-----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, NqkL9N8Bk7e8iB4YY4ngENivkP0JkhFdoS0D+dcBcgough4l1/5bP07Dh9HF3LhN gRVO+4Kc6eJreqGNL5yYjQ== 0001092306-06-000533.txt : 20060817 0001092306-06-000533.hdr.sgml : 20060817 20060817160203 ACCESSION NUMBER: 0001092306-06-000533 CONFORMED SUBMISSION TYPE: 10QSB PUBLIC DOCUMENT COUNT: 11 CONFORMED PERIOD OF REPORT: 20060630 FILED AS OF DATE: 20060817 DATE AS OF CHANGE: 20060817 FILER: COMPANY DATA: COMPANY CONFORMED NAME: RADIAL ENERGY, INC. CENTRAL INDEX KEY: 0001282496 STANDARD INDUSTRIAL CLASSIFICATION: IN VITRO & IN VIVO DIAGNOSTIC SUBSTANCES [2835] IRS NUMBER: 000000000 FILING VALUES: FORM TYPE: 10QSB SEC ACT: 1934 Act SEC FILE NUMBER: 333-113726 FILM NUMBER: 061040938 BUSINESS ADDRESS: STREET 1: 1313 EAST MAPLE STREET CITY: BELLINGHAM STATE: WA ZIP: 98225 BUSINESS PHONE: 360-685-4200 MAIL ADDRESS: STREET 1: 1313 EAST MAPLE STREET CITY: BELLINGHAM STATE: WA ZIP: 98225 FORMER COMPANY: FORMER CONFORMED NAME: BV PHARMACEUTICAL INC DATE OF NAME CHANGE: 20040303 10QSB 1 form10qsb.txt FORM 10-QSB 06-30-06 ================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 ----------------------------------------------------------- FORM 10-QSB QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2006 COMMISSION FILE NUMBER 333-113726 RADIAL ENERGY INC. ------------------ (Exact name of small business issuer as specified in its charter) NEVADA 72-1580091 ------ ---------- (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 1313 EAST MAPLE ST., SUITE 223, BELLINGHAM, WASHINGTON 98225 ------------------------------------------------------------ (Address of principal executive offices) Issuer's telephone number: (360) 685-4240 -------------- Check whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to filing requirements for the past 90 days. Yes |X| No |_| Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes |_| No |X| State the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date: As of August 10, 2006, 44,565,824 shares of common stock were issued and outstanding. ================================================================================
RADIAL ENERGY INC. TABLE OF CONTENTS PART I. FINANCIAL INFORMATION Item 1. Financial Statements Balance Sheets as of June 30, 2006, and December 31, 2005 (Unaudited)........ 1 Interim Statement of Operations for the three months and six months ended June 30, 2006 and 2005 and for the period from June 30, 2000 (date of incorporation) to June 30, 2006 (Unaudited)................................................................... 2 Interim Statement of Cash Flows for the six months ended June 30, 2006 and 2005 and for the period from June 30, 2000 (date of incorporation) to June 30, 2006 (Unaudited)................................... 3 Interim Statement of Stockholders' Equity (Deficiency) for the period June 30, 2000 (Date of Inception) to June 30, 2006 (Stated in US Dollars) (Unaudited.............. 4 Notes to Financial Statements (Unaudited)........................................... 6 Item 2. Management's Plan of Operation...................................................... 12 Item 3. Controls and Procedures............................................................. 22 PART II. OTHER INFORMATION Item 2. Unregistered Sales of Equity Securities and Use of Proceeds......................... 23 Item 5. Other Information................................................................... 23 Item 6. Exhibits............................................................................ 26 SIGNATURES............................................................................................... 28 EXHIBIT INDEX ........................................................................................... 29
================================================================================ PART I.--FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
RADIAL ENERGY INC. (A DEVELOPMENT STAGE COMPANY) BALANCE SHEETS JUNE 30, 2006 AND DECEMBER 31, 2005 (UNAUDITED) ASSETS June 30 December 31 ------ 2006 2005 ---- ---- Current Cash $ 55,259 $ 1,211 Prepaid expenses 39,535 - Current assets of discontinued operations - Note 11 - 1,000 --------------- --------------- 94,794 2,211 Equipment - Note 4 1,015 - Oil and gas properties - Note 5 2,144,814 - --------------- --------------- $ 2,240,623 $ 2,211 =============== =============== LIABILITIES Current Accounts payable and accrued liabilities - Note 5 $ 773,778 $ 8,435 Due to related parties - Notes 7 and 8 1,219,600 - Current liabilities of discontinued operations - Note 11 - 7,500 --------------- --------------- 1,993,378 15,935 --------------- --------------- STOCKHOLDERS' EQUITY (DEFICIENCY) Capital stock - Note 6 Authorized: 75,000,000 common stock, $0.001 par value Issued: 35,065,824 common stock (December 31, 2005: 151,065,824) 35,066 151,066 Additional paid-in capital 93,180 6,180 Share subscribed - Note 6 1,710,000 - Deficit accumulated during the development stage (1,591,001) (170,970) --------------- --------------- 247,245 (13,724) --------------- --------------- $ 2,240,623 $ 2,211 =============== ===============
SEE ACCOMPANYING NOTES 1 ================================================================================
RADIAL ENERGY INC. (A DEVELOPMENT STAGE COMPANY) INTERIM STATEMENT OF OPERATIONS FOR THE THREE MONTHS AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 AND FOR THE PERIOD FROM JUNE 30, 2000 (DATE OF INCORPORATION) TO JUNE 30, 2006 (UNAUDITED) June 30, 2000 (Date of Three months ended Six months ended Inception) to June 30 June 30 June 30, 2006 2005 2006 2005 2006 ---- ---- ---- ---- ---- Administrative expenses Administration fees $ 8,500 $ - $ 8,500 $ - $ 8,500 Advertising and promotion - - - - 1,001 Consulting fees - Note 7 15,564 - 29,518 - 78,015 Executive compensation and benefits - Note 7 1,259,800 - 1,259,800 - 1,259,800 Filing fees 1,990 1,566 3,971 6,613 16,426 Interest and bank charges 914 1,276 1,388 2,564 9,001 Investor relations 31,657 - 41,657 - 51,653 Marketing management services 29,150 - 29,150 - 29,150 Office and miscellaneous 1,969 1,146 4,219 3,425 17,555 Professional fees 18,544 2,388 25,412 7,610 66,050 Rent 3,321 - 3,321 - 3,826 Transfer agent fees 2,595 481 3,057 1,581 2,595 Travel and related costs 10,431 - 15,852 - 15,851 Website maintenance 12,094 273 12,094 273 14,223 ------------- ------------- -------------- ------------- -------------- Loss before other items (1,396,529) (7,130) (1,437,938) (22,066) (1,573,646) Other items: Other income - - - - 58 Gain on note payable forgiven - Note 6 - - 9,407 - 9,407 ------------- ------------- -------------- ------------- -------------- Net loss from continuing operations (1,396,529) (7,130) (1,428,531) (22,066) (1,564,181) Income (loss) from discontinued operations - Note 11 - - 8,500 480 (26,820) ------------- ------------- -------------- ------------- -------------- Net loss for the period $ (1,396,529) $ (7,130) $ (1,420,031) $ (21,586) $ (1,591,001) ============= ============= ============== ============= ============== Basic loss per share from continuing operations $ (0.04) $ (0.00) $ (0.02) $ (0.00) ============== ============= ============== ============= Basic income per share from discontinued operations $ - $ - $ 0.00 $ 0.00 ============= ============= ============= ============= Weighted average number of shares outstanding - Note 6 35,065,824 149,920,400 60,701,183 149,920,400 ============= ============= ============== =============
SEE ACCOMPANYING NOTES 2 ================================================================================
RADIAL ENERGY INC. (A DEVELOPMENT STAGE COMPANY) INTERIM STATEMENT OF CASH FLOWS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 AND FOR THE PERIOD FROM JUNE 30, 2000 (DATE OF INCORPORATION) TO JUNE 30, 2006 (UNAUDITED) June 30, 2000 (Date of Six months ended Inception) to June 30, June 30, 2006 2005 2006 ---- ---- ---- Cash Flows used in Operating Activities Net loss from continuing operations $ (1,428,531) $ (22,066) $ (1,564,181) Deduct item not affecting cash: Gain on note payable forgiven (9,407) - (9,407) Changes in non-cash working capital balances related to operations: Prepaid expenses (39,535) - (39,535) Accounts payable and accrued liabilities 765,750 (3,262) 774,185 -------------- -------------- ------------- (711,723) (25,328) (838,938) -------------- -------------- ------------- Cash Flows used in Investing Activities Acquisition of equipment (1,015) - (1,015) Oil and gas properties (2,144,814) - (2,144,814) -------------- -------------- -------------- (2,145,829) - (2,145,829) -------------- -------------- -------------- Cash Flows from Financing Activities Increase in due to related parties 1,219,600 - 1,219,600 Capital stock issued - - 99,975 Share subscribed 1,710,000 - 1,710,000 Decrease in note payable (20,000) - (20,000) Convertible debentures - 2,479 57,271 -------------- -------------- -------------- 2,909,600 2,479 3,066,846 -------------- -------------- -------------- Increase (decrease) in cash from continuing operations 52,048 (22,849) 82,079 Increase (decrease) in cash from discontinued operations - Note 11 2,000 7,980 (26,820) ------------- -------------- ------------- Increase (decrease) in cash during the period 54,048 (14,869) 55,259 Cash, beginning of the period 1,211 24,964 - -------------- -------------- -------------- Cash, end of the period $ 55,259 $ 10,095 $ 55,259 ============== ============== ==============
SEE ACCOMPANYING NOTES 3 ================================================================================
RADIAL ENERGY INC. (FORMERLY BV PHARMACEUTICAL, INC.) (A DEVELOPMENT STAGE COMPANY) INTERIM STATEMENT OF STOCKHOLDERS' EQUITY (DEFICIENCY) FOR THE PERIOD JUNE 30, 2000 (DATE OF INCEPTION) TO JUNE 30, 2006 (STATED IN US DOLLARS) (UNAUDITED) DEFICIT ACCUMULATED ADDITIONAL DURING THE COMMON STOCK PAID-IN SHARE DEVELOPMENT *SHARES **PARVALUE CAPITAL SUBSCRIBED STAGE TOTAL ------ -------- ------- ---------- ----- ----- Capital stock subscribed pursuant to an offering memorandum for cash - at $0.0000002 122,172,000 $ 122,172 $ (121,968) $ - $ - $ 204 ----------- ---------- ------------- ------- ---------- --------- Balance, December 31, 2000 122,172,000 122,172 (121,968) - - 204 Capital stock issued pursuant to a private placement - - at $0.0025 27,108,400 27,108 40,663 - - 67,771 - at $0.05 160,000 160 7,840 - - 8,000 Net loss for the year - - - - (69,885) (69,885) ----------- ---------- ------------- ------- ---------- --------- Balance, December 31, 2001 149,440,400 149,440 (73,465) - (69,885) 6,090 Capital stock issued pursuant to a private placement - - at $0.05 480,000 480 23,520 - - 24,000 Net loss for the year - - - - (30,090) (30,090) ----------- ---------- ------------- ------- ---------- --------- Balance, December 31, 2002 149,920,400 149,920 (49,945) - (99,975) - Net income for the year - - - - 108 108 ----------- ---------- ------------- ------- ---------- --------- Balance, December 31, 2003 149,920,400 149,920 (49,945) - (99,867) 108 Net loss for the year - - - - (36,453) (36,453) ----------- ---------- ------------- ------- ---------- --------- Balance, December 31, 2004 149,920,400 149,920 (49,945) - (136,320) (36,345) .../cont'd
SEE ACCOMPANYING NOTES 4 ================================================================================
DEFICIT ACCUMULATED ADDITIONAL DURING THE COMMON STOCK PAID-IN SHARE DEVELOPMENT *SHARES **PARVALUE CAPITAL SUBSCRIBED STAGE TOTAL ------ -------- ------- ---------- ----- ----- Capital stock issued pursuant to conversion of convertible debentures - at $0.05 1,145,424 1,146 56,125 - - 57,271 Net loss for the year - - - - (34,650) (34,650) ------------ ---------- ------------- ----------- ------------ ---------- Balance, December 31, 2005 151,065,824 151,066 6,180 - (170,970) (13,724) Capital stock retired to the treasury (116,000,000) (116,000 87,000 - (29,000) Share subscribed - - - 1,850,000 - 1,850,000 Finders' fees on private placement - - - (140,000) - (140,000) Net loss for the period - - - - (1,420,031) (1,420,031) ------------ ---------- ------------- ----------- ------------ ----------- Balance, June 30, 2006 35,065,824 $ 35,066$ $ 93,180 $1,710,000 $(1,591,001) $ 247,245 ============ ========== ============= =========== ============ ===========
* The common stock issued has been retroactively restated to reflect a forward stock split of 1,500 new shares for one old share, effective January 5, 2001 and a forward split of four new shares for one old share, effective February 20, 2006 (Note 6). ** The par value of common stock has been retroactively restated to reflect a change from no par value to a par value of $0.001 per share. SEE ACCOMPANYING NOTES 5 ================================================================================ RADIAL ENERGY INC. (A DEVELOPMENT STAGE COMPANY) NOTES TO FINANCIAL STATEMENTS FOR THE SIX MONTHS ENDED JUNE 30, 2006 AND 2005 AND FOR THE PERIOD FROM JUNE 30, 2000 (DATE OF INCORPORATION) TO JUNE 30, 2006 (UNAUDITED) Note 1 INTERIM REPORTING The accompanying unaudited interim financial statements have been prepared by Radial Energy Inc. (the "Company") pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and disclosures normally included in annual financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations. In the opinion of management, all adjustments and disclosures necessary for a fair presentation of these financial statements have been included. Such adjustments consist of normal recurring adjustments. These interim financial statements should be read in conjunction with the audited financial statements of the Company for the fiscal year ended December 31, 2005. The results of operations for the six months ended June 30, 2006 are not indicative of the results that may be expected for the full year. Note 2 CONTINUANCE OF OPERATIONS These interim financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for its next twelve months. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. At June 30, 2006, the Company had not yet achieved profitable operations, has accumulated losses of $1,591,001 since its inception, has a working capital deficiency of $1,898,584 and expects to incur further losses in the development of its business, all of which casts substantial doubt about the Company's ability to continue as a going concern. The Company's ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due. The Company anticipates that additional funding will be in the form of equity financing from the sale of common shares. The Company may also seek to obtain short-term loans from the directors of the company. The Company has obtained a financing of $250,000 pursuant to a promissory note (Note 9). Note 3 ADDITIONAL ACCOUNTING POLICIES OIL AND GAS PROPERTIES The Company follows the full cost method of accounting for oil and gas operations whereby all costs of exploring for and developing oil and gas reserves are initially capitalized on a country-by-country (cost centre) basis. Such costs include land acquisition costs, geological and geophysical expenses, carrying charges on non-producing properties, costs of drilling and overhead charges directly related to acquisition and exploration activities. Costs capitalized, together with the costs of production equipment, are depleted and amortized on the unit-of-production method based on the estimated gross proved reserves. Petroleum products and reserves are converted to a common unit of measure, using 6 MCF of natural gas to one barrel of oil. Costs of acquiring and evaluating unproved properties are initially excluded from depletion calculations. These unevaluated properties are assessed periodically to ascertain whether impairment has occurred. When proved reserves are assigned or the 6 ================================================================================ property is considered to be impaired, the cost of the property or the amount of the impairment is added to costs subject to depletion calculations. Future net cash flows from proved reserves using period-end, non-escalated prices and costs, are discounted to present value and compared to the carrying value of oil and gas properties. Proceeds from a sale of petroleum and natural gas properties are applied against capitalized costs, with no gain or loss recognized, unless such a sale would alter the rate of depletion by more than 20%. Royalties paid net of any tax credits received are netted with oil and gas sales. EQUIPMENT AND DEPRECIATION Equipment is recorded at cost and depreciated over their estimated useful lives using the declining balance method. Additions are depreciated at half the annual rate in the year of acquisition. Note 4 EQUIPMENT
December 31, 2005 June 30, 2006 --------------------------------------------------- ------------------ Accumulated COST DEPRECIATION NET NET Computer equipment $ 1,015 $ - $ 1,015 $ - ============= ============= ============= =============
Note 5 OIL AND GAS PROPERTIES June 30, December 31, 2006 2005 ---- ---- Anticline Project Advance $ 1,400,000 $ - Geological consulting 44,814 - --------------- --------------- 1,444,814 - Cherokee County Project Advance 700,000 - --------------- --------------- $ 2,144,814 $ - =============== =============== i) Anticline Project On May 11, 2006, the Company entered into a Joint Operating Agreement ("JOA") with Peruvian and American companies whereby the Company acquired a 20% working interest and 18% revenue interest in an oil project located in Peru by funding the acquisition of certain equipment, for the shipment of this equipment to the project site in Peru and for the drilling, testing and evaluation of the first exploratory well on the property in the total amount of $1,650,000. After the drilling of the first well is complete, the Company will have the option whether to proceed with the project by funding the drilling, testing and evaluation of another two wells on the property for an additional $1,650,000. This additional investment will also cover the costs to install production facilities, including pipeline and loading dock, tank batteries and pumping units as required to deliver the produced oil to market. Thereafter, the Company will have the option to pay for its 20% working interest share of the development and operation of the project. 7 ================================================================================ In the event the Company and the transacting parties decide that the project is not feasible, the equipment acquired will be sold and the Company will be entitled to 67% of the proceeds. At June 30, 2006, the Company had advanced $1,400,000 towards the acquisition of the equipment and the remaining $250,000 was advanced subsequent to June 30, 2006. ii) Cherokee County Project By an assignment agreement dated June 27, 2006, the Company has agreed to acquire a working interest from a Canadian company in three separate exploratory oil and gas prospects located in Cherokee County, Texas, under three leasehold assignment agreements with a company in Texas. In consideration for the assignment, the Company has agreed to pay $700,000 within 90 days of the assignment agreement with the vendor retaining a 4% overriding royalty. The payment covers the Company's share of the estimated capital expenditures to drill and complete the first test wells on each of the three prospects. The leasehold agreement for all three prospects includes a 30% working interest before payout of initial investment of the Canadian company and a 22.5% working interest after payout, with payout determined on a per project basis. In the event that the Company fails to make the payment, the Canadian company has the option to have the rights of the agreement revert back or to receive from the Company a penalty payment in the amount of 120% of the $700,000 consideration and at its option, the amount shall be convertible into the securities of the Company at a price equal to the lowest offering price of the Company's securities to the general public during the current fiscal year. Note 6 CAPITAL STOCK - Note 8 Effective on January 5, 2001, the Company forward split its issued common stock on the basis of 1,500 new for one old. On May 25, 2004, the Company amended its authorized capital stock to 75,000,000 common shares with a par value of $0.001 per share. The number of authorized shares and the par value per share as referred to in these financial statements has been restated wherever applicable to give retroactive effect to this amendment. On February 10, 2006, the Company repurchased a total of 29,000,000 pre-forward split (116,000,000 post-forward split) common shares at $0.001 per share from the previous President of the Company by the issuance of a promissory note for $29,000 bearing interest at 8% per annum and due August 10, 2006. The Company repaid $20,000 of the promissory note on March 27, 2006, which was accepted as payment in full. Consequently the balance of the note and related interest was written off during the three months ended March 31, 2006. On February 10, 2006, the Company approved a private placement offering of 8,000,000 units at $0.25 per unit for proceeds of $2,000,000. The company will pay finders' fees totaling $150,000 for this plant. Each unit consists of one common share and one stock purchase warrant exercisable for two years into one common share at $0.30 per share. At June 30, 2006, the Company had received shares subscriptions for cash totaling $1,850,000 and accrued finders' fees totaling $140,000 ($87,500 paid at June 30, 2006). Subsequent to June 30, 2006, the Company completed the private placement offering and received the remaining $150,000 in share subscriptions (less the finders' fees of $7,500) and issued the shares. Effective on February 20, 2006, the Company forward split its issued common stock on the basis of four new for one old. The number of shares referred to in these financial statements has been restated wherever applicable to give retroactive effect on the forward stock splits. There was no effect on the Company's authorized share capital. The retroactive restatement of the issued common shares is required by the Securities and Exchange Commission's Staff Accounting Bulletin, Topic 4c. In actuality, the forward stock split, of four for one is effective after the Company's repurchase of 29,000,000 pre-forward split (116,000,000 post-forward split common shares). Consequently, the number of shares actually issued immediately prior to the split was 8,766,456 pre-forward split 8 ================================================================================ common shares (35,065,824 post-forward split common shares). The actual number of common shares, both pre-forward split and post-forward split, are less than the number of common shares authorized of 75,000,000. On March 29, 2006, the officers of the Company approved a plan of merger between the Company and Radial Energy Inc. a wholly-owned inactive subsidiary of the Company incorporated in the State of Colorado on April 10, 2006 by the Company. Under the plan of merger, the shares of Radial Energy Inc. were cancelled and the shareholders of the Company received one share of the newly-merged company for every share of BV Pharmaceutical, Inc. held. The purpose of the merger was to facilitate a name change to Radial Energy Inc. Note 7 RELATED PARTY TRANSACTIONS - Note 8 The Company incurred the following amounts charged by a former director of the Company and directors and officers of the Company pursuant to employment agreements (Note 8):
June 30, 2000 (Date of Three months ended Six months ended Inception) to June 30, June 30, June 30, 2006 2005 2006 2005 2006 ---- ---- ---- ---- ---- Consulting fees $ - $ - $ 9,000 $ - $ 9,000 Executive compensation and benefits 1,259,800 - 1,259,800 - 1,259,800 ------------- ---------- ------------ ----------- -------------- $ 1,259,800 $ - $ 1,268,800 $ - $ 1,268,800 =========== ========== ============ =========== ==============
As at June 30, 2006, due to related parties consists of executive compensation and benefits owing to directors and officers of the Company. These amounts are unsecured, non-interest bearing and have no specific terms of repayment. Note 8 COMMITMENTS - Note 9 i) By an employment agreement dated March 10, 2006 with the President of the Company, and effective April 1, 2006, the Company will pay $180,000 per year plus annual bonuses as determined by the Board of Directors of the Company. In addition, the President will receive a $400 per month auto allowance, $800 per month insurance reimbursement and a minimum $1,000 per month for rental and administrative expenses to maintain an office. The Company may also issue stock options to the President as deemed appropriate by the Board of Directors. The term of the agreement is 3 years. ii) By an employment agreement dated June 1, 2006, with the Chief Operating Officer of the Company, and effective June 1, 2006, the Company will pay $132,000 per year plus annual bonuses as determined by the Board of Directors of the Company. In addition, the Chief Operating Officer will receive a $400 per month auto allowance, $800 per month reimbursement of the costs of the medical insurance coverage and a minimum $1,000 per month for rental and administrative expenses to maintain an office. The Company may also issue stock options to the Chief Operating Officer as deemed appropriate by the Board of Directors. The term of the agreement is 3 years. In addition the Company agreed to issue 1,500,000 common shares for additional services to be provided to the Company valued at $1,200,000. As at June 30, 2006, this amount has been included in due to related parties. These shares were issued subsequent to June 30, 2006. iii)By a business consulting agreement dated April 1, 2006, the Company will pay $10,000 per month for investor relations services for a term of two years. 9 ================================================================================ Note 9 SUBSEQUENT EVENTS - Notes 6 and 8 Subsequent to June 30, 2006, the Company received $250,000 pursuant to a promissory note. The note is unsecured, bears interest at 12% per annum and will mature on July 12, 2007. Note 10 NON-CASH TRANSACTION Investing and financing activities that do not have a direct impact on current cash flows are excluded from the statements of cash flows. During the period ended June 30, 2006, the Company repurchased 116,000,000 common shares by the issuance of a promissory note for $29,000. This transaction was excluded from the statements of cash flows. Note 11 DISCONTINUED OPERATIONS During the six months ended June 30, 2006, concurrent with the name change of the Company (Note 6), the Company announced its intention to shift its direction of business towards the acquisition, exploration and development of oil and gas projects. Previously, the Company's business was the collection, analysis and banking of personal DNA data. Assets, liabilities and results of operations from the Company's previous business have been disclosed as discontinued operations for the six months ended June 30, 2006 and prior periods have been restated to conform with the current presentation. The balance sheets include the following amounts related to discontinued operations:
June 30, December 31, 2006 2005 ---- ---- Current assets of discontinued operations: Accounts receivable $ - $ 1,000 =============== =============== Current liabilities of discontinued operations: Unearned revenue $ - $ 7,500 =============== ===============
Net income (loss) from discontinued operations are as follows:
June 30, 2000 (Date of Three months ended Six months ended Inception) to June 30, June 30, June 30, 2006 2005 2006 2005 2006 ---- ---- ---- ---- ---- Revenues License fees $ - $ - $ - $ - $ 24,000 Other income - - 8,500 480 10,180 ------------ ------------ ----------- ------------ -------------- - - 8,500 480 34,180 ------------ ------------ ----------- ------------ -------------- Administrative expenses Bad debt - - - - 1,000 Intellectual property acquisition costs - - - - 50,000 Marketing research And development - - - - 10,000 ------------ ------------ ----------- ------------ -------------- - - - - 61,000 ------------ ------------ ----------- ------------ -------------- Income (loss) from discontinued operations $ - $ - $ 8,500 $ 480 $ (26,820) ============ ============ =========== ============ ==============
10 ================================================================================ Cash flows from discontinued operations are as follows:
June 30, 2000 (Date of Inception) to Six months ended June 30, June 30, 2006 2005 2006 ---- ---- ---- Net income (loss) from discontinued operations $ 8,500 $ 480 $ (26,820) Changes in non-cash working capital balances related to operations Accounts receivable 1,000 - - Unearned revenue (7,500) 7,500 - ------------- ------------ --------------- Increase (decrease) in cash from discontinued operations $ 2,000 $ 7,980 $ (26,820) ============= ============ =================
