, Operator shall be held accountable only for shortages due to lack of reasonable diligence. 3. SPECIAL INVENTORIES Special inventories may be taken whenever there is any sale, change of interest, or change of Operator in the Joint Property. It shall be the duty of the party selling to notify all other Parties as quickly as possible after the transfer of interest takes place. In such cases, both the seller and the purchaser shall be governed by such inventory. In cases involving a change of Operator, all Parties shall be governed by such inventory. 4. EXPENSE OF CONDUCTING INVENTORIES A. The expense of conducting periodic inventories shall not be charged to the Joint Account unless agreed to by the Parties. B. The expense of conducting special inventories shall be charged to the Parties requesting such inventories, except inventories required due to change of Operator shall be charged to the Joint Account. -9- EX-10.(III) 5 LETTER OF INTENT 1 NATIONAL ENERGY RESOURCES, INC. 21800 Burbank Blvd., Suite 100 Woodland Hills, California 91364 June 11, 1996 Mr. Gary Foster Blackjack Oil & Gas, Inc. 1633 West Garriott Road, Suite D Enid, Oklahoma 73703 Re: Letter of Intent Dear Mr. Foster: Discussions have been held between you and the undersigned concerning the sale of certain oil and gas properties and production equipment (the "Properties") by Blackjack Oil & Gas, Inc. (the "Seller") to C.D. National Energy Resources, Inc. (the "Buyer"). This letter sets forth the terms and conditions of our proposal to purchase the Properties from the Seller. I. PROPERTIES PURCHASE Attached to this Letter of Intent as Exhibit "A" and made a part hereof is a description by lease designation of the producing oil and gas properties which Buyer is willing to purchase from Seller. The offer to purchase is made conditioned on the representations Seller has made that the lease acreage, working interest being transferred and the net revenue interest for each property is as represented on Exhibit "A". The producing properties also include all of the production and other equipment now on the wells. II. PURCHASE PRICE AND ADJUSTMENTS Buyer is offering to pay the sum of $430,000 at closing for the Properties as defined above subject to the following adjustments and the conditions set forth below. The purchase price shall be adjusted for the following: (a) any differences in the working interest percentages and net revenue interest percentages from those set forth in Exhibit "A"; (b) any changes in the producing well equipment from that listed by exhibit; (c) any changes in the joint interest billing receivables and suspense monies from those represented by Seller; and (d) any gas balancing adjustments or contract balancing adjustments as provided for below. III. TITLE Title to the Properties will be transferred free and clear of all title defects, liens, claims, mortgages and other encumbrances. The assignments of the leases for the producing properties will be with warranty. The bill of sale for the equipment shall include a warranty as to title as well. Seller will provide Buyer at Seller's cost updated title opinions on the producing properties. Acceptance of title shall be in the sole discretion of Buyer, not to be unreasonably withheld. 2 Mr. Gary Foster June 11, 1996 Page 2 IV. OPERATIONS AND CONTRACTS Seller will retain operations of the Properties following closing. Prior to closing, all gas balancing adjustments will be made for over production of the Properties as well as any gas contract balancing for royalty payment deficiencies, if any. All gas and other purchase contracts will be assigned at closing. V. PRECONDITIONS TO PURCHASE The following items are preconditions to the purchase of your the Properties by the Buyer: 1. A definitive purchase agreement being entered into between the parties which outlines all of the terms and conditions of this letter of intent. 2. That Buyers are satisfied that Properties are as represented following examination of the information and records requested. 3. A satisfactory review and examination of the information and records Seller regarding the Properties including but not limited to the operating agreements, engineering and reserve reports, title reports and opinions, gas contracts, leases, well records, accounting records and operating statements. The purchase shall be conditioned on Buyer finding such records acceptable and in good order to its sole satisfaction and determination. 4. No material adverse changes in the conditions or obligations of the Properties as determined solely by the Buyer. VI. CLOSING Buyer propose a closing to be effective not later than August 31, 1996 subject to the title and other requirements being met. If the foregoing is satisfactory to you, please sign and return the enclosed copy of this letter. I understand that this letter is merely a statement of interest and not binding upon either you or me. However, we agree in principle to the contents hereof and propose to proceed promptly and in good faith to prepare a definitive agreement and conduct our investigation. Very truly yours, Marshall Field as President of Energy Resources, Inc. 3 Mr. Gary Foster June 11, 1996 Page 3 Agreed to and accepted this ___ day of June, 1996 by the undersigned on behalf of Blackjack Oil & Gas, Inc. _______________________________ Gary Foster EX-23.(I) 6 CONSENT OF ROBINSON & WILLIAMS, INC. 1 Exhibit 23 (i) CONSENT OF COUNSEL Robertson & Williams, Inc., a professional corporation, hereby consents to the use of its name under the caption "VALIDITY OF SECURITIES" in the Prospectus constituting a part of this Registration Statement. ROBERTSON & WILLIAMS, INC. Oklahoma City, Oklahoma June 11, 1996 EX-23.(II) 7 CONSENT OF MUSECK & MUSECK 1 Exhibit 23 (ii) CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the inclusion in this Registration Statement on Form S-1 of our report dated July 31, 1995, on our audit of the financial statement of National Energy Resources, Inc. We also consent to the reference to our firm under the caption "EXPERTS." MUSECK & MUSECK New Providence, New Jersey June 11, 1996 EX-23.(III) 8 CONSENT OF F.W. ELTON 1 Exhibit 23 (iii) CONSENT OF PETROLEUM ENGINEERS F. W. Elton, Inc. hereby consents to the inclusion in this Registration Statement on Form S-1 our engineering reserve report dated April 17, 1996, and we consent to the reference to our firm under the caption "EXPERTS. F.W. ELTON, INC. Enid, Oklahoma June 11, 1996 -----END PRIVACY-ENHANCED MESSAGE-----