11 ================================================================================ ITEM 2. MANAGEMENT'S PLAN OF OPERATION CAUTIONARY STATEMENT You should read the following discussion and analysis in conjunction with the financial statements and related notes thereto contained in Part I, Item 1 of this report. The information contained in this Quarterly Report on Form 10-QSB is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this report and in our other reports filed with the Securities and Exchange Commission, or SEC, that discuss our business in greater detail. This report contains forward-looking statements within the meaning of the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995. Reference is made in particular to the description of our plans and objectives for future operations, assumptions underlying such plans and objectives, and other forward-looking statements included in this report. Such statements may be identified by the use of forward-looking terminology such as "may," "will," "expect," "believe," "estimate," "anticipate," "intend," "continue," or similar terms, variations of such terms or the negative of such terms. Such statements are based on management's current expectations and are subject to a number of factors and uncertainties, which could cause actual results to differ materially from those described in the forward-looking statements. Such statements address future events and conditions concerning, among others, capital expenditures, earnings, litigation, regulatory matters, liquidity and capital resources and accounting matters. Actual results in each case could differ materially from those anticipated in such statements by reason of factors such as future economic conditions, changes in consumer demand, legislative, regulatory and competitive developments in markets in which we operate, results of litigation and other circumstances affecting anticipated revenues and costs. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based. As used in this Form 10-QSB, "we," "us" and "our" refer to Radial Energy Inc., which is also sometimes referred to as the "Company." CORPORATE HISTORY Our company was incorporated in the State of Nevada on June 30, 2000, under the name of "All Printer Supplies.com." On April 17, 2003, we changed our name to "BV Pharmaceuticals, Inc." and became a provider of information and services in the areas of personal DNA collection, analysis, profiling, banking and DNA profile database maintenance. Effective as of April 3, 2006, through a statutory merger with our wholly owned subsidiary in which we were the surviving corporation, we changed our name to "Radial Energy Inc." GENERAL We are a development stage company that has not generated revenues from our current operations in the oil and gas industry. There is no historical financial information about Radial Energy upon which to base an evaluation of our performance. We cannot guarantee we will be successful in our new core business or in any business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources and in the exploration of oil and gas reserves. We have no assurance that future financing will be available on acceptable terms. If financing is not available on satisfactory terms, we may be unable to continue with our current business plan. If equity financing is 12 ================================================================================ available to us on acceptable terms, it could result in additional dilution to our existing stockholders. BUSINESS In March 2006, we began a new business plan concentrating on the acquisition, exploration, development, and production of domestic and international oil and gas projects. Radial Energy's primary focus is on identifying previously drilled but subsequently abandoned wells that encountered and/or tested live oil or natural gas indicating the presence of marketable hydrocarbons, reservoir, and trap. As of the date of filing of this report, we have acquired working interests in projects in South America and in Texas and are continuing to explore other opportunities in North and Latin America. BLOCK 100, HUAYA ANTICLINE, PERU Pursuant to a Letter of Intent dated April 19, 2006, and a related Joint Operating Agreement effective as of May 11, 2006, we have acquired rights to a 20% working interest and 18% revenue interest in the Huaya Anticline Project, Block 100 oil prospect located in the Ucayali Basin, Peru. The project encompasses a structural closure of approximately 500 acres, with the potential for up to 41 well locations. We acquired the interest in the Block 100 project from Ziegler-Peru, Inc., an American company based in Texas, which sold the interest to us and will retain a 10 percent interest. The majority interest is owned by the concession-holder, Compania Consultora de Petroleo, S.A., a well-known consulting company based in Lima, Peru. While Compania Consultora is the operator of record for the concession, Ziegler-Peru will act as contract driller and operator for the block. As consideration for this interest, which is only for one well, we agreed to pay a total of $1,650,000, which funds also cover the acquisition of certain equipment to be used for drilling, testing, and evaluation of the first well. As of the date of the filing of this report, we have paid in full our total financial obligation for the first well. After drilling of the first well is complete, we will have the option to proceed with the project by funding the drilling, testing and evaluation of another two wells on the property for an additional $1,650,000, which funds are expected to cover the acquisition and installation of all production facilities required to bring the hydrocarbons produced to market. Thereafter, we will have the option to pay for our 20% working interest share of the development and operation of the project. In the event Radial Energy and the other participating parties decide that the project is not feasible, the equipment acquired will be sold and we will be entitled to 67% of the proceeds. A third-party geological assessment conducted by Gustavson Associates of Boulder, Colorado, a consultant contracted by Radial Energy, estimates that the Block 100 project, if successful, may have recoverable in place reserves between 15 and 29.5 million barrels of oil (MMBO). While management believes the prospect is a low-risk opportunity to discover and develop a field with production potential, there can be no assurance the prospect will achieve such potential. The first well is expected to be drilled by the end of the third quarter of 2006, with production anticipated by year end. CHEROKEE COUNTY, TEXAS Pursuant to an Assignment Agreement dated June 27, 2006, we acquired all of the rights and obligations of Pin Petroleum Partners Ltd., a Canadian company, under three leasehold assignment agreements to properties located in Cherokee County, Texas (collectively, the "Cherokee Agreements") with Skyline Energy LLC, a company based in Texas. The prospects involve three separate exploratory oil and gas prospects, known as the Junction Prospect, the Northwest Jacksonville Prospect, and the Highway 79 Prospect. As consideration for the assignment, we agreed to pay Pin Petroleum Partners a total of $700,000 within 13 ================================================================================ 90 days of the assignment along with a four percent overriding royalty interest from our share of net revenue interest. Prior to the assignment, Pin Petroleum Partners had provided to the operator of the prospects, MLC Operating, LP, $443,790 to cover the original estimates for the drilling and completion costs for the initial well on each of the three prospects. This pre-payment by Pin Petroleum Partners has been assigned to Radial Energy. The funds will cover our share of the estimated capital expenditures to drill the first test wells on each of the three prospects. If one or more of these initial wells results in a successful discovery, the operator may request additional funds to cover completion costs if the original funds do not cover the current costs of completion. For each of the three prospects, we hold a 30% working interest before payout of initial investment, and a 22.5% working interest after payout, with payout determined on a project basis. The Junction Prospect is located in northwestern Cherokee County, approximately five miles southwest of Jacksonville, Texas. This oil and natural gas prospect's leasehold covers approximately 500 acres. The Northwest Jacksonville Prospect leasehold covers approximately 350 acres located in northern Cherokee County. The Highway 79 Prospect is located in northwestern Cherokee County, one mile west of Jacksonville, Texas, and the prospect leases cover approximately 340 net acres. While calculations based on preliminary geological analysis, reservoir studies and interpretation estimate that the prospects have oil and natural gas production potential, there is no assurance that any such potential will be achieved. We anticipate that drilling and testing in the prospects will begin during the third quarter of 2006. ONGOING ACTIVITIES Management is currently investigating and in some cases is negotiations with various parties in both the U.S. and Colombia to acquire both producing and prospective assets, but as of the date of this report had not reached formal agreement on any of these opportunities. DESCRIPTION OF PROPERTY The agreements relating to the Block 100 prospect entitle us to a 20% working interest in oil and gas leases covering approximately 500 acres in the Huaya Anticline Project, Block 100 oil prospect located in the Ucayali Basin, Peru. The leases have a primary term of 30 years from and after March 2004. Pursuant to the Assignment Agreement and our resulting rights under the Cherokee Agreements, for each of the Junction Prospect, the Northwest Jacksonville Prospect, and the Highway 79 Prospect, we hold a 30% working interest before payout of initial investment, and a 22.5% working interest after payout. The leases have primary terms of three years and are renewable so long as drilling operations occur during the primary terms. Our principal office is located at 1313 East Maple Street, Suite 223, Bellingham, Washington 98225. The office is part of a new office complex that offers a full range of office services. We rent a single office on a month-to-month lease at a rate of approximately $800 per month in rent and incidentals. PLAN OF OPERATION Our business plan is to identify, acquire, and develop low-risk oil and gas exploration and development opportunities throughout North and South America, with a primary focus on identifying previously drilled but subsequently abandoned exploratory wells that encountered and/or tested live oil or natural gas. We are flexible in our approach and will pursue opportunities as they arise both in North America and in countries throughout Latin America that are friendly to foreign investments, where factors such as lower production taxes and positive government incentives provide for significant opportunities with 14 ================================================================================ low risk. We plan to become the operator of record in the majority of our future projects. To date, execution of our business plan has largely focused on acquiring prospective rights to oil and gas leases and properties. We intend to establish a going forward exploration and development plan. Since inception, we have funded our operations primarily from the private placement of common stock and warrants. Although we expect that, during the next 12 months, our operating capital needs will be met from our current economic resources and by additional private capital stock transactions, there can be no assurance that funds required will be available on terms acceptable to us or at all. Without additional financing, we expect that our current working capital will be able to fund our operations through September 2006. If we are unable to raise sufficient funds on terms acceptable to us, we may be unable to complete our business plan. If equity financing is available to us on acceptable terms, it could result in additional dilution to our stockholders. As of the date of the filing of this report, we have two full-time employees, our Chief Executive Officer and our Chief Operating Officer. We do not expect any material changes in the number of employees over the next 12 months. However, if we are successful in our initial and any subsequent drilling programs, we may retain additional employees. We have relied on, and will continue to rely on, outside consultants for services. COMPETITORS The oil and gas industry is intensely competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial, and operational resources and staffs. Accordingly, there is a high degree of competition for desirable oil and gas leases, suitable properties for drilling operations, and necessary drilling equipment, as well as for access to funds. There are other competitors that have operations in South America and the Texas area and the presence of these competitors could adversely affect our ability to acquire additional leases and rights to properties. GOVERNMENT REGULATIONS Our oil and gas operations are subject to various United States federal, state, and local governmental regulations. Matters subject to regulation include discharge permits for drilling operations, drilling and abandonment bonds, reports concerning operations, the spacing of wells, and pooling of properties and taxation. From time to time, regulatory agencies have imposed price controls and limitations on production by restricting the rate of flow of oil and gas wells below actual production capacity in order to conserve supplies of oil and gas. The production, handling, storage, transportation and disposal of oil and gas, by-products thereof, and other substances and materials produced or used in connection with oil and gas operations are also subject to regulation under federal, state, provincial and local laws and regulations relating primarily to the protection of human health and the environment. To date, expenditures related to complying with these laws, and for remediation of existing environmental contamination, have not been significant in relation to the results of operations of our company. The requirements imposed by such laws and regulations are frequently changed and subject to interpretation, and we are unable to predict the ultimate cost of compliance with these requirements or their effect on our operations. RISK FACTORS Ownership of our common stock involves a high degree of risk. You should consider carefully the factors set forth below, as well as other information contained in this quarterly report. THERE IS NO ASSURANCE THAT WE WILL OPERATE PROFITABLY OR WILL GENERATE POSITIVE CASH FLOW IN THE FUTURE. 15 ================================================================================ If we cannot generate positive cash flows in the future, or raise sufficient financing to continue our normal operations, then we may be forced to scale down or even close our operations. In particular, additional capital may be required in the event that: o drilling and completion costs for further wells increase beyond our expectations; or o we encounter greater costs associated with general and administrative expenses or offering costs. The occurrence of any of the aforementioned events could adversely affect our ability to meet our business plans. We will depend almost exclusively on outside capital to pay for the continued exploration and development of our properties. Such outside capital may include the sale of additional stock and/or commercial borrowing. Capital may not continue to be available if necessary to meet these continuing exploration and development costs or, if the capital is available, that it will be on terms acceptable to us. The issuance of additional equity securities by us would result in a significant dilution in the equity interests of our current stockholders. Obtaining commercial loans, assuming those loans would be available, will increase our liabilities and future cash commitments. If we are unable to obtain financing in the amounts and on terms deemed acceptable to us, we may be unable to continue our business and as a result may be required to scale back or cease operations for our business, the result of which would be that our stockholders would lose some or all of their investment. A DECLINE IN THE PRICE OF OUR COMMON STOCK COULD AFFECT OUR ABILITY TO RAISE FURTHER WORKING CAPITAL AND ADVERSELY IMPACT OUR OPERATIONS. A prolonged decline in the price of our common stock could result in a reduction in the liquidity of our common stock and a reduction in our ability to raise capital. Because our operations have been primarily financed through the sale of equity securities, a decline in the price of our common stock could be especially detrimental to our liquidity and our continued operations. Any reduction in our ability to raise equity capital in the future would force us to reallocate funds from other planned uses and would have a significant negative effect on our business plans and operations, including our ability to develop new projects and continue our current operations. If our stock price declines, we may not be able to raise additional capital or generate funds from operations sufficient to meet our obligations. WE HAVE A LIMITED OPERATING HISTORY, AND IF WE ARE NOT SUCCESSFUL IN CONTINUING TO GROW OUR BUSINESS, THEN WE MAY HAVE TO SCALE BACK OR EVEN CEASE OUR ONGOING BUSINESS OPERATIONS. Our company has a limited operating history and must be considered in the development stage. The success of the company is significantly dependent on a successful acquisition, drilling, completion and production program. Our company's operations will be subject to all the risks inherent in the establishment of a developing enterprise and the uncertainties arising from the absence of a significant operating history. We may be unable to locate recoverable reserves or operate on a profitable basis. We are in the development stage and potential investors should be aware of the difficulties normally encountered by enterprises in the development stage. If our business plan is not successful, and we are not able to operate profitably, investors may lose some or all of their investment in our company. 16 ================================================================================ OUR COMPANY'S INDEPENDENT AUDITORS HAVE EXPRESSED A RESERVATION THAT OUR COMPANY CAN CONTINUE AS A GOING CONCERN. Our company's operations have been limited to general administrative operations and a limited amount of exploration. Our company's ability to continue as a going concern is dependent on our ability to raise additional capital to fund future operations and ultimately to attain profitable operations. Accordingly, these factors raise substantial doubt as to the company's ability to continue as a going concern. TRADING OF OUR STOCK MAY BE RESTRICTED BY THE SEC'S "PENNY STOCK" REGULATIONS WHICH MAY LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL OUR STOCK. The U.S. Securities and Exchange Commission has adopted regulations which generally define "penny stock" to be any equity security that has a market price (as defined) less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exceptions. Our securities are covered by the penny stock rules, which impose additional sales practice requirements on broker-dealers who sell to persons other than established customers and "accredited investors." The term "accredited investor" refers generally to institutions with assets in excess of $5,000,000 or individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000 or $300,000 jointly with their spouse. The penny stock rules require a broker-dealer, prior to a transaction in a penny stock not otherwise exempt from the rules, to deliver a standardized risk disclosure document in a form prepared by the SEC which provides information about penny stocks and the nature and level of risks in the penny stock market. The broker-dealer also must provide the customer with current bid and offer quotations for the penny stock, the compensation of the broker-dealer and its salesperson in the transaction and monthly account statements showing the market value of each penny stock held in the customer's account. The bid and offer quotations, and the broker-dealer and salesperson compensation information, must be given to the customer orally or in writing prior to effecting the transaction and must be given to the customer in writing before or with the customer's confirmation. In addition, the penny stock rules require that prior to a transaction in a penny stock not otherwise exempt from these rules, the broker-dealer must make a special written determination that the penny stock is a suitable investment for the purchaser and receive the purchaser's written agreement to the transaction. These disclosure requirements may have the effect of reducing the level of trading activity in the secondary market for the stock that is subject to these penny stock rules. Consequently, these penny stock rules may affect the ability of broker-dealers to trade our securities. We believe that the penny stock rules discourage investor interest in and limit the marketability of, our common stock. NASD SALES PRACTICE REQUIREMENTS MAY ALSO LIMIT A STOCKHOLDER'S ABILITY TO BUY AND SELL OUR STOCK. In addition to the "penny stock" rules described above, the NASD has adopted rules that require that in recommending an investment to a customer, a broker-dealer must have reasonable grounds for believing that the investment is suitable for that customer. Prior to recommending speculative low priced securities to their non-institutional customers, broker-dealers must make reasonable efforts to obtain information about the customer's financial status, tax status, investment objectives and other information. Under interpretations of these rules, the NASD believes that there is a high probability that speculative low priced securities will not be suitable for at least some customers. The NASD requirements make it more difficult for broker-dealers to recommend that their customers buy our common stock, which may limit your ability to buy and sell our stock and have an adverse effect on the market for our shares. TRADING IN OUR COMMON SHARES ON THE OTC BULLETIN BOARD IS LIMITED AND SPORADIC MAKING IT DIFFICULT FOR OUR SHAREHOLDERS TO SELL THEIR SHARES OR LIQUIDATE THEIR INVESTMENTS. 17 ================================================================================ Our common shares are currently quoted on the OTC Bulletin Board. The trading price of our common shares has been subject to wide fluctuations. Trading prices of our common shares may fluctuate in response to a number of factors, many of which will be beyond our control. The stock market has generally experienced extreme price and volume fluctuations that have often been unrelated or disproportionate to the operating performance of companies with no current business operation. There can be no assurance that trading prices and price earnings ratios previously experienced by our common shares will be matched or maintained. These broad market and industry factors may adversely affect the market price of our common shares, regardless of our operating performance. In the past, following periods of volatility in the market price of a company's securities, securities class-action litigation has often been instituted. Such litigation, if instituted, could result in substantial costs for us and a diversion of management's attention and resources. BECAUSE OF THE EARLY STAGE OF DEVELOPMENT AND THE NATURE OF OUR BUSINESS, OUR SECURITIES ARE CONSIDERED HIGHLY SPECULATIVE. Our securities must be considered highly speculative, generally because of the nature of our business and the early stage of its development. We are engaged in the business of exploring and, if warranted, developing commercial reserves of oil and gas. Our properties are in the exploration stage only and are without known reserves of oil and gas. Accordingly, we have not generated any revenues nor have we realized a profit from our operations to date and there is little likelihood that we will generate any revenues or realize any profits in the short term. Any profitability in the future from our business will be dependent upon locating and developing economic reserves of oil and gas, which itself is subject to numerous risk factors as set forth herein. Since we have not generated any revenues, we will have to raise additional monies through the sale of our equity securities or debt in order to continue our business operations. AS OUR PROPERTIES ARE IN THE EXPLORATION AND DEVELOPMENT STAGE THERE CAN BE NO ASSURANCE THAT WE WILL ESTABLISH COMMERCIAL DISCOVERIES ON OUR PROPERTIES. Exploration for economic reserves of oil and gas is subject to a number of risk factors. Few properties that are explored are ultimately developed into producing oil and/or gas wells. Our properties are in the exploration stage only and are without proven reserves of oil and gas. We may not establish commercial discoveries on any of our properties. THE POTENTIAL PROFITABILITY OF OIL AND GAS VENTURES DEPENDS UPON FACTORS BEYOND THE CONTROL OF OUR COMPANY. The potential profitability of oil and gas properties is dependent upon many factors beyond our control. For instance, world prices and markets for oil and gas are unpredictable, highly volatile, potentially subject to governmental fixing, pegging, controls, or any combination of these and other factors, and respond to changes in domestic, international, political, social, and economic environments. Additionally, due to worldwide economic uncertainty, the availability and cost of funds for production and other expenses have become increasingly difficult, if not impossible, to project. These changes and events will likely materially affect our financial performance. Adverse weather conditions can also hinder drilling operations. A productive well may become uneconomic in the event water or other deleterious substances are encountered which impair or prevent the production of oil and/or gas from the well. In addition, production from any well may be unmarketable if it is impregnated with water or other deleterious substances. The marketability of oil and gas which may be acquired or discovered will be affected by numerous factors beyond our control. These factors include the proximity and capacity of oil and gas pipelines and processing equipment, market fluctuations of prices, 18 ================================================================================ taxes, royalties, land tenure, allowable production and environmental protection. These factors cannot be accurately predicted and the combination of these factors may result in our company not receiving an adequate return on invested capital. COMPETITION IN THE OIL AND GAS INDUSTRY IS HIGHLY COMPETITIVE AND THERE IS NO ASSURANCE THAT WE WILL BE SUCCESSFUL IN ACQUIRING THE LEASES. The oil and gas industry is intensely competitive. We compete with numerous individuals and companies, including many major oil and gas companies, which have substantially greater technical, financial and operational resources and staffs. Accordingly, there is a high degree of competition for desirable oil and gas leases, suitable properties for drilling operations and necessary drilling equipment, as well as for access to funds. We cannot predict if the necessary funds can be raised or that any projected work will be completed. Our budget anticipates our acquisition of additional acreage in Nevada. This acreage may not become available or if it is available for leasing, that we may not be successful in acquiring the leases. There are other competitors that have operations in the Nevada area and the presence of these competitors could adversely affect our ability to acquire additional leases. THE MARKETABILITY OF NATURAL RESOURCES WILL BE AFFECTED BY NUMEROUS FACTORS BEYOND OUR CONTROL WHICH MAY RESULT IN US NOT RECEIVING AN ADEQUATE RETURN ON INVESTED CAPITAL TO BE PROFITABLE OR VIABLE. The marketability of natural resources which may be acquired or discovered by us will be affected by numerous factors beyond our control. These factors include market fluctuations in oil and gas pricing and demand, the proximity and capacity of natural resource markets and processing equipment, governmental regulations, land tenure, land use, regulation concerning the importing and exporting of oil and gas and environmental protection regulations. The exact effect of these factors cannot be accurately predicted, but the combination of these factors may result in us not receiving an adequate return on invested capital to be profitable or viable. OIL AND GAS OPERATIONS ARE SUBJECT TO COMPREHENSIVE REGULATION WHICH MAY CAUSE SUBSTANTIAL DELAYS OR REQUIRE CAPITAL OUTLAYS IN EXCESS OF THOSE ANTICIPATED CAUSING AN ADVERSE EFFECT ON OUR COMPANY. Oil and gas operations are subject to federal, state, and local laws relating to the protection of the environment, including laws regulating removal of natural resources from the ground and the discharge of materials into the environment. Oil and gas operations are also subject to federal, state, and local laws and regulations which seek to maintain health and safety standards by regulating the design and use of drilling methods and equipment. Various permits from government bodies are required for drilling operations to be conducted; no assurance can be given that such permits will be received. Environmental standards imposed by federal, provincial, or local authorities may be changed and any such changes may have material adverse effects on our activities. Moreover, compliance with such laws may cause substantial delays or require capital outlays in excess of those anticipated, thus causing an adverse effect on us. Additionally, we may be subject to liability for pollution or other environmental damages which it may elect not to insure against due to prohibitive premium costs and other reasons. To date we have not been required to spend any material amount on compliance with environmental regulations. However, we may be required to do so in future and this may affect our ability to expand or maintain our operations. EXPLORATION AND PRODUCTION ACTIVITIES ARE SUBJECT TO CERTAIN ENVIRONMENTAL REGULATIONS WHICH MAY PREVENT OR DELAY THE COMMENCEMENT OR CONTINUANCE OF OUR OPERATIONS. In general, our exploration and production activities are subject to certain federal, state and local laws and regulations relating to environmental quality and pollution control. Such laws and regulations increase the costs of these activities and may prevent or delay the commencement or continuance of a given operation. Compliance with these laws and regulations has not had a material effect on our operations or financial condition to date. Specifically, 19 ================================================================================ we are subject to legislation regarding emissions into the environment, water discharges and storage and disposition of hazardous wastes. In addition, legislation has been enacted which requires well and facility sites to be abandoned and reclaimed to the satisfaction of state authorities. However, such laws and regulations are frequently changed and we are unable to predict the ultimate cost of compliance. Generally, environmental requirements do not appear to affect us any differently or to any greater or lesser extent than other companies in the industry. We believe that our operations comply, in all material respects, with all applicable environmental regulations. We are not fully insured against all possible environmental risks. EXPLORATORY DRILLING INVOLVES MANY RISKS AND WE MAY BECOME LIABLE FOR POLLUTION OR OTHER LIABILITIES, WHICH MAY HAVE AN ADVERSE EFFECT ON OUR FINANCIAL POSITION. Drilling operations generally involve a high degree of risk. Hazards such as unusual or unexpected geological formations, power outages, labor disruptions, blow-outs, sour gas leakage, fire, inability to obtain suitable or adequate machinery, equipment or labor, and other risks are involved. We may become subject to liability for pollution or hazards against which it cannot adequately insure or which it may elect not to insure. Incurring any such liability may have a material adverse effect on our financial position and operations. ANY CHANGE TO GOVERNMENT REGULATION/ADMINISTRATIVE PRACTICES MAY HAVE A NEGATIVE IMPACT ON OUR ABILITY TO OPERATE AND OUR PROFITABILITY. The laws, regulations, policies or current administrative practices of any government body, organization or regulatory agency in the United States or any other jurisdiction, may be changed, applied or interpreted in a manner which will fundamentally alter the ability of our company to carry on our business. The actions, policies or regulations, or changes thereto, of any government body or regulatory agency, or other special interest groups, may have a detrimental effect on us. Any or all of these situations may have a negative impact on our ability to operate and/or our profitably. OUR BYLAWS CONTAIN PROVISIONS INDEMNIFYING OUR OFFICERS AND DIRECTORS AGAINST ALL COSTS, CHARGES AND EXPENSES INCURRED BY THEM. Our Bylaws contain provisions with respect to the indemnification of our officers and directors against all costs, charges and expenses, including an amount paid to settle an action or satisfy a judgment, actually and reasonably incurred by him, including an amount paid to settle an action or satisfy a judgment in a civil, criminal or administrative action or proceeding to which he is made a party by reason of his being or having been one of our directors or officers. INVESTORS' INTERESTS IN OUR COMPANY WILL BE DILUTED AND INVESTORS MAY SUFFER DILUTION IN THEIR NET BOOK VALUE PER SHARE IF WE ISSUE ADDITIONAL SHARES OR RAISE FUNDS THROUGH THE SALE OF EQUITY SECURITIES. In the event that we are required to issue any additional shares or enter into private placements to raise financing through the sale of equity securities, investors' interests in our company will be diluted and investors may suffer dilution in their net book value per share depending on the price at which such securities are sold. If we issue any such additional shares, such issuances also will cause a reduction in the proportionate ownership and voting power of all other shareholders. Further, any such issuance may result in a change in our control. 20 ================================================================================ OUR BYLAWS DO NOT CONTAIN ANTI-TAKEOVER PROVISIONS, WHICH COULD RESULT IN A CHANGE OF OUR MANAGEMENT AND DIRECTORS IF THERE IS A TAKE-OVER OF OUR COMPANY. We do not currently have a shareholder rights plan or any anti-takeover provisions in our Bylaws. Without any anti-takeover provisions, there is no deterrent for a take-over of our company, which may result in a change in our management and directors. RESULTS OF OPERATIONS FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2006 AND 2005 From inception to June 30, 2006, we had a loss of $1,591,001. Of this amount, $1,396,529 was generated in the three-month period ended June 30, 2006 and $1,420,031 was generated in the six-month period ended June 30, 2006, as compared to $7,130 and $21,586, respectively, for the comparable periods in 2005. Administrative expenses increased from $7,130 for the three-month period ended June 30, 2005 to $1,396,529 for the comparable period in 2006 and increased from $22,066 for the six-month period ended June 30, 2005 to $1,437,938 for the same period in 2006. The costs expended for the three and six months ended in 2006 include $15,564 and $29,518, respectively, for consulting fees; $31,657 and $41,657, respectively, for investor relations services; and $10,431 and $15,852, respectively, for travel and related costs. In addition, for the six months ended June 30, 2006, we expended $8,500 in administrative fees, $1,259,800 in executive compensation and benefits, $29,150 in marketing management services, and $3,321 in rent for office space. None of the aforementioned expenses were expended during the comparable periods in 2005. LIQUIDITY AND CAPITAL RESOURCES As of June 30, 2006, our total assets were $2,240,623, which included cash balance of $55,259 and prepaid expenses of $39,535. In addition, it included $2,144,814 we invested in the Block 100 project and the Cherokee County project. Our total liabilities were $1,993,378, all of which were current, resulting in a deficiency in working capital of $1,898,584. As of December 31, 2005, our total assets were $2,211, all of which were current, and our total liabilities were $15,935. The increase in total assets is a result of an increase in cash from the sale of our equity units as part of a private placement which commenced in February 2006. During the six-month period ended June 30, 2006, we have received subscriptions for a total of 7,400,000 units from which we received total cash proceeds of $1,850,000. Each unit consisted of one share of our common stock and one stock purchase warrant exercisable for two years into one share of common stock at $0.30 per share. For a discussion on our investments to date with respect to our current exploratory projects, see also the discussion in the Business section above. Despite our negative cash flow from operating activities of $711,723 for the six-month period ended June 30, 2006 and our investment and costs associated with our oil and gas exploration participations of $2,145,829, we have been able to obtain additional operating capital through private equity funding sources. Management's plan includes the continued development and eventual implementation of our business plan as discussed in the Plan of Operation section above. We have relied upon equity funding since inception. As of the date of this report, we have yet to generate any revenues from operations of our new core business. From inception to June 30, 2006, we have accumulated losses of $1,591,001 and expect to incur further losses in the development of our business, all of which casts doubt about Radial Energy's ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to generate future profitable operations and/or to obtain the necessary financing to meet our obligations and repay our liabilities arising from normal business operations when they become due. 21 ================================================================================ OFF-BALANCE SHEET ARRANGEMENTS We have no off-balance sheet arrangements at June 30, 2006. ITEM 3. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE CONTROLS AND PROCEDURES Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and our principal financial officer concluded that, as of the end of the period covered by this quarterly report, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our chief executive officer and chief financial officer, to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods prescribed by the SEC. CHANGES IN INTERNAL CONTROLS There were no significant changes in our internal controls or in other factors that could materially affect these controls subsequent to the evaluation date. We have not identified any significant deficiencies or material weaknesses in our internal controls, and therefore there were no corrective actions taken. 22 ================================================================================ PART II--OTHER INFORMATION ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS From March 14, 2006 through June 2006, we sold to investors pursuant to subscription agreements an aggregate of 7,400,000 units (each, a "Unit," and collectively, the "Units"), consisting of shares of our common stock and warrants to purchase our common stock in a private placement offering (the "Private Placement"). Each Unit consisted of one share of common stock and a warrant to purchase one share of common stock. The purchase price was $0.25 per Unit. The warrants have an exercise period of two years and an exercise price of $0.30 per share. As of June 30, 2006, we have received subscriptions for 7,400,000 Units and total cash proceeds of $1,850,000. The Private Placement has a minimum offering amount of $100,000 and a maximum offering amount of $2,000,000, which terms were previously approved by the Company's board of directors in February 2006, as previously disclosed in the Company's Form 8-K filed on February 17, 2006 and which is incorporated herein by reference. Since June 30, 2006, the Company sold an additional 600,000 Units for a total of $150,000 and concluded the Private Placement. In connection with the Private Placement, we paid an aggregate of $147,500 as finders' fee. The securities sold by Radial Energy in the Private Placement were exempt from registration under the Securities Act of 1933, as amended, pursuant to Regulation S promulgated thereunder and pursuant to the exemption from provided by Section 4(2) of the Securities Act for issuances not involving a public offering. ITEM 5. OTHER INFORMATION As previously reported in our Form 8-K filed on April 21, 2006, which disclosure is incorporated herein by reference, on April 19, 2006, Radial Energy entered into a Letter of Intent with Zeigler-Peru, Inc. in connection with the Huaya Anticline Project, Block 100 oil prospect located in the Ucayali Basin, Peru. Pursuant to the Letter of Intent and a related Joint Operating Agreement effective as of May 11, 2006, we have acquired rights to a 20% working interest and 18% revenue interest in the Block 100 project. This acquisition constitutes an acquisition of a significant amount of assets for Radial Energy. Item 2 of this quarterly report describes in more detail the Block 100 project and the terms of the acquisition. In addition, Item 2 of this quarterly report also describes our subsequent acquisition of the Cherokee County projects and the terms of the acquisition. In our Form 8-K filed on April 21, 2006, we also reported the repurchase by Radial Energy on February 10, 2006 of 29,000,000 shares, on a pre-split basis, of our common stock held by Art Bandenieks, a former director, and our former President and Secretary. The shares repurchased were cancelled and no longer outstanding. Prior to the repurchase, Mr. Bandenieks was the holder of record of 30,543,000 shares, on a pre-split basis, of our common stock, representing 80.9% of Radial Energy's then outstanding capital stock. As of immediately after the repurchase, Mr. Bandenieks's ownership of the company's common stock was reduced to 1,543,000 shares, on a pre-split basis, which represented 4.1% of our then outstanding capital stock. The repurchase resulted in a change in control of Radial Energy, as Mr. Bandenieks's ownership of the company's then outstanding capital stock was reduced from a majority position of 80.9% to 4.1 percent. As previously reported on our Form 8-K filed on April 21, 2006, Mr. Bandenieks resigned as a director, and as our President and Secretary, on February 10, 2006. G. Leigh Lyons was appointed as director, and as our President and Secretary, to replace the vacancies created by Mr. Bandenieks's 23 ================================================================================ resignation. At that time, our Board of Directors was then comprised of Mr. Lyons, then 47 years old, and Lee Southern. We previously provided a description of Mr. Lyons's business experience and other relevant information related to his appointment in the Form 8-K filed on April 21, 2006, which is incorporated herein by reference. Subsequently, on April 17, 2006, Lee Southern resigned as a director, and as our Treasurer and Chief Financial Officer. Mr. Lyons was then appointed as Treasurer and Chief Financial Officer of the company, and the vacancy on the Board of Directors created by Mr. Southern's resignation remained open until a suitable replacement was found. Subsequently, on June 1, 2006, Omar Michael Hayes was appointed to serve as our Chief Operating Officer. At the same time, Mr. Hayes, then 41 years old, was also appointed as a director, filling the vacancy created by Mr. Southern's resignation. We previously provided a description of Mr. Hayes's business experience and other relevant information related to his appointment in the Form 8-K filed on June 7, 2006, which is incorporated herein by reference. ADDITIONAL INFORMATION PURSUANT TO ITEM 2.01(F) OF FORM 8-K AND ITEM 5.01(A)(8) IS PROVIDED BELOW: For a detailed description of Radial Energy's business and property reflecting the consummation of the acquisition of the assets described above and as of after the change in control, please see the discussion under the Business section in Item 2 of this quarterly report. Similarly, our Plan of Operation and Risk Factors are also discussed in Item 2 of this quarterly report. COMPENSATION OF DIRECTORS AND EXECUTIVE OFFICERS We do not currently compensate our directors in cash for their service as members of our board of directors. We do reimburse our directors for reasonable expenses in connection with attendance at board meetings. At the end of our last completed fiscal year, our Chief Executive Officer was Art Bandenieks, who was also our then President, Secretary, and a director, and our Chief Financial Officer was Lee Southern, who was also our then Treasurer and a director. As previously reported in our Form 10-KSB for fiscal 2005, which is incorporated herein by reference with respect to the compensation of directors and executive officers with respect to Mr. Bandenieks and Mr. Southern, we did not pay any executive compensation since our inception for their services. As discussed above, on February 10, 2006, G. Leigh Lyons was appointed as director, and as our President and Secretary, and on April 17, 2006, Mr. Lyons became our Treasurer and Chief Financial Officer. In connection with Mr. Lyons's appointment, he entered into an employment agreement with Radial Energy, the term of which began on April 1, 2006. A description of the material the terms of the employment agreement were previously reported in our Form 8-K filed on April 21, 2006 and is incorporated herein by reference. In connection with his appointment, Mr. Lyons acquired 2,672,000 shares of our common stock from Art Bandenieks for which he paid $65. As discussed above, on June 1, 2006, Omar Michael Hayes was appointed to serve as our Chief Operating Officer and also as a director. In connection with his appointment, Mr. Hayes entered into an employment agreement with Radial Energy on June 1, 2006, the terms of which were previously reported in our Form 8-K filed on June 7, 2006 and which is incorporated herein by reference. COMMITTEES OF THE BOARD OF DIRECTORS 26 ================================================================================ We do not have standing audit, nominating or compensation committees of the Board of Directors, or committees performing similar functions, and therefore our entire Board of Directors performs such functions. We are not currently listed on any national exchange and are not required to maintain such committees by any self-regulatory agency. We do not believe it is necessary for our Board of Directors to appoint such committees because the volume of matters that come before our Board of Directors for consideration permits each director to give sufficient time and attention to such matters to be involved in all decision making. All directors participate in the consideration of director nominees. We do not have a policy with regard to attendance at board meetings. We do not have a policy with regard to consideration of nominations of directors. We accept nominations for directors from our security holders. There is no minimum qualification for a nominee to be considered by our directors. All of our directors will consider any nomination and will consider such nomination in accordance with his or her fiduciary responsibility to the company and its shareholders. Security holders may send communications to our Board of Directors by writing to Radial Energy Inc., 1313 East Maple St., Suite 223, Bellingham, Washington 98225, attention Board of Directors or any specified director. Any correspondence received at the foregoing address to the attention of one or more directors is promptly forwarded to such director or directors. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The following table sets forth certain information regarding the shares of common stock beneficially owned or deemed to be beneficially owned as of August 10, 2006 by: (i) each person known to us to be the beneficial owner of more than 5% of our common stock , (ii) each of our directors, (iii) each executive officer named in the Compensation of Directors and Executive Officers section above, and (iv) all directors and officers as a group:
Common Stock Percent Name(1) Beneficially Owned(2) of Class(3) ---------------------------------------------------- ------------------------- ------------------------------ G. Leigh Lyons................................... ...............2,672,000 .........................6.0% Omar Michael Hayes............................... ...............1,500,000 .........................3.4% Art Bandenieks(4) ............................... .......................0 ............................* Lee Southern(4).................................. .......................0 ............................* All directors and executive officers as a group (2 persons)(4)............ ...............4,172,000 .........................9.4% ---------------------------------------------------- ------------------------- ------------------------------
*Less than 1% NOTES TO BENEFICIAL OWNERSHIP TABLE: (1) Except as otherwise noted in these notes, the mailing address of the individuals listed is c/o Radial Energy Inc., 1313 East Maple St., Suite 223, Bellingham, Washington 98225. (2) The number of shares beneficially owned includes shares of common stock in which a person has sole or shared voting power and/or sole or shared investment power. Each person named reportedly has sole voting and investment powers with respect to the common stock beneficially owned by that person, subject to applicable community property and similar laws. On August 10, 2006, there were 44,565,824 shares of common stock, $.001 par value, outstanding. (3) Common stock not outstanding but which underlies options and rights (including warrants) vested as of, or vesting within, 60 days after August 10, 2006, is deemed to be outstanding for the purpose of computing the percentage of the common stock beneficially owned by each named person (and the directors and executive officers as a group), but is not deemed to be outstanding for any other purpose. 25 ================================================================================ (4) As discussed above, Mr. Bandenieks resigned as director and from his executive office positions effective on February 10, 2006, and Mr. Southern resigned as a director and from his executive office positions effective on April 17, 2006. Since they are not executive officers and directors of Radial Energy as of August 10, 2006, for purposes of the beneficial ownership table above, they are not included in all directors and executive officers as a group but are listed to show their ownership of the company individually. Mr. Bandenieks's mailing address is 2876 - 252 Street, Aldergrove, British Columbia, Canada, V4W 2R2. VOTING SECURITIES Our authorized capital stock consists of 75,000,000 shares of common stock, $0.001 par value. Our common stock is the only class of voting securities issued and outstanding. Each share of common stock is entitled to one vote. As of August 10, 2006 (after adjustment for the 4-for-1 forward stock split and the return to our treasury for cancellation of 29,000,000 shares of our common stock), there were 44,565,824 shares of our common stock issued and outstanding. MARKET PRICE OF AND DIVIDENDS ON THE REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Our common stock, par value $.001, is currently quoted on the OTC Bulletin Board under the symbol "RENG.OB"; however, active trading market in our common stock did not commence until February 2006. We completed a 4-for-1 forward stock split of our issued and outstanding shares of common stock on February 20, 2006. The following table sets forth the high and low bid prices for our common stock for the periods indicated. Such quotations are taken from information provided by Exshare and reflect inter dealer prices, without retail mark-up, mark-down or commissions, and may not necessarily represent actual transactions. ---------------------------------------------------------------------- QUARTER ENDED HIGH LOW ---------------------------------------------------------------------- June 30, 2006 $1.02 $0.61 ---------------------------------------------------------------------- March 31, 2006 $1.25 $0.25 ---------------------------------------------------------------------- On August 10, 2006, the last closing price for a share of our common stock was $1.00, as reported by the OTC Bulletin Board. As of August 10, 2006, there were approximately 49 holders of record of our common stock. We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we expect to retain any earnings to finance the operation and expansion of our business. INDEMNIFICATION OF DIRECTORS AND OFFICERS Our Bylaws provide indemnification by the company of any individual made a party to proceeding because he is or was an officer, director, employee or agent of the company against liability incurred in the proceeding, to the fullest extent permissible under the laws of Nevada. The Bylaws provide that the company advance the expenses of officers and directors incurred in defending any such proceeding, provided that the company received an undertaking from such person to repay the expenses advanced if it is ultimately determined that he is not entitled to be indemnified. ITEM 6. EXHIBITS 3(i) Articles of Merger filed with the Nevada Secretary of State effective as of April 3, 2006. (Incorporated by reference to Exhibit 2 of Radial Energy Inc.'s Current Report on Form 8-K filed on April 21, 2006.) 26 ================================================================================ 10.1* Form of Subscription Agreement. 10.2* Form of Common Stock Purchase Warrant. 10.3* Letter of Intent by and between Radial Energy Inc. and Ziegler-Peru Inc. dated April 19, 2006. 10.4* Joint Operating Agreement by and between Radial Energy Inc.,Ziegler- Peru Inc., and Compania Consultora de Petroleo, S.A. effective as of May 11, 2006. 10.5* Employment Agreement by and between Radial Energy Inc. and G. Leigh Lyons dated March 10, 2006. 10.6* Employment Agreement by and between Radial Energy Inc. and Omar Michel Hayes dated June 1, 2006. 10.7* Assignment Agreement by and between Radial Energy Inc. and Pin Petroleum Partners Ltd. dated June 27, 2006. 31.1* Certifications of the Chief Executive Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certifications of the Chief Financial Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certifications of the Chief Executive Officer and Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Filed herewith. 27 ================================================================================ SIGNATURES In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. RADIAL ENERGY INC. By: /S/ G. LEIGH LYONS ------------------------------------------------ G. Leigh Lyons President, Chief Executive Officer, and Chief Financial Officer (Principal Executive and Financial Officer) Date: August 17, 2006 27 ================================================================================ EXHIBIT INDEX EXHIBIT NUMBER DESCRIPTION OF EXHIBIT 3(i) Articles of Merger filed with the Nevada Secretary of State effective as of April 3, 2006. (Incorporated by reference to Exhibit 2 of Radial Energy Inc.'s Current Report on Form 8-K filed on April 21, 2006.) 10.1* Form of Subscription Agreement. 10.2* Form of Common Stock Purchase Warrant. 10.3* Letter of Intent by and between Radial Energy Inc. and Ziegler-Peru Inc. dated April 19, 2006. 10.4* Joint Operating Agreement by and between Radial Energy Inc.,Ziegler- Peru Inc., and Compania Consultora de Petroleo, S.A. effective as of May 11, 2006. 10.5* Employment Agreement by and between Radial Energy Inc. and G. Leigh Lyons dated March 10, 2006. 10.6* Employment Agreement by and between Radial Energy Inc. and Omar Michel Hayes dated June 1, 2006. 10.7* Assignment Agreement by and between Radial Energy Inc. and Pin Petroleum Partners Ltd. dated June 27, 2006. 31.1* Certifications of the Chief Executive Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2* Certifications of the Chief Financial Officer provided pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1* Certifications of the Chief Executive Officer and Chief Financial Officer provided pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. *Filed herewith. 29 ================================================================================ EX-10.1 2 ex10-1.txt FORM OF SUBSCRIPTION AGREEMENT EXHIBIT 10.1 CONFIDENTIAL PRIVATE PLACEMENT ______________________________ RADIAL ENERGY, INC. SUBSCRIPTION AGREEMENT ______________________ (REGULATION S) ______________ To: RADIAL ENERGY, INC. 1313 East Maple St. Bellingham WA 98225 The offering will commence on March 14, 2006, and will be a non-brokered, exempt private placement which will be open for a maximum of 90 days from the commencement date, subject to extension for an additional 90 days, at the sole discretion of the Company ("Offering Period"). The terms are as follows: Minimum offering will be US$100,000.00 Maximum offering will be US$2,000,000.00 This offering will be for units consisting of 1 share of restricted Common Stock and 1 warrant to purchase 1 share of restricted Common Stock, at a purchase price of $0.25 per unit, and the warrant will be exercisable for 2 years at $0.30 per share. If the maximum offering is sold ($2,000,000.00), there will be an additional 8,000,000 shares of restricted Common Stock issued and outstanding, and if all of the warrants are exercised, there will be an additional 8,000,000 shares of restricted Common Stock issued and outstanding, for a total of 16,000,000 additional shares, assuming all of the units are sold and all warrants are exercised, of which there can be no assurance. The undersigned has received and read the Subscription documents (the "Documents") included herewith which offer a minimum of 400,000 up to a maximum of 8,000,000 Units of RADIAL ENERGY, INC., a Nevada corporation (the "Company"), at US$.25 per Unit, for a total minimum of US$100,000.00 and a maximum of US$2,000,000.00. Each Unit consists of one (1) restricted share of Common Stock, par value $.001 per share, and one (1) warrant. One (1) warrant is required to purchase one (1) share, at the purchase price of US$0.30 per share (the "Exercise Price"), for a period of two (2) years from date of acceptance of this subscription by the Company ("Exercise Period"). The Units are hereinafter referred to as the "Securities". THE SECURITIES ARE SUBJECT TO ALL THE RULES, CONDITIONS AND RESTRICTIONS CONTAINED IN RULES 901-905 OF REGULATION S, PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED ("1933 ACT"). Any Warrant not exercised within the Exercise Period shall become null, void and worthless. THE MINIMUM AMOUNT OF PROCEEDS WHICH MUST BE RECEIVED IN THIS OFFERING IS US$100,000.00 AND, ACCORDINGLY, ANY AND ALL MONIES RECEIVED FROM ANY SUBSCRIPTION OVER THIS MINIMUM, UP TO THE MAXIMUM OF $2,000,000.00, WILL BE IMMEDIATELY PLACED INTO THE ACCOUNT OF THE COMPANY. ALL MONIES RECEIVED IN THIS OFFERING SHALL BE USED AS WORKING CAPITAL. IF THE MINIMUM ($100,000.00) IS NOT RECEIVED DURING THE OFFERING PERIOD, ALL SUBSCRIPTION MONIES WILL BE RETURNED TO THE SUBSCRIBERS, WITHIN 10 DAYS AFTER EXPIRATION OF THE OFFERING PERIOD, WITHOUT INTEREST OR DEDUCTION. 1. SUBSCRIPTION. Subject to the terms and conditions of this Subscription Agreement and the provisions of the Documents, the undersigned hereby subscribes to purchase Securities in the aggregate dollar amount set forth below. The amount of Securities to be issued to the undersigned shall be as set forth in the Documents. The undersigned hereby agrees that this subscription shall be irrevocable and shall survive the death or disability of the undersigned. The undersigned is tendering 100% of the purchase price to which this subscription relates. 2. ACCEPTANCE OF SUBSCRIPTION. The undersigned acknowledges that the Company has the absolute right to accept or reject this subscription, in whole or in part. The undersigned agrees that subscriptions need not be accepted in the order received. 3. REPRESENTATIONS, WARRANTIES AND COVENANTS OF THE UNDERSIGNED. The undersigned hereby represents and warrants to and covenants with the Company, and its affiliates, managers, officers, directors, agents, owners and employees as follows: (a) The undersigned has adequate means of providing for his current needs and possible personal contingencies, and he has no need, and anticipates no need in the foreseeable future, to sell the Securities for which he hereby subscribes. He is able to bear the economic risks of this investment and, consequently, without limiting the generality of the foregoing, he is able to hold the Securities for an indefinite period of time and has a sufficient financial liquidity to sustain a loss of his entire investment in the event such loss should occur. (b) The undersigned has such knowledge and experience in financial and business matters that he is capable of evaluating the merits and risks of an investment in the Securities. The undersigned is an "accredited investor", as that term is defined in Regulation D, Rule 501, promulgated under the 1933 Act. (c) The undersigned has received and read and is familiar with the Documents, including the exhibits annexed thereto and any amendments or supplements thereto (if any), and he (which is hereinafter deemed to include the pronouns she and it) confirms that all documents, records and books pertaining to his proposed investment in the Securities have been made available to him. (d) The undersigned has had an opportunity to review the Company's filings on the EDGAR database at the S.E.C., filed prior to or on the date hereof. (e) The Securities for which the undersigned hereby subscribes or any equity acquired by means of conversion of the Securities will be acquired for this own account for investment and not with the view toward resale or distribution in a manner which would require registration under the 1933 Act, or any applicable state securities laws, and he does not now have any reason to anticipate any change in his circumstances or other particular occasion or event which would cause him to sell the Securities. (f) The undersigned is presently a bona fide resident of the country set forth below and the address and tax/citizen identification number set forth below are his true and correct residence and tax/citizen identification number. The undersigned has no present intention of becoming a resident of any other jurisdiction. (g) The undersigned understands that no securities administrator of any state has made any findings or determination relating to the fairness for investment of the Securities and that no securities administrator of any state has or will recommend or endorse any offering of the Securities. (h) The undersigned has received no representation or warranties from the Company, or any other person or entity or their respective affiliates, employees or agents, not contained or described in the Documents and in making his investment decision, he is relying solely on the information contained in the Documents and investigations made by him. (i) The undersigned will be the sole party in interest in the Securities and as such will be vested with all legal and equitable rights in the Securities. (j) All representations, warranties and covenants contained in this Subscription Agreement and the accompanying Prospective Purchaser Questionnaire and Purchaser Representative Disclosure Statement (if applicable) are true and correct as of the date hereof and will be true and correct as of the date this subscription is accepted by the Company, if at all. (k) The undersigned acknowledges and is aware of all the risks related to this investment, including but not limited to the following factors: (i) the securities offered hereby are speculative and involve a high degree of risk; (ii) any projections, forecasts or estimates as may have been provided in the Filings are purely speculative and cannot be relied upon to indicate actual results that may be obtained through this investment; any such projections, forecasts and estimates are based upon assumptions which are subject to change and which are beyond the control of the Company or its management; (iii) the tax effects which may be expected by this investment are not susceptible to absolute prediction, and new developments and rules of the Internal Revenue Service of the United States or any tax or regulatory authority of any jurisdiction in which the undersigned is a resident or subject to taxes or other payments to a government regulatory authority , audit adjustment, court decisions or legislative changes may have an adverse effect on one or more of the tax consequences of this investment; and (iv) the undersigned has been advised to consult with his own advisor regarding legal matters and tax consequences involving this investment. (l) The undersigned certifies that (i) the tax identification/ citizen number shown on this form is the correct tax identification/citizen number, and (ii) the undersigned is not subject to backup withholding of monies either because (A) the undersigned has not been notified that the undersigned is subject to backup withholding as a result of a failure to report all interest or dividends, or (B) the Internal Revenue Service (the "Service") has notified the undersigned that the undersigned is no longer subject to backup withholding. The undersigned certifies that the undersigned is a foreign person, or a corporation, or a foreign estate or trust, which would be a foreign person within the meaning of Sections 1441, 1446 and 7701 (a) of the Internal Revenue Code of 1986, as amended, and that the undersigned will notify the Company before a change in the undersigned's foreign status. (You must cross out item (ii) above if you have been notified by the Internal Revenue Service that you are subject to backup withholding due to notified payee underreporting, and if you have not been notified by the Service advising you that backup withholding due to notified payee underreporting has terminated.) (m) This offer and sale is made pursuant to an exemption available under Rule 903 of Regulation S promulgated pursuant to the 1933 Act, based on the fact that the Undersigned is a non-U.S. Person engaged in an offshore transaction, as those terms are defined in Regulation S. The parties agree to fully comply with all terms and conditions of Rules 901-905 of Regulation S. 4. INDEMNIFICATION. The undersigned acknowledges that he understands the meaning and legal consequences of the representations, warranties and covenants in paragraph 3 hereof, and that the Company has relied upon such representations, warranties and covenants agrees to hold harmless the Company and its officers, managers, directors, controlling persons, agents, owners and employees from and against any and all loss, damage or liability due to or arising out of breach of any such representation, warranty or covenant. Notwithstanding the foregoing, however, no representation, warranty, acknowledgment or agreement made herein by the undersigned shall in any manner be deemed to constitute a waiver of any rights granted to him under federal or state securities laws. All representations, warranties and covenants of the undersigned contained in this Subscription Agreement, the accompanying Prospective Purchaser Questionnaire, the Purchaser Representative Disclosure Statement (if applicable), and the indemnification contained in this paragraph 4, shall survive the acceptance of this subscription. 5. ARBITRATION. Any and all controversies or disputes, whether now existing or which may arise in the future, which have arisen or may arise between the undersigned and the Company, and/or its managers, officers, directors, controlling persons, agents, affiliates or employees, whether arising out of or relating to this Subscription Agreement, the conduct of the aforesaid persons or entities, or otherwise, which can be lawfully submitted to arbitration, shall be submitted to arbitration in accordance with the rules, then existing, of the American Arbitration Association. The award of the arbitrators, or a majority of them, shall be final, and judgment upon the award may be entered in any state or federal court having jurisdiction. Any and all proceedings pursuant to this paragraph 5 shall be held in Washoe County, Nevada. This paragraph 5 shall bind the undersigned to submit to arbitration any and all controversies as aforesaid, including those which could otherwise be brought in a judicial forum and those which could be joined to other claims not subject to arbitration. 6. LIMITATION ON TRANSFER OF THE SECURITIES. The undersigned acknowledges that he is aware that there are substantial restrictions on the transferability of the Securities. Since the Securities will no be, and the undersigned has no right to require that it be, registered under the 1933 Act, the Securities may not be, and the undersigned agrees that it shall not be, sold unless such sale is exempt from such registration under the 1933 Act, and applicable state securities laws. The undersigned further acknowledges that the Company is under no obligation to aid him in obtaining any exemption from the registration requirements. The undersigned also acknowledges that he shall be responsible for compliance with all conditions on transfer imposed by any securities administrator of any state and for any expense incurred by the Company for legal or accounting services in connection with reviewing such a proposed transfer and/or issuing opinions in connection therewith. The undersigned also acknowledges that the Securities purchased hereunder will be restricted securities under Rule 144 (see Rule 905 of Regulation S). 7. COMPLIANCE WITH PRIVATE PLACEMENT EXEMPTION REQUIREMENTS. The undersigned understands and agrees that the following restrictions and limitations are applicable to his purchase and his resale, hypothecations or other transfers of the Securities pursuant to rules promulgated under the 1933 Act and various state securities laws: (a) Such Securities shall not be sold, pledged, hypothecated or otherwise transferred unless the securities are registered under the 1933 Act and applicable state securities laws or are exempt therefrom. (b) A legend in substantially the following form bas been or will be placed on any certificate(s) or other document(s) evidencing the Securities as issued or converted: THE SECURITIES REPRESENTED BY THIS INSTRUMENT OR DOCUMENT HAVE BEEN ACQUIRED FOR INVESTMENT AND HAVE NOT BEEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS, ALL IN RELIANCE OF REGULATION S PROMULGATED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. WITHOUT SUCH REGISTRATION, SUCH SECURITIES MAY NOT BE SOLD, PLEDGED, HYPOTHECATED OR OTHERWISE TRANSFERRED AT ANY TIME WHATSOEVER, EXCEPT UPON DELIVERY TO THE ISSURER OF AN OPINION OF COUNSEL THAT REGISTRATION IS NOT REQUIRED FOR SUCH TRANSFER OR THE SUBMISSION TO THE ISSUER OF SUCH OTHER EVIDENCE AS MAY BE SATISFACTORY TO THE ISSUER TO THE EFFECT THAT ANY SUCH TRANSFER SHALL NOT BE IN VIOLATION OF THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE STATE SECURITIES LAWS OR ANY RULE OR REGULATION PROMULGATED THEREUNDER. (c) In addition, the legend described in subparagraph (b) above will be placed with respect to any new certificates or other document(s) for transfer. 8. BINDING EFFECT. All rights and obligations under this Subscription Agreement shall be binding upon and inure to the benefit of the undersigned, his heirs, personal representatives and permitted transferees or assigns. 9. GOVERNING LAW. This agreement shall be governed by and construed according to the laws of the State of Nevada. 10. VALIDITY AND SEVERABILITY. If any provision of this Subscription Agreement is held to be illegal, invalid, or unenforceable under the present or future laws effective during the term of this Subscription Agreement, such provision shall be fully severable; this Subscription Agreement shall be construed and enforced as if such illegal, invalid, or unenforceable provision had never comprised a part of this Subscription Agreement, and the remaining provisions of this subscription Agreement shall remain in full force and effect and shall not be affected by the illegal, invalid, or unenforceable provision or by its severance from this Subscription Agreement. Furthermore, in lieu of such illegal invalid or unenforceable provision as may be possible and still be legal, valid, and enforceable. 11. TIME OF THE ESSENCE. Time is of the essence with regards to the performance by the parties of their respective obligations under this Subscription Agreement. * * * * * * * * * * PLEASE COMPLETE THE FOLLOWING TO SUBSCRIBE FOR SECURITIES: U.S. Dollar Amount of Securities Subscribed for: $_______________ The Subscription Documents should be mailed or delivered to: RADIAL ENERGY, INC. 1313 East Maple St. Bellingham WA 98225 The monies representing payment for the Units should be in certified funds or bank wire to the Company, as set forth in Schedule "A" attached hereto. All monies will be held in trust, in a segregated account, until the minimum of US$100,000.00 is received, and the Subscription Documents have been fully executed by all parties, at which time the minimum of $100,000.00 will be released to the Company to be used for working capital, and all funds received thereafter, up to the maximum of US$2,000,000.00, will be immediately released to the Company upon receipt thereof, together with the Subscription Documents fully executed by all parties, and all of such monies will be used for working capital. IN WITNESS WHEREOF, the undersigned has executed this Subscription agreement as of the _____ day of ________________, 2006. THIS SUBSCRIPTION AGREEMENT CONTAINS A DISPUTE ARBITRATION CLAUSE AT PAGE 3, PARAGRAPH 5. THE UNDERSIGNED ACKNOWLEDGES RECEIPT OF A COPY OF THIS SUBSCRIPTION AGREEMENT. _____________________________________ Signature of Investor _____________________________________ Signature of Investor _____________________________________ (Names) Typed or Printed __________________________________________ Taxpayer/Citizen ID Number in Country of Residence _____________________________________ Street or Postal Address _____________________________________ City, Province, Country and Postal Code _____________________________________ Telephone Number (incl. country code) SUBSCRIPTION ACCEPTED BY RADIAL ENERGY, INC. By: _________________________________ Date: ___________________ CONFIDENTIAL PRIVATE PLACEMENT ______________________________ RADIAL ENERGY, INC. INSTRUCTIONS FOR SUBSCRIBING Before making a decision to invest in the securities, the prospective investor should read and be familiar with the provisions and disclosures set forth in the Company's filings with the Securities and Exchange Commission, on the EDGAR database, and other publicly available information, as of the date of this subscription. By executing the Subscription Agreement, the investor will acknowledge that he, she or it has reviewed the Filings. 1. SUBSCRIPTION AGREEMENT: (a) After reviewing the Subscription Agreement, investor should fill in the dollar amount of the subscription where provided following Paragraph 11. (b) Investor should complete, sign and date the Subscription Agreement on the last page of the document. Investor should also make note of the taxpayer certification language at Paragraph 3 (l) of the Subscription Agreement, and make changes as applicable. 2. PROSPECTIVE PURCHASER QUESTIONNAIRE: (a) The information requested by items one through eight should be completed. (b) Partnership and corporate investors should also complete item nine, and trust and estate investors should also complete item ten. (c) Investor should sign and date the Prospective Purchaser Questionnaire following Paragraph 10. 3. PURCHASER REPRESENTATIVE DISCLOSURE STATEMENT: (a) If a Purchaser Representative is being consulted, such representative should complete, sign and date the Purchaser Representative Disclosure Statement. (b) Investor should sign and date the document on the last page of the document. 4. The Subscription Documents should be mailed or delivered to: RADIAL ENERGY, INC. 1313 East Maple St. Bellingham WA 98225 The monies representing payment for the Units should be in certified funds or bank wire to the Company, as set forth in Schedule "A" attached hereto. All monies will be held in trust, in a segregated account, until the minimum of US$100,000.00 is received, and the Subscription Documents have been fully executed by all parties, at which time the minimum of $100,000.00 will be released to the Company to be used for working capital, and all funds received thereafter, up to the maximum of US$2,000,000.00, will be immediately released to the Company upon receipt thereof, together with the Subscription Documents fully executed by all parties, and all of such monies will be used for working capital. PROSPECTIVE PURCHASER QUESTIONNAIRE RADIAL ENERGY, INC. 1313 East Maple St. Bellingham WA 98225 Gentlemen: The information contained herein is being furnished to you to enable you to determine whether sales of securities (the "Securities"), by RADIAL ENERGY, INC., (the "Company"), a Nevada corporation, may be made to me pursuant to Regulation S of the Securities Act of 1933, as amended (the "Act"), and under applicable state securities laws, if any. I understand that (i) you will rely upon the information contained herein for purposes of such determination, (ii) the Securities will not be registered under the Act in reliance upon the exemptions from registration provided by one or more of Section 4 (2) of the Act and/or Regulation S; (iii) the Securities will not be registered under any state securities laws in reliance upon exemptions from registration provided thereby; (iv) requesting that I complete this Questionnaire does not constitute an offer of the Securities to me; and (v) I may be required to hold any Securities purchased by me indefinitely. I represent to you that (i) The information contained herein is complete and accurate and may be relied upon by you; and (ii) I will notify you immediately of any material change in any of such information occurring prior to the closing of the purchase of any of the Securities by me. I understand that if I am required by the Company to use the services of a Purchaser Representative, as that term is defined in the securities laws, in connection herewith, additional documentation will be required. All information furnished is for the sole use of you and your counsel, except that this Questionnaire may be furnished to such parties as you deem desirable to establish compliance with federal and state securities laws. PLEASE PRINT OR TYPE RESPONSES, EXCEPT FOR SIGNATURE 1. Name: _________________________________________________________________ Nature of Business or Employment: ___________________________________________________________ Position and Duties: _______________________________________________________________________ _______________________________________________________________________ Highest Level of Education Completed: __________ Degree: _______________________ 2. I have personally invested in excess of $________________ over the past five years, including investments during such period in excess of $______________ in non-liquid investments. 3. Listed below are the types of investments I have made in the past five years, with particular attention to investments in non-marketable or non-liquid investments. _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 4. If the subscriber has used the services of a Purchaser Representative in connection with this investment, please provide the following information with respect to such Purchaser Representative: Name: _________________________________________________________________ Telephone: ____________________________________________________________ Firm: _________________________________________________________________ Address: ______________________________________________________________ Note: A Purchaser Representative Questionnaire will need to be completed by such Purchaser Representative. 5. My personal net worth (exclusive of primary residence, furnishings therein and personal automobiles) is in excess of $________________. 6. Investment Experience: (i) The frequency of my investment in marketable securities is: ( ) often; ( ) occasionally; ( ) seldom; ( ) never. (ii) The frequency of my investment in commodities futures is: ( ) often; ( ) occasionally; ( ) seldom; ( ) never. (iii)The frequency of my investment in options is: ( ) often; ( ) occasionally; ( ) seldom; ( ) never. (iii) The frequency of my investment in securities purchased on margin is: ( ) often; ( ) occasionally; ( ) seldom; ( ) never. (iv) The frequency of my investment in unmarketable securities is: ( ) often; ( ) occasionally; ( ) seldom; ( ) never. (v) The frequency of my investment in securities sold in reliance on the private offering exemption from registration under the Securities Act of 1933 and/or Regulation S is: ( ) often; ( ) occasionally; ( ) seldom; ( ) never. 7. Indicated in the space provided below is additional information which I think may be helpful in enabling the Company to determine whether my knowledge and experience in financial and business matters is sufficient to enable me to evaluate the merits and risks of my prospective investment: _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 8. I am not a "U.S. Person", as that term is defined in Rule 901 of Regulation S promulgated under the Securities Act of 1933, and this offering and sale is made pursuant to Rules 901-905 of Regulation S, and I qualify in all respects to subscribe and purchase under Regulation S. ONLY PARTNERSHIPS, LLC'S AND CORPORATIONS NEED TO ANSWER QUESTION 9 9. If the investment will be in the name of a partnership, LLC or corporation, answer the following: Type of Entity: _______________________________________________________________ Date and Country of Formation: ____________________________________________________________ Taxpayer Identification Number in Country of Domicile: ________________________________________ Number of Shareholders or Partners: __________________________ Net Worth: $______________________ NOTE: IF A CORPORATION OR LLC, THE OFFICER/MANAGER OF THE CORPORATION OR LLC WHO WILL BE RESPONSIBLE FOR MAKING THE DECISION TO PUCHASE MUST COMPLETE A PROSPECTIVE PURCHASER QUESTIONNAIRE. NOTE: IF A PARTNERSHIP, THE PARTNER WHO WILL BE RESPONSIBLE FOR MAKING THE DECISION TO PURCHASE MUST COMPLETE A PROSPECTIVE PURCHASER QUESTIONNAIRE. ONLY TRUSTS AND ESTATES NEED TO ANSWER QUESTION 10 10. If the investment will be in the name of a trust or estate, answer the following: Type of Entity: _______________________________________________________________________ Date and Jurisdiction of Formation: ___________________________________ Number of Beneficiaries: __________________________________________ Net Worth: $___________________________ NOTE: THE TRUSTEE OR EXECUTOR WHO WILL BE RESPONSIBLE FOR MAKING THE DECISION TO PURCHASE MUST COMPLETE A PROSPECTIVE PURCHASER QUESTIONNAIRE. IN WITNESS WHEREOF, the undersigned has executed this Prospective Purchaser Questionnaire as of the ______ day of ______________, 2006. _______________________________ ________________________________ Signature of Investor Signature of Investor ______________________________________ Name(s) (Please Print or Type Clearly) PURCHASER REPRESENTATIVE DISCLOSURE STATEMENT _____________________________________________ RADIAL ENERGY, INC. (the "Company") may, under certain circumstances, require a potential purchaser to obtain the assistance of one or more qualified Purchaser Representatives in evaluating an investment in the Securities (the "Securities"), offered by the Company. The purpose of this Purchaser Representative Disclosure Statement is to obtain certain representations from, and information regarding, any such Purchaser Representative. The undersigned makes the following representations with the intent that they may be relied upon by the Company in determining the undersigned's qualification to serve as a Purchaser Representative to ______________________ (insert name of prospective investor being represented) in connection with an investment in the Securities. 1. Name and Address of Purchaser Representative: _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 2. Are you an affiliate, director, officer or other employee of the Company, or the beneficial owner of 10% or more of the Securities interest in the Company? yes _____ no _____ 3. If the Answer to No 2 is "yes" what is the relationship? _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 4. I have, either myself or together with my client, sufficient knowledge and experience in financial, business, and tax matters to be capable of evaluating the risks and merits of an investment in the Securities to be issued by the Company and making an informed investment decision with respect thereto. yes _____ no _____ 5. Current employment and position held: _______________________________________________________________________ _______________________________________________________________________ How long? ___________________________________ 6. Educational background: _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ Degree? _____________________________________ 7. Area of knowledge and experience (e.g., legal matters, tax matters, real estate, leasing programs, financial or business consultant, etc.): _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 8. Describe any and all material relationships which now exist, which have existed at any time over the past two years or are mutually understood to be contemplated in the future between yourself or your affiliates and the Company or its affiliates. (If none, so state): _______________________________________________________________________ _______________________________________________________________________ _______________________________________________________________________ 9. The undersigned has received $____________________from the Company or its affiliates within the past two years as a result of such relationships described in Item 8 above. _______________________________________________ Name of Purchaser representative (Please Print) _______________________________________________ Signature of Purchaser Representative Date _______________________________________________ Street Address _______________________________________________ City and State/Province Country Postal Code NOTE: A copy of this Disclosure Statement must be given to the purchaser whom you represent and the purchaser must execute the following Acknowledgment. This Disclosure Statement and Acknowledgment must be completed, signed and returned with the purchaser's subscription documents prior to the purchaser being sold any Securities by the Company. The undersigned hereby acknowledges that you have been designated to act as Purchaser Representative for the undersigned in connection with the evaluation of the merits and risks of an investment in the Securities. ________________________________________________ Name of Prospective Purchaser (Please Print) __________________________________________________________ Signature of Prospective Purchaser Date BROKER-DEALER INFORMATION (TO BE COMPLETED BY SELLING ACCOUNT EXECUTIVE): _____________________________________ Broker-Dealer Name _____________________________________ Account Executive Name and Representative Number _____________________________________________________________ Address City State/Province Country Postal Code ACCEPTED as of this _____ day of __________, 2006. RADIAL ENERGY, INC. By: _______________________________ EX-10.2 3 ex10-2.txt FORM OF COMMON STOCK PURCHASE WARRANT EXHIBIT 10.2 This Warrant will be void and of no value unless exercised on or before 5:00pm in the afternoon (Pacific Standard Time) on August 4, 2008 THIS WARRANT IS A NON-TRANSFERABLE WARRANT FOR THE PURCHASE OF COMMON SHARES OF RADIAL ENERGY, INC __________________ (FORMERLY "BV PHARMACEUTICAL, INC.") ____________________________________ Warrant Number: 2006-1-<> RIGHT TO PURCHASE <> COMMON SHARES THIS IS TO CERTIFY THAT, for value received <> (the "Holder"), is entitled to subscribe for and purchase the above referenced number of fully paid and non-assessable common shares without par value in the capital stock (as constituted on August 5, 2006) of Radial Energy, Inc. (the "Company") at the price of US$0.30 per share at any time prior to 5:00pm in the afternoon (Pacific Standard Time) on August 4, 2008. The rights represented by this Warrant may be exercised by the Holder, in whole or in part (but not as to a fractional share), by completing the subscription form attached hereto and surrendering this Warrant at the office of the Company or to one of its directors together with a certified cheque, money order or bank draft payable to or to the order of the Company in payment of the purchase price of the number of Common Shares subscribed for. In the event of an exercise of the rights represented by this Warrant, certificates for the Common Shares so purchased shall be delivered to the Holder within a reasonable time, not exceeding ten (10) days after the rights represented by this Warrant shall have been exercised and, unless this Warrant has expired, a new Warrant representing the number of Common Shares, if any, with respect to which this Warrant shall not then have been exercised shall also be issued to the Holder within such time. Share certificates issued upon exercise of this Warrant will bear a resale legend for the United States indicating that the shares have not been registered for resale in the United States and that, without registration or an available registration exemption such as Rule 144, those shares may not be resold in the United States or for the benefit or account of a US person. The Company covenants and agrees that all Common Shares which may be issued upon the exercise of the rights represented by this Warrant will, upon issuance, be fully paid and non-assessable. The Company further covenants and agrees that during the period within which the rights represented by this Warrant may be exercised, the Company will at all times have authorized and reserved a sufficient number of Common Shares to provide for the exercise of the rights represented by this Warrant. The following are the terms and conditions referred to in this Warrant: 1. In the event of any subdivision of the Common Shares of the Company as such shares are constituted on the date hereof, at any time while this Warrant is outstanding, into a greater number of Common Shares, the Company will thereafter deliver at the time or times of purchase of shares hereunder, in addition to the number of shares in respect of which the right to purchase is then being exercised, such additional number of shares as result from such subdivision without any additional payment or other consideration therefor. 2. In the event of any consolidation of the Common Shares of the Company as such shares are constituted on the date hereof, at any time while this Warrant is outstanding, into a lesser number of Common Shares, the number of shares represented by this Warrant shall thereafter be deemed to be consolidated in like manner and any subscription by the Holder for shares hereunder shall be deemed to be a subscription for shares of the Company as consolidated. 3. In the event of any reclassification of the Common Shares of the Company at any time while this Warrant is outstanding, the Company shall thereafter deliver at the time of the purchase of shares hereunder the number of shares of the appropriate class resulting from the reclassification as the Holder would have been entitled to receive in respect of the number of shares so purchased had the right to purchase been exercised before such reclassification. 4. As used herein, the term "Common Shares" shall mean and include the Company's presently authorized Common Shares and shall also include any capital stock of any class of the Company hereafter authorized which shall not be limited to a fixed sum or percentage in respect of the rights of the holder thereof to participate in dividends and in the distribution of assets upon the voluntary or involuntary liquidation, dissolution or winding up of the Company. 5. This Warrant shall not entitle the Holder to any rights as a member of the Company, including without limitation, voting rights. 6. The Holder, by acceptance of this Warrant, agrees that this Warrant, any shares acquired by the Holder pursuant to this Warrant and all rights hereunder are non-transferable and further agrees that the Company may, on the certificate representing any shares acquired by the Holder pursuant to this Warrant, print any legend regarding resale restrictions or hold periods which the Company, in its sole discretion acting reasonably, may determine apply as a result of the jurisdiction of residency of the Holder. 7. This Warrant may be executed by the Company by facsimile. IN WITNESS WHEREOF Radial Energy, Inc. has executed this Warrant effective as of August 5, 2006. RADIAL ENERGY, INC. Per: _________________________________ Authorized Signatory SUBSCRIPTION FORM To: RADIAL ENERGY INC. The holder of the within Share Purchase Warrant, hereby subscribes for ______________Common Shares referred to therein according to the terms and conditions thereof, and herewith makes payment of the purchase price in full for the said number of shares at the rate of US$0.30 per share. DATED this ____ day of _____________, 200___. _______________________________ Signature of Warrant Holder EX-10.3 4 ex10-3.txt LETTER OF INTENT BY AND BETWEEN RADIAL ENERGY... EXHIBIT 10.3 ZIEGLER-PERU, INC OIL PRODUCER April 19, 2006 Radial Energy, Inc. Mr. G. Leigh Lyons, President Re: Huaya Anticline Project - Letter of Intent Dear Leigh: The Ziegler-Peru, Inc. ("ZPI") proposes that Radial Energy, Inc. ("Investor") participate in this Project as follows, and by agreement hereto Radial Energy, Inc. intends to participate in this Project under the following terms: 1. The Concession Agreement holder, Compania Consultora De Petroleo, S.A. ("CCP") in Lima, Peru will be the Operator the Huaya Anticline Area of Block 100 ("the Project"). A Joint Operating Agreement ("JOA") will be signed which gives CCP, Investor, and ZPI votes based on a yet to be negotiated format similar to the ZPI Draft attached as Exhibit A for the Voting Procedures section, which establishes an Operating Committee with significant voting power in Investor and ZPI as minority owners. ZPI provided a Draft AIPN 1995 Model Form International Operating Agreement to Radial a few days ago. See Exhibit A, Section 5.9 for Voting Procedures (draft). 2. Investor will acquire a 20% working interest and 18% revenue interest (base royalty, depending on production rate) in the Project for a payment to CCP, on behalf of ZPI, of US$ 600,000 on May 5, 2006 at Closing. This payment is to acquire the interest in the Project, with this cash also covering expenses of CCP other than items acquired for the project and expended by ZPI for the drilling rig, drilling, casing, tubing, wellhead equipment and similar items for the first well (Obligation Well One) or for the Project. The expenses to be paid by CCP for the Project startup and for Obligation Well One as part of the US$ 600,000 in this payment includes such items as surface property settlements, roads, Obligation Well One location, drilling April 19, 2006 Page 2 of 8 fluids, mud logging while drilling, open hole logging, cased hole logging, cementing, running casing, and supervision, which total CCP AFE totals over US$ 600,000 for these items for Obligation Well One (again, does not include drilling rig cost and pipe/wellhead, etc., as set forth above and the Equipment Acquisition Budget process set forth below). 3. Investor shall, with an Equipment Acquisition Budget form presented by ZPI, fund monthly, beginning on May 5, 2006, the costs to acquire and transport a drilling rig, bulldozer, casing, and related equipment, with the total cost to Investor through the drilling, testing, and evaluation of Obligation Well One being US$ 1,650,000 for the items in paragraph 2. above and this paragraph 3. paid to CCP and ZPI, as indicated in this LOI, in total. It is estimated that the first Equipment Acquisition Budget on May 5, 2006 will be US$ 300,000. Any amount not paid for a total of US$ 1,650,000 by the day Obligation Well One is spudded will be paid by Investor to ZPI on that day. 4. The interest of Investor will be reduced proportionately for any part of the balance of the total of US$1,650,000 not paid on the date the well is spudded as this payment and procedure is set forth in the paragraph above. 5. Investor will have the option to decide whether to continue or withdraw from the Project after Obligation Well One is drilled, tested, and evaluated. See the decision procedure set forth in attached at Exhibit A Sections 6.1, 6.2, and/or 6.(draft) of the 1995 AIPN Joint International Operating Agreement section. 6. If Investor decides to continue in the Project after Obligation Well One, Investor will pay ZPI US$ 1,650,000 within ten (10) days of being given information and a recommendation by the Operator to proceed as under Section 6.1 of the Draft JOA. This payment will be for the drilling, testing and evaluation of Obligation Well Two and Obligation Well Three, and for production equipment, metering and measurement provisions for production, production testing and evaluation, and a pipeline to and a loading connection at the Ucayali River. It is planned that the production equipment and pipeline will be started essentially when/while Obligation Well Two and Obligation Well Three are being drilled so cash flow will be generated from Obligation Well One during this period, and so the field can also continue production from Obligation Well Two and Obligation Well Three as soon as they are completed. See again Exhibit A, Sections 6.1, 6.2, and 6.3. April 19, 2006 Page 3 of 8 7. After the work described above for Obligation Well Two and Obligation Well Three, Investor will again decide whether it will go forward or not. Investor will bear its 20% WI share of the development and operation of the Project if it proceeds. 8. It is the goal of CCP to begin the drilling of Obligation Well One as soon as possible with September 1, 2006 as a self-imposed latest planned date, and CCP and ZPI will work diligently to achieve that goal. 9. The drilling rig and related equipment acquired will be owned by the Joint Operation/Project after Obligation Well Three is drilled and the decision is made for the Project to go forward to development. The drilling rig and related equipment is part of Investor's payment for the interest in the Project, but if all of the owners of the Project agree to withdraw before proceeding to development of the Project after Obligation Well Three, the rig and related equipment will be sold by CCP for a reasonable amount and Investor will receive 67% of the proceeds and ZPI will receive 33% of the proceeds. 10. Conditions Precedent to Investor's Obligations: Each and every obligation of Investor to be performed on the closing date shall be subject to the satisfaction prior thereto of the following conditions: 10.1 Truth of Representations and Warranties. The representations and warranties made by ZPI in this Agreement or given on its behalf hereunder shall be substantially accurate in all material respects on and as of the Closing date with the same effect as though such representations and warranties had been made or given on and as of the Closing date. 10.2 Performance of Obligations and Covenants. ZPI and CCP shall have performed and complied with all obligations and covenants required by this Agreement to be performed or complied with by it prior to or at the Closing. 10.3 Officer's Certificate. Investor shall have been furnished with a certificate (dated as of the Closing date and in form and substance reasonably satisfactory to Investor), executed by an executive officer of ZPI and CCP, respectively, certifying to the fulfillment of the conditions specified in subsections 10.1 and 10.2 hereof. April 19, 2006 Page 4 of 8 10.4 No Material Adverse Change. As of the closing date there shall not have occurred any material adverse change, financially or otherwise, which materially impairs the ability of ZPI or CCP to conduct their respective business or the earning power thereof, as contemplated herein. 10.5 Opinion of Counsel. ZPI and CCP shall provide an opinion of counsel opining as to the usual and customary matters of law covered under similar transactions and parties. 10.6 Investor shall have completed its due diligence regarding the Project and matters related thereto, all in the discretion of Investor, and provided written notice thereof to ZPI. 10.7 The parties shall have met, face to face, and negotiated to their mutual satisfaction and agreement, a JOA. 10.8 In the event any of the representations made by ZPI or CCP are false or misleading, ZPI and CCP shall reimburse Investor for any and all reasonable costs, expenses and fees expended by Investor as of the date such misrepresentation(s) is first determined by Investor. Please consider this proposal and Letter of Intent, and we look forward to making this project a success. Regards, Edward R. Ziegler President Ziegler-Peru, Inc. Agreed to this 19th day of April, 2006. /s/ G. LEIGH LYONS _______________________________________ Radial Energy, Inc. /s/ EDWARD R. ZIEGLER _______________________________________ Ziegler-Peru, Inc. April 19, 2006 Page 5 of 8 EXHIBIT A [Modified by Ziegler-Peru, Inc. from AIPN 1995 Model Form International Operating Agreement ] ARTICLE V - OPERATING COMMITTEE _______________________________ 5.1 ESTABLISHMENT OF OPERATING COMMITTEE To provide for the overall supervision and direction of Joint Operations, there is established an Operating Committee composed of representatives of each Party holding a Participating Interest. Each Party shall appoint one (1) representative and one (1) alternate representative to serve on the Operating Committee. Each Party shall as soon as possible after the date of this Agreement give notice in writing to the other Parties of the name and address of its representative and alternate representative to serve on the Operating Committee. Each Party shall have the right to change its representative and alternate at any time by giving notice to such effect to the other Parties in writing. 5.2 POWERS AND DUTIES OF OPERATING COMMITTEE The Operating Committee shall have power and duty to authorize and supervise Joint Operations that are necessary or desirable to fulfill the Concession Agreement and properly exploit the Project in accordance with this Agreement and in a manner appropriate in the circumstances. X X X X X (SECTIONS DELETED FROM THIS SUMMARY) 5.9 VOTING PROCEDURE All votes, except as expressly provided for elsewhere in this Agreement, will be decided by the majority of the number of Parties with Participating Interests. At the time this agreement is signed, there are three (3) Parties with Participating Interests. The number of voting interests will not be increased by any sale or division of interests in the Project, but will stay at three (3) total, with any interests created after the effective date of this Agreement having a percentage share of the original interest from which the new or acquired interest is derived, and the total of those percentage interests so subdivided will count as one total vote. All effective decisions and affirmative votes will be either unanimous or by a two vote to one vote margin. However, CCP as the Operator or a successor Operator with the same interest as CCP originally holds in the Project, or the combined divided or successor interests to the original April 19, 2006 Page 6 of 8 CCP interest, shall have a veto vote that may be exercised over any affirmative vote that it does not agree to as one of the three (3) total votes under this section. Once CCP or that successor interest votes in the affirmative on any vote, the veto vote may not be later exercised to negate that decision. Thus the Operator may veto a vote, but no work on the Project, other than for Minimum Work Commitments under the Concession Agreement, if any, can go forward without at least a 2/3 vote based on the original Participating Interest formula set forth in this Section 5.9. X X X X X (SECTIONS DELETED FROM THIS SUMMARY) ARTICLE VI - WORK PROGRAMS AND BUDGETS ______________________________________ 6.1 DRILLING OF OBLIGATION WELL ONE (A) Within sixty (60) days after the date of execution of this Agreement, Operator shall deliver to the Parties a proposed Work Program and Budget detailing the Joint Operations to be performed for the mobilization of a rig and equipment and for the drilling, testing, and evaluation of Obligation Well One. It is the goal of the Joint Operation to begin the drilling of Obligation Well One by September 1, 2006. (B) After obtaining the results of Obligation Well One, Operator shall as soon as possible submit to the Operating Committee and to the Parties a report containing available details concerning the results of and data from Obligation Well One and Operator's recommendation as to whether the result merits the drilling of Obligation Wells Two and Three. (C) Parties agree that Obligation Well One includes approval for the drilling, testing, logging, setting casing on, and a test or completion attempt for the well, with no Casing Point Election as is provided for other wells under this Agreement. (D) By unanimous agreement of the Parties, Obligation Well One may be abandoned at any point without finishing the drilling of, testing, evaluation, or completion of the well. (E) If the attempt to drill and evaluate Obligation Well One is abandoned for any reason, the Parties or remaining Party or Parties (if any Party or Parties withdraw from the Project as provided in this agreement), may propose a replacement or alternate Obligation Well One and proceed then as set forth in this agreement during and after that well as though it was the originally proposed Obligation Well One. April 19, 2006 Page 7 of 8 (F) Parties agreeing to do so within Five (5) Days of being presented with the Operator's recommendation as in Section 6.1(B) above will continue the Project and proceed to the drilling of Obligation Wells Two and Three. 6.2 DRILLING OF OBLIGATION WELLS TWO AND THREE (A) Once a vote is taken as set forth in Article V as to whether to proceed with the drilling of Obligation Wells Two and Three, and if the result is positive, the drilling, testing, and evaluation of those wells shall proceed under the direction of the Operator, with the Operator reporting on the operations and results of those wells as provided elsewhere in this Agreement. (B) Parties agree that approval to drill Obligation Wells Two and Three includes approval for the drilling, testing, logging, setting casing on, and a test or completion attempt for the well(s), with no Casing Point Election as is provided for other wells under this Agreement. (C) By unanimous vote of the Operating Committee as is set forth in Article V, any operation on Obligation Well Two or Obligation Well Three may be stopped, modified, or abandoned. 6.3 DEVELOPMENT PROGRAM AND DRILLING (A) If after the drilling, testing, and evaluation of Obligation Wells Two and Three the Operating Committee determines that the Project merits development, Operator within Ninety (90) Days, shall deliver to the Parties a proposed Work Program and Budget for the development of the Project. Within Ninety (90) Days of such delivery, or earlier if necessary to meet any applicable deadline under the Concession Agreement, the Operating Committee shall meet to consider, modify and then either approve or reject the development Work Program and Budget. If the development Work Program and Budget is approved by the Operating Committee, Operator shall take such steps as may be required under the Concession Agreement to secure approval of the development Work Program and Budget by the Government, if required. In the event the Government requires changes in the development Work Program and Budget, the matter shall be resubmitted to the Operating Committee for further consideration. (B) The Work Program and Budget agreed pursuant to this Article 6.3 shall include the Minimum Work Obligations, or at least that part of such Minimum Work Obligations required to be carried out during the Calendar Year in question under the terms of the Concession Agreement. If within the time periods prescribed in this Article 6.3 the Operating Committee is unable to agree on such a Work Program and Budget, then the proposal capable of satisfying the Minimum Work Obligations for the Calendar Year in question that receives the largest Participating Interest vote (even if less than the applicable percentage under Article 5.9) shall be deemed adopted as part of the annual Work Program and Budget. If competing proposals receive equal votes, then Operator shall choose between those competing proposals. April 19, 2006 Page 8 of 8 Any portion of a Work Program and Budget adopted pursuant to this Article 6.3(B) instead of Article 5.9 shall include only such operations for the Joint Account as are necessary to maintain the Concession Agreement in full force and effect, including such operations as are necessary to fulfill the Minimum Work Obligations, if any, required for the given Calendar Year. (C) The Operator will submit to the Parties a proposed Work Program and Budget by October 31 of each Calendar Year for the following year, and the Parties will vote on and approve the presented Work Program and Budget or an agreed or compromise program. (D) Any approved Work Program and Budget may be revised by the Operating Committee from time to time. To the extent such revisions are approved by the Operating Committee, the Work Program and Budget shall be amended accordingly. The Operator shall prepare and submit a corresponding work program and budget amendment to the Government if required by the terms of the Concession Agreement. (E) During the development Work Program, any Party or Participating Interest may go "non-consent" for an operation under the following terms: X X X X X (SECTIONS DELETED FROM THIS SUMMARY) [ End of Draft Text Example ] EX-10.4 5 ex10-4.txt JOINT OPERATING AGREEMENT BY AND BETWEEN ... EXHIBIT 10-4 [AIPN LOGO GOES HERE] MODEL FORM INTERNATIONAL OPERATING AGREEMENT 1995 DISCLAIMER THIS MODEL FORM HAS BEEN PREPARED ONLY AS A SUGGESTED GUIDE AND MAY NOT CONTAIN ALL OF THE PROVISIONS THAT MAY BE REQUIRED BY THE PARTIES TO AN ACTUAL AGREEMENT. THIS MODEL FORM HAS NOT BEEN ENDORSED BY THE ASSOCIATION OF INTERNATIONAL PETROLEUM NEGOTIATORS (AIPN) OR BY ANY MEMBERS OF THE AIPN. USE OF THIS MODEL FORM OR ANY PORTION OR VARIATION THEREOF SHALL BE AT THE SOLE DISCRETION AND RISK OF THE USER PARTIES. USERS OF THE MODEL FORM OR ANY VARIATION THEREOF ARE ENCOURAGED TO SEEK THE ADVICE OF LEGAL COUNSEL TO ENSURE THAT THE FINAL DOCUMENT REFLECTS THE ACTUAL AGREEMENT OF THE PARTIES. THE AIPN DISCLAIMS ANY AND ALL INTERESTS OR LIABILITY WHATSOEVER FOR LOSS OR DAMAGES THAT MAY RESULT FROM USE OF THIS MODEL FORM OR PORTIONS OR VARIATIONS THEREOF. ALL LOGOS AND REFERENCES TO THE AIPN MUST BE REMOVED FROM THIS MODEL FORM WHEN USED AS AN ACTUAL AGREEMENT. (C) Association of International Petroleum NegotiatorS 1995 MODEL FORM INTERNATIONAL OPERATING AGREEMENT COMPANIA CONSULTORA DE PETROLEO ("CCP") (1) ZIEGLER-PERU, INC. ("ZPI") (2) RADIAL ENERGY, INC. ("RADIAL") (3) OPERATING AGREEMENT COVERING: HUAYA ANTICLINE PROJECT ("PROJECT") LOCATED IN BLOCK 100 LORETO DEPARTMENT, PERU -2- -3- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 TABLE OF CONTENTS PAGE ARTICLE I - DEFINITIONS ..................................................... 1 ARTICLE II - EFFECTIVE DATE AND TERM ........................................ 3 ARTICLE III - SCOPE ......................................................... 4 3.1 Scope ......................................................... 4 3.2 Participating Interest ........................................ 4 3.3 Ownership, Obligations and Liabilities ........................ 4 3.4 Government Participation ...................................... 4 ARTICLE IV - OPERATOR .................................................... 5 4.1 Designation of Operator ....................................... 5 4.2 Rights and Duties of Operator ................................. 5 4.3 Employees of Operator ......................................... 5 4.4 Contractors ................................................... 6 4.5 Information Supplied by Operator .............................. 6 4.6 Settlement of Claims and Lawsuits ............................. 6 4.7 Limitation on Liability of Operator ........................... 6 4.8 Insurance Obtained by Operator ................................ 7 4.9 Commingling of Funds .......................................... 8 4.10 Resignation of Operator ....................................... 8 4.11 Removal of Operator ........................................... 8 4.12 Appointment of Successor ...................................... 8 ARTICLE V - OPERATING COMMITTEE ............................................. 9 5.1 Establishment of Operating Committee .......................... 9 5.2 Powers and Duties of Operating Committee ...................... 9 5.3 Authority to Vote ............................................. 9 5.4 Subcommittees ................................................. 9 5.5 Notice of Meeting ............................................. 9 5.6 Contents of Meeting Notice..................................... 9 5.7 Location of Meetings .......................................... 9 5.8 Operator's Duties for Meetings ................................ 9 5.9 Voting Procedure ............................................. 10 5.10 Record of Votes .............................................. 10 5.11 Minutes ...................................................... 10 5.12 Voting by Notice ............................................. 10 5.13 Effect of Vote ............................................... 10 ARTICLE VI - WORK PROGRAMS AND BUDGETS ..................................... 11 6.1 Drilling of Obligation Well One .............................. 11 6.2 Drilling of Obligation Wells Two and Three ................... 11 6.3 Development Program and Drilling ............................. 12 6.4 Production ................................................... 12 6.5 Itemization of Expenditures .................................. 12 6.6 Contract Awards .............................................. 13 6.7 Authorization for Expenditure ("AFE") Procedure .............. 13 6.8 Overexpenditures of Work Programs and Budgets ................ 13 ARTICLE VII - OPERATIONS BY LESS THAN ALL PARTIES .......................... 13 7.1 Limitation on Applicability .................................. 13 -i- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 ARTICLE VIII - DEFAULT ..................................................... 14 8.1 Default and Notice ........................................... 14 8.2 Operating Committee Meetings and Data ........................ 14 8.3 Allocation of Defaulted Accounts ............................. 14 8.4 Remedies ..................................................... 15 8.5 Survival ..................................................... 16 8.6 No Right of Set Off .......................................... 16 ARTICLE IX - DISPOSITION OF PRODUCTION .................................... 16 9.1 Right and Obligation to Take in Kind ......................... 16 9.2 Agreement for Crude Oil Sales ................................ 16 9.3 Separate Agreement for Natural Gas ........................... 17 ARTICLE X - ABANDONMENT .................................................. 17 10.1 Abandonment of Wells Drilled as Joint Operations ............. 17 ARTICLE XI - SURRENDER, EXTENSIONS AND RENEWALS ........................... 17 11.1 Surrender .................................................... 17 11.2 Extension of the Term ........................................ 18 ARTICLE XII - TRANSFER OF INTEREST OR RIGHTS ............................... 18 12.1 Obligations .................................................. 18 12.2 Rights ....................................................... 19 ARTICLE XIII - WITHDRAWAL FROM AGREEMENT ................................... 19 13.1 Right of Withdrawal .......................................... 19 13.2 Partial or Complete Withdrawal ............................... 19 13.3 Rights of a Withdrawing Party ................................ 20 13.4 Obligations and Liabilities of a Withdrawing Party ........... 20 13.5 Emergency .................................................... 20 13.6 Assignment ................................................... 20 13.7 Approvals .................................................... 21 13.8 Security ..................................................... 21 13.9 Withdrawal or Abandonment by all Parties ..................... 21 ARTICLE XIV - RELATIONSHIP OF PARTIES AND TAX .............................. 21 14.1 Relationship of Parties ...................................... 21 14.2 Tax ........................................................ 21 14.3 United States Tax Election ................................... 21 ARTICLE XV - CONFIDENTIAL INFORMATION - PROPRIETARY TECHNOLOGY ............ 22 15.1 Confidential Information ..................................... 22 15.2 Continuing Obligations ....................................... 22 15.3 Proprietary Technology ....................................... 22 15.4 Trades of Information ........................................ 23 ARTICLE XVI - FORCE MAJEURE ................................................ 23 16.1 Obligations .................................................. 23 16.2 Definition of Force Majeure .................................. 23 ARTICLE XVII - NOTICES ..................................................... 23 ARTICLE XVIII - APPLICABLE LAW AND DISPUTE RESOLUTION ...................... 24 18.1 Applicable Law ............................................... 24 18.2 Dispute Resolution ........................................... 24 ARTICLE XIX - ALLOCATION OF COST RECOVERY RIGHTS ........................... 25 -ii- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 19.1 Allocation of Production ..................................... 25 ARTICLE XX - GENERAL PROVISIONS ............................................ 25 20.1 Warranties as to no Payments, Gifts and Loans ................ 25 20.2 Conflicts of Interest ........................................ 25 20.3 Public Announcements ......................................... 26 20.4 Successors and Assigns ....................................... 26 20.5 Waiver ....................................................... 26 20.6 Severance of Invalid Provisions .............................. 26 20.7 Modifications ................................................ 26 20.8 Headings ..................................................... 26 20.9 Singular and Plural .......................................... 26 20.10 Gender ....................................................... 26 20.11 Counterpart Execution ........................................ 26 20.12 Entirety ..................................................... 26 Signature Page ........................................................ 27 Exhibit "A" - Contract Area for Huaya Anticline Project - Map Exhibit "B" - License Contract for Block 100 Exhibit "C" - Accounting Procedure -iii- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 [ This Page Intentionally Left Blank ] -iv- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 OPERATING AGREEMENT ("JOA") THIS AGREEMENT (hereinafter "Agreement") is made as of the Effective Date among Compania Consultora de Petroleo, S.A. (hereinafter "CCP"), a company incorporated in the Republic of Peru; Radial Energy, Inc., a company incorporated in Nevada, United States of America (hereinafter referred to as "Radial"); and Ziegler-Peru, Inc., a company incorporated in Texas, United States of America (hereinafter referred to as "ZPI"). The companies named above may sometimes individually be referred to as "Party" and collectively as the "Parties". WITNESSETH: WHEREAS, the Parties have entered into contracts and agreements for oil and gas exploration, exploitation, development, and production as regards a License Contract (hereinafter the "License Contract" or "Contract") with the Republic of Peru, Ministry of Mines, and/or PeruPetro covering certain areas located in the Loreto Department, Peru - Ucayali Basin called Block 100, with the "Contract Area" being the Huaya Anticline Project. Exhibit A to this Agreement is a map showing the Huaya Anticline Project (hereinafter "Project"), and Exhibit B is a copy of the License Contract for Block 100; and WHEREAS, the Parties desire to define their respective rights and obligations with respect to their operations under the Contract Area; NOW, THEREFORE, in consideration of the premises and the mutual covenants and agreements and obligations set out below and to be performed, the Parties agree as follows: ARTICLE I - DEFINITIONS As used in this Agreement, the following words and terms shall have the meaning ascribed to them below: I.1 ACCOUNTING PROCEDURE means the rules, provisions and conditions set forth and contained in Exhibit C to this Agreement. I.2 AFE means an authorization for expenditure pursuant to Article 6.6. I.3 AFFILIATE means a company, partnership or other legal entity which controls, or is controlled by, or which is controlled by an entity which controls, a Party. Control means the ownership directly or indirectly of fifty (50) percent or more of the voting rights in a company, partnership or legal entity. I.1 AGREED INTEREST RATE means interest compounded on a monthly basis, at the rate per annum equal to the one (1) month term, London Interbank Offered Rate (LIBOR rate) for U.S. dollar deposits, as published by THE WALL STREET JOURNAL or if not published there, then by the FINANCIAL TIMES OF LONDON, plus N/A ( ) percentage points, applicable on the first Business Day prior to the due date of payment and thereafter on the first Business Day of each succeeding calendar month. If the aforesaid rate is contrary to any applicable usury law, the rate of interest to be charged shall be the maximum rate permitted by such applicable law. I.2 AGREEMENT means this agreement, together with the Exhibits attached to this agreement, and any extension, renewal or amendment hereof agreed to in writing by the Parties. I.3 APPRAISAL WELL means any well (other than an Exploration Well or a Development Well) whose purpose at the time of commencement of drilling such well is to appraise the extent or the volume of Hydrocarbon reserves contained in an existing Discovery. I.4 BARREL means a quantity consisting of forty-two (42) United States gallons, corrected to a temperature of sixty (60) degrees Fahrenheit under one (1) atmosphere of pressure. I.5 BUSINESS DAY means a day on which the banks in LIMA, PERU are customarily open for business. I.6 CALENDAR QUARTER means a period of three (3) months commencing with January 1 and ending on the following March 31, a period of three (3) months commencing with April 1 and ending on the following June 30, a period of three (3) months commencing with July 1 and ending on the following September 30, or a period of three (3) months commencing with October 1 and ending on the following December 31 according to the Gregorian Calendar. I.7 CALENDAR YEAR means a period of twelve (12) months commencing with January 1 and ending on the following December 31. I.8 CASH PREMIUM means the payment made pursuant to Article 7.5(B) by a Non-Consenting Party to reinstate its rights to participate in an Exclusive Operation. I.9 COMMERCIAL DISCOVERY means any Discovery which is sufficient to entitle the Parties to apply for authorization from the Government to commence exploitation. -1- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 I.10 COMPLETION means an operation intended to complete a well through the Christmas tree as a producer of Hydrocarbons in one or more Zones, including, but not limited to, the setting of production casing, perforating, stimulating the well and production Testing conducted in such operation. COMPLETE and other derivatives shall be construed accordingly. I.11 CONSENTING PARTY means a Party who agrees to participate in and pay its share of the cost of a Joint Operation. I.12 CONTRACT means the License Contract awarded for Block 100 as concluded between the Republic of Peru, Ministry of Mines, and/or PeruPetro and CCP as identified in the second paragraph of this Agreement, and any extension, renewal or amendment thereof agreed to in writing by or for the Parties, and those laws, statutes, rules and regulations with respect to the exploration, exploitation, development, and production of Hydrocarbons that govern such instrument or are incorporated by the terms of such instrument. I.13 CONTRACT AREA means as of the Effective Date the surface area of the Huaya Anticline Project which is described in Exhibit A to this Agreement, and formations to all depths below that surface area on which Joint Operations will be conducted. I.14 DAY means a calendar day unless otherwise specifically provided. I.15 DEFAULT NOTICE shall have the meaning ascribed in Article 8.1. I.16 DEFAULTING PARTY shall have the meaning ascribed in Article 8.1. I.17 DEEPENING means an operation whereby a well is drilled to an objective Zone below the deepest Zone in which the well was previously drilled, or below the deepest Zone proposed in the associated AFE, whichever is the deeper. DEEPEN and other derivatives shall be construed accordingly. I.18 DEVELOPMENT PLAN means a plan for the development of Hydrocarbons from the Contract Area. I.19 DEVELOPMENT WELL means any well drilled for the production of Hydrocarbons pursuant to a Development Plan. I.20 DISCOVERY means the discovery of an accumulation of Hydrocarbons whose existence until that moment was unproven by drilling. I.21 EFFECTIVE DATE means the date this Agreement comes into effect as stated in Article II. I.22 ENTITLEMENT means a quantity of Hydrocarbons of which a Party has the right and obligation to take delivery pursuant to the Contract or, if applicable, an offtake agreement, and the terms of this Agreement, after adjustment for overlifts and underlifts. I.23 EXCLUSIVE OPERATION means those operations and activities carried out pursuant to this Agreement, the costs of which are chargeable to the account of less than all the Parties. I.24 EXCLUSIVE WELL means a well drilled pursuant to an Exclusive Operation. I.25 EXPLOITATION AREA means that part of the Contract Area which is established for development of a Commercial Discovery pursuant to the Contract or if the Contract does not establish an exploitation area, then that part of the Contract Area which is delineated as the exploitation area in a Development Plan approved as a Joint Operation or as an Exclusive Operation. I.26 EXPLOITATION PERIOD means any and all periods of exploitation during which the production and removal of Hydrocarbons is permitted under the Contract. I.27 EXPLORATION PERIOD means any and all periods of exploration set out in the Contract. I.28 EXPLORATION WELL means any well whose purpose at the time of the commencement of drilling is to explore for an accumulation of Hydrocarbons whose existence was at that time unproven by drilling. I.29 G & G DATA means only geological, geophysical and geochemical data and other similar information that is not obtained through a well bore. I.30 GOVERNMENT means the government the Republic of Peru and any political subdivision or agency or instrumentality thereof, including without limitation the Government Oil Company. I.31 GOVERNMENT OIL COMPANY means PeruPetro. I.32 GROSS NEGLIGENCE means any act or failure to act (whether sole, joint or concurrent) by any person or entity which was intended to cause, or which was in reckless disregard of or wanton indifference to, harmful consequences such person or entity knew, or should have known, such act or failure would have on the safety or property of another person or entity. I.33 HYDROCARBONS means all substances including liquid and gaseous hydrocarbons which are subject to and covered by the Contract. I.34 IN KIND PREMIUM means the grant of an interest in production made pursuant to Article 7.5(C) by a Non-Consenting Party to reinstate its rights under an Exclusive Operation. I.35 JOINT ACCOUNT means the accounts maintained by Operator in accordance with the provisions of this Agreement and of the Accounting Procedure for Joint Operations. -2- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 I.36 JOINT OPERATIONS means those operations and activities carried out by Operator pursuant to this Agreement, the costs of which are chargeable to all Parties unless otherwise defined in this Agreement or agreed to by the Parties. I.37 JOINT PROPERTY means, at any point in time, all wells, facilities, equipment, materials, information, funds and the property held for use in Joint Operations. I.38 MINIMUM WORK OBLIGATIONS means those work and/or expenditure obligations specified in the Contract which must be performed during the then current Contract phase or period in order to satisfy the obligations of the Contract, and may become part of or become the MINIMUM DEVELOPMENT PROGRAM as the Project moves to the development phase. I.39 MINIMUM DEVELOPMENT PROGRAM means the program that is applied for by CCP and approved by the Government as the development plan for proceeding to that phase of the Project and is the minimum that the Parties agree to participate in going forward beyond Obligation Well Three. 1.39A NON-CONSENTING PARTY OR NON-PARTICIPATING PARTY means a Party who elects not to participate in a Joint Operation. 1.39B NON-OPERATOR(S) means the Party or Parties to this Agreement other than Operator. I.40 OPERATING COMMITTEE means the committee constituted in accordance with Article V. I.41 OPERATOR means a Party to this Agreement designated as such in accordance with this Agreement. I.42 PARTICIPATING INTEREST means the undivided percentage interest of each Party in the rights and obligations derived from the Contract and this Agreement. I.43 PARTY means any of the entities named in the first paragraph to this Agreement and any respective permitted successors or assigns. I.44 PETROLEUM COSTS means costs and expenses incurred by the Parties and allowed to be recovered pursuant to the Contract. I.45 PLUGGING BACK means a single operation whereby a deeper Zone is abandoned in order to attempt a Completion in a shallower Zone. Plug Back and other derivatives shall be construed accordingly. I.46 PRODUCTION BONUS includes any funds payable by the Parties under any provision of the Contract. I.47 PROFIT OIL means that portion of the total production of Hydrocarbons, in excess of Cost Oil, which is allocated to the Parties under the terms of the Contract, if applicable. I.48 REALLOCATION COST OIL shall have the meaning ascribed in Article 19.2. I.49 RECOMPLETION means an operation whereby a Completion in one Zone is abandoned in order to attempt a Completion in a different Zone within the existing wellbore. RECOMPLETE and other derivatives shall be construed accordingly. I.50 REWORKING means an operation conducted in the wellbore of a well after it is Completed to secure, restore, or improve production in a Zone which is currently open to production in the wellbore. Such operations include, but are not limited to, well stimulation operations, but exclude any routine repair or maintenance work, or drilling, Sidetracking, Deepening, Completing, Recompleting, or Plugging Back of a well. REWORK and other derivatives shall be construed accordingly. I.51 SENIOR SUPERVISORY PERSONNEL means with respect to a Party, any individual who functions as such Party's designated manager or supervisor who is responsible for, or in charge of onsite drilling, construction or production and related operations, or any other field operations; and any individual who functions for such Party or one of its Affiliates at a management level equivalent to or superior to the tier selected, or any officer or director of such Party or one of its Affiliates. 1.51 SIDETRACKING means the directional control and intentional deviation of a well from vertical so as to change the bottom hole location unless done to straighten the hole or to drill around junk in the hole or to overcome other mechanical difficulties. SIDETRACK and other derivatives shall be construed accordingly. 1.52 TESTING means an operation intended to evaluate the capacity of a Zone to produce Hydrocarbons. TEST and other derivatives shall be construed accordingly. 1.53 WORK PROGRAM AND BUDGET means a work program for Joint Operations and budget therefore as described and approved in accordance with Article VI. 1.54 ZONE means a stratum of earth containing or thought to contain an accumulation of Hydrocarbons separately producible from any other accumulation of Hydrocarbons. ARTICLE II - EFFECTIVE DATE AND TERM -3- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 This Agreement shall have effect from May, 10 2006, and shall continue in effect until the Contract terminates or all Joint Operations are concluded, and all materials, equipment and personal property used in connection with the Joint Operations have been removed and disposed of, and final settlement has been made among the Parties. Notwithstanding the preceding sentence: (A) Article X shall remain in effect until all wells have been properly abandoned; and (B) Article 4.5 and Article XVIII shall remain in effect until all obligations, claims, arbitrations and lawsuits have been settled or otherwise resolved. ARTICLE III - SCOPE 3.1 SCOPE (A) The purpose of this Agreement is to establish the respective rights and obligations of the Parties with regard to operations under the Contract and in the Contract Area, including without limitation the joint exploration, appraisal, development and production of Hydrocarbon reserves from the Contract Area. (B) Without limiting the generality of Article 3.1(A), the following activities are outside of the scope of this Agreement and are not addressed herein: (1) Construction, operation, maintenance, repair and removal of facilities downstream from the point of delivery of the Parties' shares of Hydrocarbons under the offtake agreement provided for in Article 9.2; (2) Transportation of Hydrocarbons beyond the point of delivery of the Parties' shares of Hydrocarbons under the offtake agreement provided for in Article 9.2; (3) Marketing and sales of Hydrocarbons, except as expressly provided in Articles 7.5, 7.11(E) and 8.4 and in Article IX; (4) Acquisition of rights to explore for, appraise, develop or produce Hydrocarbons outside of the Contract Area (other than as a consequence of unitization with an adjoining contract area under the terms of the Contract); and (5) Exploration, appraisal, development or production of minerals other than Hydrocarbons, whether inside or outside of the Contract Area. 3.2 PARTICIPATING INTEREST (A) The Participating Interests of the Parties as of the Effective Date are: CCP 70 % --- -- RADIAL 20 % ------ -- ZPI 10 % --- -- (B) If a Party transfers all or part of its Participating Interest pursuant to the provisions of this Agreement and the Contract, the Participating Interests of the Parties shall be revised accordingly. 3.3 OWNERSHIP,OBLIGATIONS AND LIABILITIES (3) Unless otherwise provided in this Agreement, all the rights and interests in and under the Contract, all Joint Property and any Hydrocarbons produced from the Contract Area shall, subject to the terms of the Contract, be owned by the Parties in accordance with their respective Participating Interests. (3) Unless otherwise provided in this Agreement, the obligations of the Parties under the Contract and all liabilities and expenses incurred by Operator in connection with Joint Operations shall be charged to the Joint Account and all credits to the Joint Account shall be shared by the Parties, as among themselves, in accordance with their respective Participating Interests. (3) Each Party shall pay when due, in accordance with the Accounting Procedure, its Participating Interest share of Joint Account expenses, including cash advances and interest, accrued pursuant to this Agreement. The Parties agree that time is of the essence for payments owing under this Agreement. A Party's payment of any charge under this Agreement shall be without prejudice to its right to later contest the charge. 3.4 GOVERNMENT PARTICIPATION If Government Oil Company elects to participate in the rights and obligations of Parties pursuant to provisions of or requirements of the Contract, the Parties shall contribute, in proportion to their respective Participating Interests, to the interest to be acquired by Government Oil Company and shall execute such documents as may be necessary to effect such transfer of interests and the joinder of the Government Oil Company as a party to this Agreement. All payments received for the transfer of such interests shall be credited to the Parties in proportion to their Participating Interests. 57 -4- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 ARTICLE IV - OPERATOR 4.1 DESIGNATION OF OPERATOR CCP is designated as Operator, and agrees to act as such. 4.2 RIGHTS AND DUTIES OF OPERATOR (A) Subject to the terms and conditions of this Agreement, Operator shall have all of the rights, functions and duties of Operator under the Contract and shall have exclusive charge of and shall conduct all Joint Operations. Operator may employ independent contractors and/or agents (which may include Affiliates of Operator) in such Joint Operations. (B) In the conduct of Joint Operations, Operator shall: (1) Perform Joint Operations in accordance with the provisions of the Contract, this Agreement and the instructions of the Operating Committee not in conflict with this Agreement; (2) Conduct all Joint Operations in a diligent, safe and efficient manner in accordance with good and prudent oil field practices and conservation principles generally followed by the international petroleum industry under similar circumstances; (3) Subject to Article 4.6 and the Accounting Procedure, neither gain a profit nor suffer a loss as a result of being the Operator in its conduct of Joint Operations, provided that Operator may rely upon Operating Committee approval of specific accounting practices not in conflict with the Accounting Procedure; (4) Perform the duties for the Operating Committee set out in Article V, and prepare and submit to the Operating Committee the proposed Work Programs, Budgets and AFEs as provided in Article VI; (5) Acquire all permits, consents, approvals, surface or other rights that may be required for or in connection with the conduct of Joint Operations; (6) Upon receipt of reasonable advance notice, permit the representatives of any of the Parties to have at all reasonable times and at their own risk and expense reasonable access to the Joint Operations with the right to observe all such Joint Operations and to inspect all Joint Property and to conduct financial audits as provided in the Accounting Procedure; (7) Maintain the Contract in full force and effect. Operator shall promptly pay and discharge all liabilities and expenses incurred in connection with Joint Operations and use its reasonable efforts to keep and maintain the Joint Property free from all liens, charges and encumbrances arising out of Joint Operations; (8) Pay to the Government for the Joint Account, within the periods and in the manner prescribed by the Contract and all applicable laws and regulations, all periodic payments, royalties, taxes, fees and other payments pertaining to Joint Operations, but excluding any taxes measured by the incomes of the Parties; (9) Carry out the obligations of Operator pursuant to the Contract, including, but not limited to, preparing and furnishing such reports, records and information as may be required pursuant to the Contract; (10) Have in accordance with the decisions of the Operating Committee, the exclusive right and obligation to represent the Parties in all dealings with the Government with respect to matters arising under the Contract and Joint Operations. Operator shall notify the other Parties as soon as possible of such meetings. Non-Operators shall have the right to attend such meetings but only in the capacity of observers. Nothing contained in this Agreement shall restrict any Party from holding discussions with the Government with respect to any issue peculiar to its particular business interests arising under the Contract or this Agreement, but in such event such Party shall promptly advise the Parties, if possible, before and in any event promptly after such discussions, provided that such Party shall not be required to divulge to the Parties any matters discussed to the extent the same involve proprietary information on matters not affecting the Parties; and (11) Take all necessary and proper measures for the protection of life, health, the environment and property in the case of an emergency; provided, however, that Operator shall immediately notify the Parties of the details of such emergency and measures. 4.3 EMPLOYEES OF OPERATOR Subject to the Contract and this Agreement, Operator shall determine the number of employees, the selection of such employees, the hours of work and the compensation to be paid all such employees in connection with Joint Operations. Operator shall employ only such employees, agents and contractors as are reasonably necessary to conduct Joint Operations. -5- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 4.4 CONTRACTORS Operator shall employ only such agents and contractors as are reasonably necessary to conduct Joint Operations. 4.5 INFORMATION SUPPLIED BY OPERATOR (A) Operator shall provide Non-Operators the following data and reports as they are currently produced or compiled from the Joint Operations: (1) Copies of all logs or surveys; (2) Daily drilling progress reports; (3) Copies of all Tests and core analysis reports; (4) Copies of the plugging reports; (5) Copies of the final geological and geophysical maps and reports; (6) Engineering studies, development schedules and annual progress reports on development projects; (7) Field and well performance reports, including reservoir studies and reserve estimates; (8) Copies of all reports relating to Joint Operations furnished by Operator to the Government, except magnetic tapes or computer generated or other electronic data which shall be stored by Operator and made available for inspection and/or copying at the sole expense of the Non-Operator requesting same; (9) Other reports as frequently as is justified by the activities or as instructed by the Operating Committee; and (10) Subject to Article 15.3, such additional information for Non-Operators as they or any of them may request, provided that the requesting Party or Parties pay the costs of preparation of such information and that the preparation of such information will not unduly burden Operator's administrative and technical personnel. Only Non-Operators who pay such costs shall receive such additional information. (B) Operator shall give Non-Operators access at all reasonable times to all other data acquired in the conduct of Joint Operations. Any Non-Operator may make copies of such other data at its sole expense. 4.6 SETTLEMENT OF CLAIMS AND LAWSUITS (A) Operator shall promptly notify the Parties of any and all material claims or suits and such other claims and suits as the Operating Committee may direct which arise out of Joint Operations or relate in any way to Joint Operations. Operator shall represent the Parties and defend or oppose the claim or suit. Operator may in its sole discretion compromise or settle any such claim or suit or any related series of claims or suits for an amount not to exceed the equivalent of U.S. dollars ten thousand (U.S. $ 10,000) exclusive of legal fees. Operator shall obtain the approval and direction of the Operating Committee on amounts in excess of the above stated amount. Each Non-Operator shall have the right to be represented by its own counsel at its own expense in the settlement, compromise or defense of such claims or suits. (B) Any Non-Operator shall promptly notify the other Parties of any claim made against such Non- Operator by a third party which arises out of or may affect the Joint Operations, and such Non-Operator shall defend or settle the same in accordance with any directions given by the Operating Committee. Those costs, expenses and damages incurred pursuant to such defense or settlement which are attributable to Joint Operations shall be for the Joint Account. (C) Notwithstanding Article 4.5(A) and Article 4.5(B), each Party shall have the right to participate in any such suit, prosecution, defense or settlement conducted in accordance with Article 4.5(A) and Article 4.5(B) at its sole cost and expense; provided always that no Party may settle its Participating Interest share of any claim without first satisfying the Operating Committee that it can do so without prejudicing the interests of the Joint Operations. 4.7 LIMITATION ON LIABILITY OF OPERATOR (A) Except as set out in this Article 4.6, NEITHER THE PARTY DESIGNATED AS OPERATOR NOR ANY OTHER INDEMNITEE (AS DEFINED BELOW) SHALL BEAR (EXCEPT AS A PARTY TO THE EXTENT OF ITS PARTICIPATING INTEREST SHARE) ANY DAMAGE, LOSS, COST, EXPENSE OR LIABILITY RESULTING FROM PERFORMING (OR FAILING TO PERFORM) THE DUTIES AND FUNCTIONS OF THE OPERATOR, AND THE INDEMNITEES ARE HEREBY RELEASED FROM LIABILITY TO NON-OPERATORS FOR ANY AND ALL DAMAGES, LOSSES, COSTS, EXPENSES AND LIABILITIES ARISING OUT OF, INCIDENT TO OR RESULTING FROM SUCH PERFORMANCE OR FAILURE TO PERFORM, EVEN THOUGH CAUSED IN WHOLE OR IN PART BY A PRE-EXISTING DEFECT, THE NEGLIGENCE (WHETHER SOLE, JOINT OR -6- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 CONCURRENT), GROSS NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL FAULT OF OPERATOR (OR ANY SUCH INDEMNITEE). (B) Except as set out in this Article 4.6, THE PARTIES SHALL IN PROPORTION TO THEIR PARTICIPATING INTERESTS DEFEND AND INDEMNIFY OPERATOR AND ITS AFFILIATES, AND THE OFFICERS AND DIRECTORS OF BOTH (COLLECTIVELY, THE "INDEMNITEES"), FROM ANY AND ALL DAMAGES, LOSSES, COSTS, EXPENSES (INCLUDING REASONABLE LEGAL COSTS, EXPENSES AND ATTORNEYS' FEES) AND LIABILITIES INCIDENT TO CLAIMS, DEMANDS OR CAUSES OF ACTION BROUGHT BY OR ON BEHALF OF ANY PERSON OR ENTITY, WHICH CLAIMS, DEMANDS OR CAUSES OF ACTION ARISE OUT OF, ARE INCIDENT TO OR RESULT FROM JOINT OPERATIONS, EVEN THOUGH CAUSED IN WHOLE OR IN PART BY A PRE-EXISTING DEFECT, THE NEGLIGENCE (WHETHER SOLE, JOINT OR CONCURRENT), GROSS NEGLIGENCE, STRICT LIABILITY OR OTHER LEGAL FAULT OF OPERATOR (OR ANY SUCH INDEMNITEE). (C) Nothing in this Article 4.6 shall be deemed to relieve the Party designated as Operator from its Participating Interest share of any damage, loss, cost, expense or liability arising out of, incident to or resulting from Joint Operations. (D) Notwithstanding Articles 4.6(A) and 4.6(B), if any Senior Supervisory Personnel of Operator or its Affiliates engage in Gross Negligence that proximately causes the Parties to incur damage, loss, cost, expense or liability for claims, demands or causes of action referred to in Articles 4.6(A) or 4.6(B), then, in addition to its Participating Interest share, Operator shall bear only the actual damage, loss, cost, expense and liability to repair, replace and/or remove Joint Property so damaged or lost, if any. 4.8 INSURANCE OBTAINED BY OPERATOR (A) Operator shall procure and maintain or cause to be procured and maintained for the Joint Account all insurance in the types and amounts required by the Contract and applicable laws, rules and regulations. (B) Operator shall obtain such further insurance, at competitive rates, as the Operating Committee may from time to time require. (C) Any Party may elect not to participate in the insurance to be procured under Article 4.7(B) provided such Party: (1) gives prompt notice to that effect to Operator; (2) does nothing which may interfere with Operator's negotiations for such insurance for the other Parties; and (3) obtains and maintains such insurance (in respect of which an annual certificate of adequate coverage from a reputable insurance broker shall be sufficient evidence) or other evidence of financial responsibility which fully covers its Participating Interest share of the risks that would be covered by the insurance procured under Article 4.7 (B), and which the Operating Committee may determine to be acceptable. No such determination of acceptability shall in any way absolve a non-participating Party from its obligation to meet each cash call including any cash call in respect of damages and losses and/or the costs of remedying the same in accordance with the terms of this Agreement. If such Party obtains other insurance, such insurance shall contain a waiver of subrogation in favor of all the other Parties, the Operator and their insurers but only in respect of their interests under this Agreement. (D) The cost of insurance in which all the Parties are participating shall be for the Joint Account and the cost of insurance in which less than all the Parties are participating shall be charged to the Parties participating in proportion to their respective Participating Interests. (E) Operator shall, in respect of all insurance obtained pursuant to this Article 4.7: (1) promptly inform the participating Parties when such insurance is obtained and supply them with certificates of insurance or copies of the relevant policies when the same are issued; (2) arrange for the participating Parties, according to their respective Participating Interests, to be named as co-insureds on the relevant policies with waivers of subrogation in favor of all the Parties; and (3) duly file all claims and take all necessary and proper steps to collect any proceeds and credit any proceeds to the participating Parties in proportion to their respective Participating Interests. (F) Operator shall use its reasonable efforts to require all contractors performing work in respect of Joint Operations to obtain and maintain any and all insurance in the types and amounts required by any applicable laws, rules and regulations or any decision of the Operating Committee and shall use its reasonable efforts to require all such contractors to name the Parties as additional insureds on such contractors' insurance policies -7- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 or to obtain from their insurers waivers of all rights of recourse against Operator, Non-Operators and their insurers. 4.9 COMMINGLING OF FUNDS Operator may not commingle with Operator's own funds the monies which Operator receives from or for the Joint Account pursuant to this Agreement. Operator will establish a separate bank account or accounts for the Joint Operation. 4.10 RESIGNATION OF OPERATOR Subject to Article 4.11, Operator may resign as Operator at any time by so notifying the other Parties at least one hundred and twenty (120) Days prior to the effective date of such resignation. 4.11 REMOVAL OF OPERATOR (A) Subject to Article 4.11, Operator shall be removed upon receipt of notice from any Non-Operator if: (1) An order is made by a court or an effective resolution is passed for the reorganization under any bankruptcy law, dissolution, liquidation, or winding up of Operator; (2) Operator dissolves, liquidates, is wound up, or otherwise terminates its existence; (3) Operator becomes insolvent, bankrupt or makes an assignment for the benefit of creditors; or (4) A receiver is appointed for a substantial part of Operator's assets. (B) Subject to Article 4.11, Operator may be removed by the decision of the Non-Operators if Operator has committed a material breach of this Agreement and has either failed to commence to cure that breach within thirty (30) Days of receipt of a notice from Non-Operators detailing the alleged breach or failed to diligently pursue the cure to completion. Any decision of Non-Operators to give notice of breach to Operator or to remove Operator under this Article 4.10(B) shall be made by an affirmative vote of all of the non-Operator interest in the Joint Operations. CHECK IF DESIRED. [X] OPTIONAL PROVISION (C) If Operator together with any Affiliate of Operator is or becomes the holder of a Participating Interest of less than TEN percent (___10__%), then Operator shall be required to promptly notify the other Parties. The Operating Committee shall then vote within THIRTY (_30___) Days of such notification on whether or not a successor Operator should be named pursuant to Article 4.11. CHECK IF DESIRED. [X] OPTIONAL PROVISION (D) If there is a direct or indirect change in control of Operator (other than a transfer of control to an Affiliate of Operator), Operator shall be required to promptly notify the other Parties. The Operating Committee shall vote within THIRTY (__30__) Days of such notification on whether or not a successor Operator should be named pursuant to Article 4.11. For purposes of this Article 4.10(D), control means the ownership directly or indirectly of: fifty percent (50%) or more of the voting rights in Operator. 4.12 APPOINTMENT OF SUCCESSOR When a change of Operator occurs pursuant to Article 4.9 or Article 4.10: (A) The Operating Committee shall meet as soon as possible to appoint a successor Operator pursuant to the voting procedure of Article 5.9. However, no Party may be appointed successor Operator against its will. (B) If the Operator disputes commission of or failure to rectify a material breach alleged pursuant to Article 4.10(B) and proceedings are initiated pursuant to Article XVIII, no successor Operator may be appointed pending the conclusion or abandonment of such proceedings, subject to the terms of Article 8.3 with respect to Operator's breach of its payment obligations. (C) If an Operator is removed, other than in the case of Article 4.10(C) or Article 4.10(D), neither Operator nor any Affiliate of Operator shall have the right to vote for itself on the appointment of a successor Operator, nor be considered as a candidate for the successor Operator. (D) A resigning or removed Operator shall be compensated out of the Joint Account for its reasonable expenses directly related to its resignation or removal, except in the case of Article 4.10(B). (E) The resigning or removed Operator and the successor Operator shall arrange for the taking of an inventory of all Joint Property and Hydrocarbons, and an audit of the books and records of the removed Operator. Such inventory and audit shall be completed, if possible, no later than the effective date of the change of Operator and shall be subject to the approval of the Operating Committee. The liabilities and expenses of such inventory and audit shall be charged to the Joint Account. -8- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 (F) The resignation or removal of Operator and its replacement by the successor Operator shall not become effective prior to receipt of any necessary Government approvals. (G) Upon the effective date of the resignation or removal, the successor Operator shall succeed to all duties, rights and authority prescribed for Operator. The former Operator shall transfer to the successor Operator custody of all Joint Property, books of account, records and other documents maintained by Operator pertaining to the Contract Area and to Joint Operations. Upon delivery of the above-described property and data, the former Operator shall be released and discharged from all obligations and liabilities as Operator accruing after such date. 9 ARTICLE V - OPERATING COMMITTEE 5.1 ESTABLISHMENT OF OPERATING COMMITTEE To provide for the overall supervision and direction of Joint Operations, there is established an Operating Committee composed of representatives of each Party holding a Participating Interest in the Project. Each Party shall appoint one (1) representative and one (1) alternate representative to serve on the Operating Committee. Each Party shall as soon as possible after the date of this Agreement give notice in writing to the other Parties of the name and address of its representative and alternate representative to serve on the Operating Committee. Each Party shall have the right to change its representative and alternate at any time by giving notice to such effect to the other Parties in writing. Based on the voting procedure in Section 5.9 below, fractional subsequent interests of the original Party interests may have only a fractional vote on the Operating Committee. 5.2 POWERS AND DUTIES OF OPERATING COMMITTEE The Operating Committee shall have power and duty to authorize and supervise Joint Operations that are necessary or desirable to fulfill the Contract License and properly exploit the Project in accordance with this Agreement and in a manner appropriate in the circumstances. 5.3 AUTHORITY TO VOTE The representative of a Party, or in his absence his alternate representative, shall be authorized to represent and bind such Party with respect to any matter which is within the powers of the Operating Committee and that is properly brought before the Operating Committee. Each such representative shall have a vote equal to the voting rights of the Participating Interest of the Party such person represents as shown in the section covering the Voting Procedure in Section 5.9 below. Each alternate representative shall be entitled to attend all Operating Committee meetings but shall have no vote at such meetings except in the absence of the representative for whom he is the alternate. In addition to the representative and alternate representative, each Party may also bring to any Operating Committee meetings such technical and other advisors as it may deem appropriate. 5.4 SUBCOMMITTEES The Operating Committee may establish such subcommittees, including technical subcommittees, as the Operating Committee may deem appropriate. The functions of such subcommittees shall be in an advisory capacity or as otherwise determined unanimously by the Parties. 5.5 NOTICE OF MEETING (A) Operator may call a meeting of the Operating Committee by giving notice to the Parties at least fifteen (15) Days in advance of such meeting. (B) Any Non-Operator may request a meeting of the Operating Committee by giving notice to all the other Parties. Upon receiving such request by an Party or Participating Interest, Operator shall call such meeting for a date not less than fifteen (15) Days nor more than twenty (20) Days after receipt of the request. (C) The notice periods above or any meeting dates or schedule may only be waived or modified with the unanimous written consent of all the Parties. 5.6 CONTENTS OF MEETING NOTICE (A) Each notice of a meeting of the Operating Committee as provided by Operator shall contain: (1) The date, time and location of the meeting; and (2) An agenda of the matters and proposals to be considered and/or voted upon. (B) A Party, by notice to the other Parties given not less than seven (7) Days prior to a meeting, may add additional matters to the agenda for a meeting. (C) On the request of a Party, and with the unanimous consent of all Parties, the Operating Committee may consider at a meeting a proposal not contained in such meeting agenda. 5.7 LOCATION OF MEETINGS -9- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 All meetings of the Operating Committee shall be held in Lima, Peru, or elsewhere as decided by the Operating Committee. 5.8 OPERATOR'S DUTIES FOR MEETINGS (A) With respect to meetings of the Operating Committee and any subcommittee, Operator's duties shall include, but not be limited to: (1) Timely preparation and distribution of the agenda; (2) Organization and conduct of the meeting; and (3) Preparation of a written record or minutes of each meeting. (B) Operator shall have the right to appoint the chairman of the Operating Committee and all subcommittees. 5.9 VOTING PROCEDURE At the time this agreement is signed, there are three (3) Parties with Participating Interests. The number of votes of the Operating Committee will not be increased by any sale or division of interests in the Project, but will stay at three (3) total, with any interests created after the effective date of this Agreement having a fractional share of the original interest from which the new or acquired interest is derived, and the total of those fractional interests so subdivided from one vote will still or only count as one total vote. All affirmative or approving votes of the Operating Committee will be either unanimous or by a two vote to one vote margin. However, the CCP vote, or its successor or the total of any created fractional interests of that one vote, shall have a veto vote that may be exercised over any affirmative vote of the other two voting interests with which it does not agree. Once the CCP interest votes in the affirmative on any vote, the veto vote may not be later exercised to negate that decision. CCP thus has three voting options, one is to agree, one is to veto, and the third is to vote to not participate but to allow the operation to proceed without its participation as is set forth in Article 7.1 (D) and (E) below. If any Party or Parties withdraw from the Project, the same successor interest will be created for voting as for any sale or division of interests as set forth above. 5.10 RECORD OF VOTES The chairman of the Operating Committee shall appoint a secretary who shall make a record of each proposal voted on and the results of such voting at each Operating Committee meeting. Each representative shall sign and be provided a copy of such record at the end of such meeting and it shall be considered the final record of the decisions of the Operating Committee. 5.11 MINUTES The secretary shall provide each Party with a copy of the minutes of the Operating Committee meeting within fifteen (15) Days after the end of the meeting. Each Party shall have fifteen (15) Days after receipt of such minutes to give notice of its objections to the minutes to the secretary. A failure to give notice specifying objection to such minutes within said fifteen (15) Day period shall be deemed to be approval of such minutes. In any event, the votes recorded under Article 5.10 shall take precedence over the minutes described above. 5.12 VOTING BY NOTICE (A) In lieu of a meeting, any Party may submit any proposal to the Operating Committee for a vote by notice. The proposing Party or Parties shall notify Operator who shall give each representative notice describing the proposal so submitted. Each Party shall communicate its vote by notice to Operator and the other Parties within five (5) Days after receipt of Operator's notice. (B) Except in the case of Article 5.12(A)(1), any Non-Operator may by notice delivered to all Parties within three (3) Days of receipt of Operator's notice request that the proposal be decided at a meeting rather than by notice. In such an event, that proposal shall be decided at a meeting duly called for that purpose. (C) Except as provided in Article X, any Party failing to communicate its vote in a timely manner shall be deemed to have voted against such proposal. (D) If a meeting is not requested, then at the expiration of the appropriate time period, Operator shall give each Party a confirmation notice stating the tabulation and results of the vote. 5.13 EFFECT OF VOTE All decisions taken by the Operating Committee pursuant to this Article V, shall be conclusive and - binding on all the Parties, except that: (A) If pursuant to this Article V, a Joint Operation, other than an operation to fulfill the Minimum Work Obligations, has been properly proposed to the Operating Committee and the Operating Committee has not approved such proposal in a timely manner, then any Party may conduct procedures to implement operations essentially the same as those proposed for such Joint Operation within the time frame as follows: -10- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 (1) For proposals involving the use of a contractor's drilling rig that is standing by in the Contract Area, such right shall be exercisable for twenty-four (24) hours after the time specified in Article 5.12(A)(1) has expired or after receipt of Operator's notice given pursuant to Article 5.13(D), as applicable. (2) For all other proposals, such right shall be exercisable for ten (10) Days after the date the Operating Committee was required to consider such proposal pursuant to Article 5.6 or Article 5.12. (B) If a Party voted against any proposal which was approved by the Operating Committee and which could be conducted as an Exclusive Operation pursuant to Article VII, other than any proposal relating to Minimum Work Obligations, then such Party shall have the right not to participate in the operation contemplated by such approval. The Parties that were not entitled to give or did not give notice of non- consent shall be Consenting Parties as to the operation contemplated by the Operating Committee approval, and shall conduct such operation as an Exclusive Operation under Article VII. Any Party that gave notice of non-consent shall be a Non-Consenting Party as to such Exclusive Operation. (C) The Operating Committee may, at any time, pursuant to this Article V, reconsider and approve, decide or take action on any proposal that the Operating Committee declined to approve earlier, or modify or revoke an earlier approval, decision or action. (D) Once a Joint Operation for the drilling, Deepening, Testing, Sidetracking, Plugging Back, Completing, Recompleting, Reworking or plugging of a well, has been approved and commenced, such operation shall not be discontinued without the consent of the Operating Committee; provided, however, that such operation may be discontinued, if circumstances occur which in the reasonable judgment of Operator cause the continuation of such operation to be unwarranted and after notice the Operating Committee within the period required under Article 5.12(A)(1) approves discontinuing such operation. On the occurrence of either of the above, Operator shall promptly notify the Parties that such operation is being discontinued pursuant to the foregoing. (E) For any operation for which a Party can go non-consent or decide to not participate, any such Party wishing to exercise its right of non-consent must give notice of non-consent to all other Parties within five (5) Days (or within twenty-four (24) hours if the drilling rig or well service rig to be used in such operation is standing by in the Contract Area) following Operating Committee approval of such proposal. ARTICLE VI - WORK PROGRAMS AND BUDGETS 6.1 DRILLING OF OBLIGATION WELL ONE (A) Within thirty (30) days after the effective date of this Agreement, Operator shall deliver to the Parties a proposed initial schedule detailing the Joint Operations to be performed for the mobilization of a rig and equipment and for the drilling, testing, and evaluation of Obligation Well One. It is the goal of the Project/Joint Operation to begin the drilling of Obligation Well One by September 1, 2006. (B) After obtaining the results of Obligation Well One including after any part of the test period allowed by the Contract, Operator shall as soon as possible submit to the Operating Committee and to the Parties a report containing available details concerning the results of and data from Obligation Well One and Operator's recommendation as to whether the result merits the drilling of Obligation Wells Two and Three. (C) Parties agree that participating in Obligation Well One includes approval for the drilling, testing, logging, setting casing on, and a test or completion attempt for the well, with no Casing Point Election. (D) By unanimous agreement of the Parties, Obligation Well One may be abandoned at any point without finishing the drilling of, testing, evaluation, or completion of the well. (E) If the attempt to drill and evaluate Obligation Well One is abandoned for any reason, the Parties or remaining Party or Parties (if any Party or Parties withdraw from the Project as provided in this Agreement), may propose a replacement or alternate Obligation Well One and proceed then as set forth in this Agreement during and after that well as though it was the originally proposed Obligation Well One. (F) Parties agreeing to do so within thirty (30) Days of being presented with the Operator's recommendation as in Section 6.1(B) above will continue the Project and proceed to the drilling of Obligation Wells Two and Three. 6.2 DRILLING OF OBLIGATION WELLS TWO AND THREE (A) Once a vote is taken as set forth in Article V as to whether to proceed with the drilling of Obligation Wells Two and Three, and if the result is positive, the drilling, testing, and evaluation of those wells shall proceed under the direction of the Operator, with the Operator reporting on the operations and results of those wells as provided elsewhere in this Agreement. -11- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 (B) Parties agree that approval to drill Obligation Wells Two and Three includes approval for the drilling, testing, logging, setting casing on, and a test or completion attempt for the well(s), with no Casing Point Election. (C) Any Party may decide after Obligation Well Two to not continue with Obligation Well Three, and then may withdraw from the Project. (D) By unanimous vote of the Operating Committee as is set forth in Article V, any operation on Obligation Well Two or Obligation Well Three may be stopped, modified, or abandoned. 6.3 DEVELOPMENT PROGRAM AND DRILLING (A) If after the drilling, testing, and evaluation of Obligation Wells Two and Three the Operating Committee determines that the Project merits development, the Parties agree to vote within thirty (30) Days whether to continue the Project, and those Parties voting to continue the Project agree to move to the development phase of the project and agree to participate in at least the Minimum Development Plan as approved by the Government or Government Oil Company. The Operator shall as soon as practical propose and seek approval of a Minimum Development Plan as is required by the Contract License. Within thirty (30) Days after obtaining approval of the mandated Contract License Minimum Development Plan, Operator shall deliver to the Parties a proposed Work Program and Budget for the development of and for producing from the Project during the first calendar year or part thereof. Within thirty (30) Days of such delivery, or earlier if necessary to meet any applicable deadline under the Contract License, the Operating Committee shall meet to consider, modify and then either approve or reject the initial development Work Program and Budget. Once the initial year's development Work Program and Budget is approved by the Operating Committee, Operator shall take such steps as may be required under the Contract License to secure approval of the development Work Program and Budget by the Government, if required. In the event the Government requires changes in the development Work Program and Budget, the matter shall be resubmitted to the Operating Committee for further consideration. (B) The Work Program and Budget agreed pursuant to this Article 6.3 shall include all of the Minimum Work Obligations, or at least that part of such Minimum Work Obligations required to be carried out during the Calendar Year in question under the terms of the Contract License or approved Minimum Development Program. If within the time periods prescribed in this Article 6.3 the Operating Committee is unable to agree on such a Work Program and Budget, then the proposal capable of satisfying the Minimum Work Obligations for the Calendar Year in question that receives the largest Participating Interest vote (even if less than the applicable percentage under Article 5.9) shall be deemed adopted as part of the annual Work Program and Budget. If competing proposals receive equal votes, then Operator shall choose between those competing proposals. Any portion of a Work Program and Budget adopted pursuant to this Article 6.3(B) instead of Article 5.9 shall include only such operations for the Joint Account as are necessary to maintain the Contract License in full force and effect, including such operations as are necessary to fulfill the Minimum Work Obligations, if any, required for the given Calendar Year. (C) The Operator will submit to the Parties a proposed Work Program and Budget by October 31 of each Calendar Year for the following year, and the Operating Committee will vote on and approve the presented Work Program and Budget or an agreed or compromise program for drilling, production and other operations of the Project/Joint Operations within thirty (30) Days of the presentation. (D) Any approved Work Program and Budget may be revised by the Operating Committee from time to time. To the extent such revisions are approved by the Operating Committee, the Work Program and Budget shall be amended accordingly. The Operator shall prepare and submit a corresponding work program and budget amendment to the Government if required by the terms of the Contract. (E) During the development Work Program, any Party or Participating Interest may determine to not participate in an operation and the Party will be a non-participating Party or interest as defined in Article VII. 6.4 PRODUCTION On or before the 31stt day of October of each Calendar Year, Operator shall deliver to the Parties a proposed Work Program and Budget as set forth in Article 6.3, which will include production operations to be performed for the Project and the projected production schedule for the following Calendar Year. Within thirty (30) days of such delivery, the Operating Committee shall agree upon a production Work Program and Budget. The production Work Program and Budget, during any year in which development may occur, may be part of the development Work Program and Budget. 6.5 ITEMIZATION OF EXPENDITURES (A) During the preparation of the proposed Work Programs and Budgets and Development Plans contemplated in this Article VI, Operator shall consult with the Operating Committee or the appropriate subcommittees regarding the contents of such Work Programs and Budgets and Development Plans. -12- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 (B) Each Work Program and Budget submitted by Operator shall contain an itemized estimate of the costs of Joint Operations and all other expenditures to be made for the Joint Account during the Calendar Year in question and shall: (1) Identify each work category in sufficient detail to afford the ready identification of the nature, scope and duration of the activity in question; (2) Include such reasonable information regarding Operator's allocation procedures and estimated manpower costs as the Operating Committee may determine; and (3) Comply with the current and minimum requirements of the Contract. (C) The Work Program and Budget shall designate the portion or portions of the Contract Area (i.e., drilling locations) in which Joint Operations itemized in such Work Program and Budget are to be conducted and shall specify the kind and extent of such operations in such detail as the Operating Committee may deem suitable. Any well location set forth in any development plan may be modified or relocated by the Operating Committee. 6.6 CONTRACT AWARDS Operator shall award each contract for approved Joint Operations to the best qualified contractor as determined by cost and ability to perform the contract without the obligation to tender and without informing or seeking the approval of the Operating Committee, except that before entering into contracts with Affiliates of the Operator exceeding U.S. dollars ten thousand (U.S. $ 10,000), Operator shall obtain the approval of the Operating Committee. Upon the request of a Party, Operator shall within ten (10) Days provide such Party with a copy of the final version any contract. 6.7 AUTHORIZATION FOR EXPENDITURE ("AFE") PROCEDURE (A) Prior to incurring any commitment or expenditure for the Joint Account, which is estimated to be: (1) In excess of U.S. dollars ten thousand (US$ 10,000) in a development Work Program and Budget; and (2) In excess of U.S. dollars ten thousand (US$ 10,000) in a production Work Program and Budget. Operator shall send to each Non-Operator an AFE as described in Article 6.7(C). Notwithstanding the above, Operator shall not be obliged to furnish for approval an AFE to the Parties with respect to any Minimum Work Obligations, workovers of wells and general and administrative costs that are listed as separate line items in an approved Work Program and Budget. (B) All AFEs shall be for informational purposes only where approval of an operation in the current Work Program and Budget authorizes Operator to conduct the operation (subject to Article 6.7) without further authorization from the Operating Committee. (C) Each AFE required to be proposed and prepared by the Operator shall and any other AFE for Joint Operations shall: (1) Identify the operation by specific reference to the applicable line items in the Work Program and Budget; or (2) Describe the work in detail; (3) Contain proposer's best estimate of the total funds required to carry out such work; (4) Outline the proposed work schedule; (5) Provide a timetable of expenditures, if known; and (6) Be accompanied by such other supporting information as is necessary for an informed decision. 6.8 OVEREXPENDITURES OF WORK PROGRAMS AND BUDGETS (A) For expenditures on any line item of an approved Work Program and Budget, Operator shall be entitled to incur without further approval of the Operating Committee an overexpenditure for such line item up to ten percent (10%) of the authorized amount for such line item; provided that the cumulative total of all overexpenditures for a Calendar Year shall not exceed five percent (5%) of the total Work Program and Budget in question. (B) At such time that Operator is certain that the limits of Article 6.7(A) will be exceeded, Operator shall furnish a supplemental AFE for the estimated overexpenditures to the Operating Committee for its approval and shall provide the Parties with full details of such overexpenditures. Operator shall promptly give notice of the amounts of overexpenditures when actually incurred. (C) The restrictions contained in this Article VI shall be without prejudice to Operator's rights to make expenditures as set out in Article 4.2(B)(11) and Article 13.5. -13- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 ARTICLE VII - OPERATIONS BY LESS THAN ALL PARTIES 7.1 LIMITATION ON APPLICABILITY - NON-PARTICIPATING SITUATIONS BUT NO EXCLUSIVE OPERATIONS (A) No operations may be conducted in furtherance of the License Contract except as Joint Operations under Article V or Article VI which are: (1) Operations, including the drilling of wells, included in the required and approved Government/Contract License minimum development plan, including any modifications of that plan, or (2) Operations, including the drilling of wells and production operations, included in an annual Work Program and Budget, or (3) Operations which are proposed by and approved by the Operating Committee as modifications of the annual Work Program and Plan, or (4) Operations to which the CCP vote has not been exercised as a veto. (B) Operations which are required to fulfill the Minimum Work Obligations or minimum development plan must be proposed and conducted as Joint Operations under Article V, including those proposed or approved by the Operating Committee, and may not be proposed or conducted as Exclusive Operations. (C) As is set forth in Article V, any Joint Operation which is proposed by the Operating Committee or a Party, must be approved within five (5) days of the proposal, or within twenty-four (24) hours if a drilling rig or well service rig is on the well, or any Party not approving the operation will be in a non-participating status. (D) Any Party voting to not participate in any well or operation on a well, including a recorded no vote by default as is set forth in Section 7.1 (C) above, will have no interest from that point in time forward in the subject well and for any future work, operation, or production from that well. Consenting Party(ies) will provide metering means to segregate the measured production volumes (but not necessarily the physical production) for the subject well from other Project production. (E) If CCP determines to not participate in a well or other operation and determines not to veto that proposal, the Operator shall operate the well or wells in which CCP is non-participating unless the Operating Committee sets forth another procedure. ARTICLE VIII - DEFAULT 8.1 DEFAULT AND NOTICE Any Party that fails to pay when due its Participating Interest share of Joint Account expenses, including cash advances and interest, shall be in default under this Agreement (a "Defaulting Party"). Operator, or any non-defaulting Party in the case Operator is the Defaulting Party, shall promptly give notice of such default to the Defaulting Party and each of the non-defaulting Parties (the "Default Notice"). The amount not paid by the Defaulting Party shall bear interest from the date due until paid in full at the Agreed Interest Rate. 8.2 OPERATING COMMITTEE MEETINGS AND DATA. Beginning five (5) Business Days from the date of the Default Notice, and thereafter while the Defaulting Party remains in default, the Defaulting Party shall not be entitled to attend Operating Committee or subcommittee meetings or to vote on any matter coming before the Operating Committee or any subcommittee until all of its defaults have been remedied (including payment of accrued interest). Unless agreed otherwise by the non-defaulting Parties, the voting interest of each non- defaulting Party during this period shall be its percentage of the total Participating Interests of the non- defaulting Parties. Any matters requiring a unanimous vote of the Parties shall not require the vote of the Defaulting Party. In addition, beginning five (5) Business Days from the date of the Default Notice, and thereafter while the Defaulting Party remains in default, the Defaulting Party shall not have access to any data or information relating to Joint Operations. During this period, the non-defaulting Parties shall be entitled to trade data without such Defaulting Party's consent, and the Defaulting Party shall have no right to any data received in such a trade unless and until its default is remedied in full. The Defaulting Party shall be deemed to have elected not to participate in any Joint Operations or Exclusive Operations that are voted upon at least five (5) Business Days after the date of the Default Notice but before all of its defaults have been remedied to the extent such an election would be permitted by Article 5.13(B) of this Agreement. The Defaulting Party shall be deemed to have approved, and shall join with the non-defaulting Parties in taking, any other actions voted on during that period. 8.3 ALLOCATION OF DEFAULTED ACCOUNTS -14- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 (A) The Party providing the Default Notice pursuant to Article 8.1 shall include in the Default Notice to each non-defaulting Party a statement of the sum of money that the non-defaulting Party is to pay as its portion (such portion being in the ratio that each non-defaulting Party's Participating Interest bears to the Participating Interests of all non-defaulting Parties) of the amount in default (excluding interest), subject to the terms of this Article 8.3. If the Defaulting Party remedies its default in full within five (5) Business Days from the date of the Default Notice, the notifying Party shall promptly notify each non-defaulting Party by telephone and facsimile, and the non-defaulting Parties shall be relieved of their obligation to pay a share of the amounts in default. Otherwise, each non-defaulting Party shall pay Operator, within five (5) Business Days after receipt of the Default Notice, its share of the amount which the Defaulting Party failed to pay. If any non-defaulting Party fails to pay its share of the amount in default as aforesaid, such Party shall thereupon be a Defaulting Party subject to the provisions of this Article VIII. The non-defaulting Parties which pay the amount owed by any Defaulting Party shall be entitled to receive their respective shares of the principal and interest payable by such Defaulting Party pursuant to this Article VIII. (B) If Operator is a Defaulting Party, then all payments otherwise payable to Operator for Joint Account costs pursuant to this Agreement shall be made to the notifying Party instead until the default is cured or a successor Operator appointed. The notifying Party shall maintain such funds in a segregated account separate from its own funds and shall apply such funds to third party claims due and payable from the Joint Account of which it has notice, to the extent Operator would be authorized to make such payments under the terms of this Agreement. The notifying Party shall be entitled to bill or cash call the other Parties in accordance with the Accounting Procedure for proper third party charges that become due and payable during such period to the extent sufficient funds are not available. When Operator has cured its default or a successor Operator is appointed, the notifying Party shall turn over all remaining funds in the account to Operator and shall provide Operator and the other Parties with a detailed accounting of the funds received and expended during this period. The notifying Party shall not be liable for damages, losses, costs, expenses or liabilities arising as a result of its actions under this Article 8.3(B) except to the extent Operator would be liable under Article 4.6. 8.4 REMEDIES (A) During the continuance of a default, the Defaulting Party shall not have a right to its Entitlement, which shall vest in and be the property of the non-defaulting Parties. Operator (or the notifying Party if Operator is a Defaulting Party) shall be authorized to sell such Entitlement in an arm's-length sale on terms that are commercially reasonable under the circumstances and, after deducting all costs, charges and expenses incurred in connection with such sale, pay the net proceeds to the non-defaulting Parties in proportion to the amounts they are owed by the Defaulting Party hereunder (and apply such net proceeds toward the establishment of a reserve fund under Article 8.4(C), if applicable) until all such amounts are recovered and such reserve fund is established. Any surplus remaining shall be paid to the Defaulting Party,and any deficiency shall remain a debt due from the Defaulting Party to the non-defaulting Parties. When making sales under this Article 8.4(A), the non-defaulting Parties shall have no obligation to share any existing market or obtain a price equal to the price at which their own production is sold. (B) If Operator disposes of any Joint Property or any other credit or adjustment is made to the Joint Account while a Party is in default, Operator (or the notifying Party if Operator is a Defaulting Party) shall be entitled to apply the Defaulting Party's Participating Interest share of the proceeds of such disposal, credit or adjustment against all amounts owing by the Defaulting Party to the non-defaulting Parties hereunder (and toward the establishment of a reserve fund under Article 8.4(C), if applicable). Any surplus remaining shall be paid to the Defaulting Party, and any deficiency shall remain a debt due from the Defaulting Party to the non-defaulting Parties. (C) The non-defaulting Parties shall be entitled to apply proceeds received under Articles 8.4(A) and 8.4(B) toward the creation of a reserve fund in an amount equal to the Defaulting Party's Participating Interest share of (i) the estimated cost to abandon any wells and other property in which the Defaulting Party participated, (ii) the estimated cost of severance benefits for local employees upon cessation of operations and (iii) any other identifiable costs that the non-defaulting Parties anticipate will be incurred in connection with the cessation of operations. (D) If a Defaulting Party fails to remedy its default by the sixtieth (60th) Day following the date of the Default Notice, then, without prejudice to any other rights available to the non-defaulting Parties to recover amounts owing to them under this Agreement, each non-defaulting Party shall have the option, exercisable at anytime thereafter until the Defaulting Party has completely cured its defaults, to require that the Defaulting Party completely withdraw from this Agreement and the Contract. Such option shall be exercised by notice to the Defaulting Party and each non-defaulting Party. If such option is exercised, the Defaulting Party shall -15- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 be deemed to have transferred, pursuant to Article 13.6, effective on the date of the non-defaulting Party's notice, all of its right, title and beneficial interest in and under this Agreement and the Contract Area to the non-defaulting Parties. The Defaulting Party shall, without delay following any request from the non- defaulting Parties, do any and all acts required to be done by applicable law or regulation in order to render such transfer legally valid, including, without limitation, obtaining all governmental consents and approvals, and shall execute any and all documents and take such other actions as may be necessary in order to effect a prompt and valid transfer of the interests described above. The Defaulting Party shall be obligated to promptly remove any liens and encumbrances which may exist on such transferred interests. For purposes of this Article 8.4(D), each Party constitutes and appoints each other Party its true and lawful attorney to execute such instruments and make such filings and applications as may be necessary to make such transfer legally effective and to obtain any necessary consents of the Government. Actions under this power of attorney may be taken by any Party individually without the joinder of the others. This power of attorney is irrevocable for the term of this Agreement and is coupled with an interest. If requested, each Party shall execute a form prescribed by the Operating Committee setting forth this power of attorney in more detail. In the event all Government approvals are not timely obtained, the Defaulting Party shall hold its Participating Interest in trust for the non-defaulting Parties who are entitled to receive the Defaulting Party's Participating Interest. Notwithstanding the terms of Article XIII, in the absence of an agreement among the non- defaulting Parties to the contrary, any transfer to the non-defaulting Parties following a withdrawal pursuant to this Article 8.4(D) shall be in proportion to the Participating Interests of the non-defaulting Parties. The acceptance by a non-defaulting Party of any portion of a Defaulting Party's Participating Interest shall not limit any rights or remedies that the non-defaulting Party has to recover all amounts (including (E) The non-defaulting Parties shall be entitled to recover from the Defaulting Party all reasonable attorneys' fees and all other reasonable costs sustained in the collection of amounts owing by the Defaulting Party. (F) The rights and remedies granted to the non-defaulting Parties in this Agreement shall be cumulative, not exclusive, and shall be in addition to any other rights and remedies that may be available to the non- defaulting Parties, whether at law, in equity or otherwise. Each right and remedy available to the non- defaulting Parties may be exercised from time to time and so often and in such order as may be considered expedient by the non-defaulting Parties in their sole discretion. 8.5 SURVIVAL The obligations of the Defaulting Party and the rights of the non-defaulting Parties shall survive the surrender of the Contract Area, abandonment of Joint Operations and termination of this Agreement. 8.6 NO RIGHT OF SET OFF Each Party acknowledges and accepts that a fundamental principle of this Agreement is that each Party pays its Participating Interest share of all amounts due under this Agreement as and when required. Accordingly, any Party which becomes a Defaulting Party undertakes that, in respect of either any exercise by the non-defaulting Parties of any rights under or the application of any of the provisions of this Article VIII, such Party hereby waives any right to raise by way of set off or invoke as a defense, whether in law or equity, any failure by any other Party to pay amounts due and owing under this Agreement or any alleged claim that such Party may have against Operator or any Non-Operator, whether such claim arises under this Agreement or otherwise. Each Party further agrees that the nature and the amount of the remedies granted to the non-defaulting Parties hereunder are reasonable and appropriate in the circumstances. ARTICLE IX - DISPOSITION OF PRODUCTION 9.1 RIGHT AND OBLIGATION TO TAKE IN KIND Except as otherwise provided in this Article IX or in Article VIII, each Party shall have the right and obligation to own, take in kind and separately dispose of the share of total production available to it from the Project pursuant to the Contract and this Agreement in such quantities and in accordance with such procedures as may be set forth in the offtake agreement referred to in Article 9.2. If Government Oil Company is party to the offtake agreement, then the Parties shall endeavor to obtain its agreement to the principles set forth in this Article IX. 9.2 AGREEMENT FOR CRUDE OIL SALES If crude oil is produced from the Project, the Operator shall in good faith, and not less than thirty (30) -16- Days prior to first delivery of crude oil, negotiate and conclude the terms of an agreement to cover the sale of crude oil produced under the Contract and for the Contract Area. The Government may, if necessary and -16- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 practicable, also be party to the sales agreement. This sales or "offtake" agreement shall, to the extent consistent with the Contract, make provision for: (A) The delivery point, at which title and risk of loss of Participating Interest shares of crude oil shall pass to the Parties interested (or as the Parties may otherwise agree); (B) Operator's regular periodic advice to the Parties of estimates of total available production for suc- 6 ceeding periods, quantities of each grade of crude oil and each Party's share for as far ahead as is necessary for Operator and the Parties to plan offtake arrangements. Such advice shall also cover for each grade of crude oil total available production and deliveries for the preceding period, inventory and overlifts and underlifts; (C) Nomination by the Parties to Operator of acceptance of their shares of total available production for the succeeding period. Such nominations shall in any one period be for each Party's entire share of available production during that period subject to operational tolerances and agreed minimum economic cargo sizes or as the Parties may otherwise agree; (D) Elimination of overlifts and underlifts; (E) If a river terminal for vessel loading is involved, risks regarding acceptability of barges, tankers, demurrage and (if applicable) availability of berths; (F) Distribution to the Parties of available grades, gravities and qualities of Hydrocarbons to ensure, to the extent Parties take delivery of their Entitlements as they accrue, that each Party shall receive in each period Entitlements of grades, gravities and qualities of Hydrocarbons from the Project similar to the grades, gravities and qualities of Hydrocarbons received by each other Party from the Project in that period. (G) To the extent that distribution of Entitlements on such basis is impracticable due to availability of facilities and minimum cargo sizes, a method of making periodic adjustments; and (H) The option and the right of the other Parties to sell an Entitlement which a Party fails to nominate for acceptance pursuant to (C) above or of which a Party fails to take delivery, in accordance with applicable agreed procedures, provided that such failure either constitutes a breach of Operator's or Parties' obligations under the terms of the Contract, or is likely to result in the curtailment or shut-in of production. Such sales shall be made only to the limited extent necessary to avoid disruption in Joint Operations. Operator shall give all Parties as much notice as is practicable of such situation and that a sale option has arisen. Any sale shall be of the un-nominated or undelivered Entitlement as the case may be and for reasonable periods of time as are consistent with the minimum needs of the industry and in no event to exceed twelve (12) months. The right of sale shall be revocable at will subject to any prior contractual commitments. Payment terms for production sold under this option shall be established in the offtake agreement. If a sales agreement has not been entered into by the date of first delivery of crude oil, the Parties shall be bound by the principles set forth in this Article 9.2 until a sales agreement has been entered into. 9.3 SEPARATE AGREEMENT FOR NATURAL GAS The Parties recognize that if natural gas is discovered it may be necessary for the Parties to enter into special arrangements for the disposal of the natural gas, which are consistent with this Agreement and subject to the terms of the Contract. ARTICLE X - ABANDONMENT 10.1 ABANDONMENT OF WELLS DRILLED AS JOINT OPERATIONS (A) A decision to plug and abandon any well which has been drilled as a Joint Operation shall require the approval of the Operating Committee. (B) Should any Party fail to reply within the period prescribed in Article 5.12(A)(1) or Article 5.12(A)(2), whichever is applicable, after delivery of notice of the Operator's proposal to plug and abandon such well, such Party shall be deemed to have consented to the proposed abandonment. (C) Any well plugged and abandoned under this Agreement 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 such well. ARTICLE XI - SURRENDER, EXTENSIONS AND RENEWALS 11.1 SURRENDER (A) If the Contract requires the Parties to surrender any portion of the Contract Area, Operator shall advise the Operating Committee of such requirement at least one hundred and twenty (120) Days in advance of the earlier of the date for filing irrevocable notice of such surrender or the date of such surrender. Prior to -17- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 the end of such period, the Operating Committee shall determine pursuant to Article V the size and shape of the surrendered area, consistent with the requirements of the Contract. If a sufficient vote of the Operating Committee cannot be attained, then the proposal supported by a simple majority of the Participating Interests shall be adopted. If no proposal attains the support of a simple majority of the Participating Interests, then the proposal receiving the largest aggregate Participating Interest vote shall be adopted. In the event of a tie, the Operator shall choose among the proposals receiving the largest aggregate Participating Interest vote. The Parties shall execute any and all documents and take such other actions as may be necessary to effect the surrender. Each Party renounces all claims and causes of action against Operator and any other Parties on account of any area surrendered in accordance with the foregoing but against its recommendation if Hydrocarbons are subsequently discovered under the surrendered area. (B) A surrender of all or any part of the Contract Area which is not required by the Contract shall require the unanimous consent of the Parties. 11.2 EXTENSION OF THE TERM (A) A proposal by any Party to enter into or extend the term of any requirement, period, or any phase of the Contract, or a proposal to extend the term of the Contract, shall be brought before the Operating Committee pursuant to Article V. (B) Any Party shall have the right to enter into an agreement to extend the term of the Contract, regardless of the level of support in the Operating Committee. If any Party or Parties take such action, any Party not wishing to extend shall have a right to withdraw from the Project, subject to the requirements of Article XIII. ARTICLE XII - TRANSFER OF INTEREST OR RIGHTS 12.1 OBLIGATIONS (A) Subject always to the requirements of the Contract, the transfer of all or part of a Party's Participating Interest, excepting transfers pursuant to Article VIII or Article XIII, shall be effective only if it satisfies the terms and conditions of this Article XII. (B) Except in the case of a Party transferring all of its Participating Interest, no transfer shall be made by any Party which results in the transferor or the transferee holding a Participating Interest of less than one percent (1%) or holding any interest other than a Participating Interest the same as other Parties in the Contract, the Project, and this Agreement. (C) The transferring Party shall, notwithstanding the transfer, be liable to the other Parties for any obligations, financial or otherwise, which have vested, matured or accrued under the provision of the Contract or this Agreement prior to such transfer. Such obligations shall include, without limitation, any proposed expenditure approved by the Operating Committee prior to the transferring Party notifying the other Parties of its proposed transfer. (D) The transferee shall have no rights in and under the Contract, the Contract Area or this Agreement unless and until it obtains any necessary Government approval and expressly undertakes in an instrument satisfactory to the other Parties to perform the obligations of the transferor under the Contract and this Agreement in respect of the Participating Interest being transferred and furnishes any guarantees required by the Government or the Contract. (E) A transferee other than an Affiliate shall have no rights in and under the Contract, the Contract Area or this Agreement unless each Party has consented in writing to such transfer, which consent shall be denied only if such transferee fails to establish to the reasonable satisfaction of each Party its capability to perform its obligations under the Contract and this Agreement. (F) Nothing contained in this Article XII shall prevent a Party from mortgaging, pledging, charging or otherwise encumbering all or part of its interest in the Contract Area and in and under this Agreement for the purpose of security relating to finance provided that: (1) Such Party shall remain liable for all obligations relating to such interest; (2) The encumbrance shall be subject to any necessary approval of the Government and be expressly subordinated to the rights of the other Parties under this Agreement; and (3) Such Party shall ensure that any such mortgage, pledge, charge or encumbrance shall be expressed to be without prejudice to the provisions of this Agreement. (4) No interest in the Contract Area larger in any extent than that owned by Such Party shall be encumbered in any way. -18- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 (G) Any transfer of all or a portion of a Party's Participating Interest whether directly or indirectly by assignment, merger, consolidation, sale of stock, or other conveyance, other than with or to an Affiliate shall be subject to the following procedure: (1) In the event that a Party wishes to transfer any part or all of its Participating Interest, it shall send all other Parties notice of its intention and invite them to submit offers therefore. The other Parties shall have thirty (30) Days from the date of such notification to deliver a counter-notification with a binding offer in accordance with Article 12.1(G) (3). If the prospective transferor Party accepts the offer, the prospective transferor and the offering Party shall have the next sixty (60) Days in which to negotiate in good faith and execute the terms and conditions of a mutually acceptable transfer agreement. If the prospective transferor does not find any Party's offer acceptable, or if sixty (60) Days elapse and it is evident to the prospective transferor that a fully negotiated agreement with an offering Party is not imminent, the prospective transferor shall be entitled for a period of one hundred eighty (180) Days, plus such reasonable additional period as may be necessary to secure governmental approvals, to transfer its Participating Interest to a third party subject to the obligations set forth in this Article XII, so long as terms and conditions of the transfer to a third party are more favorable to the prospective transferor than the best terms and conditions offered by any Party; (2) If more than one Party counter-notifies the prospective transferor that it intends to acquire the Participating Interest which is the subject of the proposed transfer, then each such Party shall acquire a proportion of the Participating Interest to be transferred equal to the ratio of its own Participating Interest to the total Participating Interests of all the counter-notifying Parties, unless they otherwise agree; (3) All Parties giving such counter-notice shall meet to formulate a joint offer. Each such Party shall make known to the other Parties the highest price or value in which it is willing to offer to the prospective transferor. The proposal with the highest price or value shall be offered to the prospective transferor as the joint proposal of the Parties still willing to participate in such offer under the provisions of (1) and (2) above; (4) In the event that a Party's proposed transfer of part or all of its Participating Interest involves consideration other than cash or involves other properties included in a wider transaction (package deal), then the Participating Interest (or part thereof) shall be allocated a reasonable and justifiable cash value by the prospective transferor in any notification to the other Parties. Such other Parties may satisfy the requirements of this Article 12.1(G) by agreeing to pay such cash value in lieu of the consideration payable in the third-party offer. 12.2 RIGHTS (A) Each Party shall have the right, subject to the provisions of Article 12.1, to freely transfer its Participating Interest. ARTICLE XIII - WITHDRAWAL FROM AGREEMENT 13.1 RIGHT OF WITHDRAWAL (A) Subject to the provisions of this Article XIII, other than for the various agreements and proposals between or among the parties by which their original participation in the Project occurred, any Party may withdraw from this Agreement and the Contract Area by giving notice to all other Parties stating its decision to withdraw. Such notice shall be unconditional and irrevocable when given, except as may be provided in Article 13.7. (B) The effective date of withdrawal for a withdrawing Party shall be the end of the calendar month following the calendar month in which the notice of withdrawal is given, provided that if all Parties elect to withdraw, the effective date of withdrawal for each Party shall be the date determined by Article 13.9. 13.2 PARTIAL OR COMPLETE WITHDRAWAL (A) Within thirty (30) Days of receipt of each withdrawing Party's notification, each of the other Parties may also give notice that it desires to withdraw from this Agreement, the Project, and the Contract. Should all Parties give notice of withdrawal, the Parties shall proceed to abandon the Contract Area and terminate the Contract and this Agreement. If less than all of the Parties give such notice of withdrawal, then the withdrawing Parties shall take all steps to withdraw from the Contract and this Agreement on the earliest possible date and execute and deliver all necessary instruments and documents to assign their Participating Interest to the Parties which are not withdrawing, without any compensation whatsoever, in accordance with the provisions of Article 13.6. -19- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 (B) Any Party withdrawing under Article 11.2 or under this Article XIII shall withdraw from the entirety of the Contract Area and Project, and thus abandon to the other Parties not joining in its withdrawal all its rights to Cost Oil and Profit Oil generated by operations after the effective date of such withdrawal and all rights in associated Joint Property. 13.3 RIGHTS OF A WITHDRAWING PARTY A withdrawing Party shall have the right to receive its Entitlement of Hydrocarbons produced through the effective date of its withdrawal. The withdrawing Party shall be entitled to receive all information to which such Party is otherwise entitled under this Agreement until the effective date of its withdrawal. After giving its notification of withdrawal, a Party shall not be entitled to vote on any matters coming before the Operating Committee, other than matters for which such Party has financial responsibility. Any withdrawal may be subject to prior agreements between or among the Parties, and include, where applicable, the provisions of Article 20.12. 13.4 OBLIGATIONS AND LIABILITIES OF A WITHDRAWING PARTY (A) A withdrawing Party shall, following its notification of withdrawal, remain liable only for its share of the following: (1) Costs of Joint Operations, and Exclusive Operations in which it has agreed to participate, that were approved by the Operating Committee or Consenting Parties as part of a Work Program and Budget or AFE prior to such Party's notification of withdrawal, regardless of when they are actually incurred; (2) Any Minimum Work Obligations for the current period or phase of the Contract, and for any subsequent period or phase which has been approved pursuant to Article 11.2 and with respect to which such Party has failed to timely withdraw under Article 13.4(B); (3) Emergency expenditures as described in Articles 4.2(B)(11) and 13.5; (4) All other obligations and liabilities of the Parties or Consenting Parties, as applicable, with respect to acts or omissions under this Agreement prior to the effective date of such Party's withdrawal for which such Party would have been liable, had it not withdrawn from this Agreement. The obligations and liabilities for which a withdrawing Party remains liable shall specifically include its share of any costs of plugging and abandoning wells or portions of wells in which it participated (or was required to bear a share of the costs pursuant to Article 13.4(A)(1)), to the extent such costs of plugging and abandoning are payable by the Parties under the Contract. Any liens, charges and other encumbrances which the withdrawing Party placed on such Party's Participating Interest prior to its withdrawal shall be fully satisfied or released, at the withdrawing Party's expense, prior to its withdrawal. A Party's withdrawal shall not relieve it from liability to the non-withdrawing Parties with respect to any obligations or liabilities attributable to the withdrawing Party under this Article XIII merely because they are not identified or identifiable at the time of withdrawal. (B) Notwithstanding the foregoing, a Party shall not be liable for any operations or expenditures it voted against (other than operations and expenditures described in Article 13.4(A)(2) or 13.4(A)(3)) if it sends notification of its withdrawal within five (5) Days (or within twenty-four (24) hours if the drilling rig to be used in such operation is standing by on the Contract Area) of the Operating Committee vote approving such operation or expenditure. Likewise, a Party voting against voluntarily entering into or extending any phase of the Contract or voluntarily extending the Contract shall not be liable for the Minimum Work Obligations associated therewith provided that it sends notification of its withdrawal within thirty (30) Days of such vote pursuant to Article 11.2. 13.5 EMERGENCY If a well goes out of control or a fire, blow out, sabotage or other emergency occurs prior to the effective date of a Party's withdrawal, the withdrawing Party shall remain liable for its Participating Interest share of the costs of such emergency, regardless of when they are actually incurred. 13.6 ASSIGNMENT A withdrawing Party shall assign its Participating Interest free of cost to each of the non-withdrawing Parties in the proportion which each of their Participating Interests (prior to the withdrawal) bears to the total Participating Interests of all the non-withdrawing Parties (prior to the withdrawal), unless the non- withdrawing Parties agree otherwise. The expenses associated with the withdrawal and assignments shall be borne by the withdrawing Party. If any withdrawing Party acquired its interests through either CCP or Ziegler-Peru, then those entities may reacquire through the withdrawal those interests in their entirety, unless CCP or Ziegler-Peru wish to offer part or all of the interest to the other under the terms of withdrawal stated in other parts of this section. No obligations of the interest thus transferred will increase the responsibility of CCP or Ziegler-Peru by the pass through or interest. -20- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 13.7 APPROVALS As this is a private contract, no Government approvals are required of a withdrawing party. 13.8 SECURITY (A) A Party withdrawing from this Agreement and the Contract pursuant to this Article XIII shall provide Security satisfactory to the other Parties to satisfy any obligations or liabilities which were approved or accrued prior to notice of withdrawal, but which become due after its withdrawal, including, without limitation, Security to cover the costs of an abandonment, if applicable. (B) Failure to provide Security shall constitute default under this Agreement. (C) "Security" means a standby letter of credit issued by a bank or an on demand bond issued by a surety corporation, such bank or corporation having a credit rating indicating it has sufficient worth to pay its obligations in all reasonably foreseeable circumstances, or, failing the provision of either of those, cash contributed to an account approved by the Operating Committee. 13.9 WITHDRAWAL OR ABANDONMENT BY ALL PARTIES In the event all Parties decide to withdraw, the Parties agree that they shall be bound by the terms and conditions of this Agreement for so long as may be necessary to wind up the affairs of the Parties with the Government, to satisfy any requirements of applicable law and to facilitate the sale, disposition or abandonment of property or interests held by the Joint Account. ARTICLE XIV - RELATIONSHIP OF PARTIES AND TAX 14.1 RELATIONSHIP OF PARTIES The rights, duties, obligations and liabilities of the Parties under this Agreement shall be individual, not joint or collective. It is not the intention of the Parties to create, nor shall this Agreement be deemed or construed to create a mining or other partnership, joint venture or association or (except as explicitly provided in this Agreement) a trust. This Agreement shall not be deemed or construed to authorize any Party to act as an agent, servant or employee for any other Party for any purpose whatsoever except as explicitly set forth in this Agreement. In their relations with each other under this Agreement, the Parties shall not be considered fiduciaries except as expressly provided in this Agreement. 14.2 TAX Each Party shall be responsible for reporting and discharging its own tax measured by the profit or income of the Party and the satisfaction of such Party's share of all contract obligations under the Contract and under this Agreement. Each Party shall protect, defend and indemnify each other Party from any and all loss, cost or liability arising from the indemnifying Party's failure to report and discharge such taxes or satisfy such obligations. The Parties intend that all income and all tax benefits (including, but not limited to, deductions, depreciation, credits and capitalization) with respect to the expenditures made by the Parties hereunder will be allocated by the Government tax authorities to the Parties based on the share of each tax item actually received or borne by each Party. If such allocation is not accomplished due to the application of the laws and regulations of the Government or other Government action, the Parties shall attempt to adopt mutually agreeable arrangements that will allow the Parties to achieve the financial results intended. Operator shall provide each Party, in a timely manner and at such Party's sole expense, with such information with respect to Joint Operations as such Party may reasonably request for preparation of its tax returns or responding to any audit or other tax proceeding. 14.3 UNITED STATES TAX ELECTION (A) If, for United States federal income tax purposes, this Agreement and the operations under this Agreement are regarded as a partnership (and if the Parties have not agreed to form a tax partnership), each "U.S. Party" (as defined below) elects to be excluded from the application of all of the provisions of Subchapter "K", Chapter 1, Subtitle "A" of the United States Internal Revenue Code of 1986, as amended (the "Code"), as permitted and authorized by Section 761(a) of the Code and the regulations promulgated under the Code. Each Party is authorized and directed to execute and file for each U.S. Party such evidence of this election as may be required by the Internal Revenue Service, including specifically, but not by way of limitation, all of the returns, statements, and the data required by United States Treasury Regulations Sections 1.761-2 and 1.6031-1(d)(2), and shall provide a copy thereof to each U.S. Party. Should there be any requirement that any U.S. Party give further evidence of this election, each U.S. Party shall execute such documents and furnish such other evidence as may be required by the Internal Revenue Service or as may be necessary to evidence this election. (B) No Party shall give any notice or take any other action inconsistent with the election made above. If -21- any income tax laws of any state or other political subdivision of the United States or any future income tax -21- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 laws of the United States or any such political subdivision contain provisions similar to those in Subchapter "K", Chapter 1, Subtitle "A" of the Code, under which an election similar to that provided by Section 761(a) of the Code is permitted, each U.S. Party shall make such election as may be permitted or required by such laws. In making the foregoing election, each U.S. Party states that the income derived by it from operations under this Agreement can be adequately determined without the computation of partnership taxable income. (C) For the purposes of this Article XIV, "U.S. Party" shall mean any Party which is subject to the income tax law of the United States in respect of operations under this Agreement. (D) No activity shall be conducted under this Agreement that would cause any Party that is not a U.S. Party to be deemed to be engaged in a trade or business within the United States under applicable tax laws and regulations. (E) A Party which is not a U.S. Party shall not be required to do any act or execute any instrument which might subject it to the taxation jurisdiction of the United States. ARTICLE XV - CONFIDENTIAL INFORMATION -- PROPRIETARY TECHNOLOGY 15.1 CONFIDENTIAL INFORMATION (A) Subject to the provisions of the Contract, the Parties agree that all information and data acquired or obtained by any Party in respect of Joint Operations shall be considered confidential and shall be kept confidential and not be disclosed during the term of the Contract to any person or entity not a Party to this Agreement, except: (1) To an Affiliate, provided such Affiliate maintains confidentiality as provided in this Article XV; (2) To a governmental agency or other entity when required by the Contract; (3) To the extent such data and information is required to be furnished in compliance with anyapplicable laws or regulations, or pursuant to any legal proceedings or because of any order of any court binding upon a Party; (4) To prospective or actual contractors, consultants and attorneys employed by any Party where disclosure of such data or information is essential to such contractor's, consultant's or attorney's work; (5) To a bona fide prospective transferee of a Party's Participating Interest (including an entity with whom a Party or its Affiliates are conducting bona fide negotiations directed toward a merger, consolidation or the sale of a majority of its or an Affiliate's shares); (6) To a bank or other financial institution to the extent appropriate to a Party arranging for funding; (7) To the extent such data and information must be disclosed pursuant to any rules or requirements of any government or stock exchange having jurisdiction over such Party, or its Affiliates; provided that if any Party desires to disclose information in an annual or periodic report to its or its Affiliates' shareholders and to the public and such disclosure is not required pursuant to any rules or requirements of any government or stock exchange, then such Party shall comply with Article 20.3; (8) To its respective employees for the purposes of Joint Operations, subject to each Party taking customary precautions to ensure such data and information is kept confidential; (9) Any data or information which, through no fault of a Party, becomes a part of the public domain. (B) Disclosure as pursuant to Article 15.1(A)(4), (5), and (6) shall not be made unless prior to such disclosure the disclosing Party has obtained a written undertaking from the recipient party to keep the data and information strictly confidential for at least five (5) years and not to use or disclose the data and information except for the express purpose for which disclosure is to be made. 15.2 CONTINUING OBLIGATIONS Any Party ceasing to own a Participating Interest during the term of this Agreement shall nonetheless remain bound by the obligations of confidentiality in Article 15.1 and any disputes shall be resolved inaccordance with Article XVIII. 15.3 PROPRIETARY TECHNOLOGY Nothing in this Agreement shall require a Party to divulge proprietary technology to the other Parties; provided that where the cost of development of proprietary technology has been charged to the Joint Account, such proprietary technology shall be disclosed to all Parties bearing a portion of such cost and may be used by any such Party or its Affiliates in other operations. -22- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 15.4 TRADES OF INFORMATION Notwithstanding the foregoing provisions of this Article XV, Operator may, with approval of the Operating Committee, make trade or sell Project and well information, logs, and other data or information for the benefit of the Parties, with any data so obtained to be furnished to all Parties who participated in the cost of the data that was traded. Operator shall cause any third party to such trade to enter into an undertaking to keep the traded data confidential. Data that is sold may or may not be confidential depending on the arrangement the Operator makes with the acquiring entity or person. Any value or benefit from the sale will be paid pro-rata to the Parties. ARTICLE XVI- FORCE MAJEURE 16.1 OBLIGATIONS If as a result of Force Majeure any Party is rendered unable, wholly or in part, to carry out its obligations under this Agreement, other than the obligation to pay any amounts due or to furnish security, then the obligations of the Party giving such notice, so far as and to the extent that the obligations are affected by such Force Majeure, shall be suspended during the continuance of any inability so caused and for such reasonable period thereafter as may be necessary for the Party to put itself in the same position that it occupied prior to the Force Majeure, but for no longer period. The Party claiming Force Majeure shall notify the other Parties of the Force Majeure within a reasonable time after the occurrence of the facts relied on and shall keep all Parties informed of all significant developments. Such notice shall give reasonably full particulars of the Force Majeure, and also estimate the period of time which the Party will probably require to remedy the Force Majeure. The affected Party shall use all reasonable diligence to remove or overcome the Force Majeure situation as quickly as possible in an economic manner, but shall not be obligated to settle any labor dispute except on terms acceptable to it and all such disputes shall be handled within the sole discretion of the affected Party. 16.2 DEFINITION OF FORCE MAJEURE For the purposes of this Agreement, "Force Majeure" shall have the same meaning as: (A) Is set out in the Contract, or; (B) Circumstances which were beyond the reasonable control of the Party concerned and shall include strikes, lockouts and other industrial disturbances even if they were not "beyond the reasonable control" of the Party. ARTICLE XVII - NOTICES Except as otherwise specifically provided, all notices authorized or required between the Parties by any of the provisions of this Agreement, shall be in writing, in English and delivered in person or by courier service or by any electronic means of transmitting written communications, but electronic means, including emails, are only effective notices if the sender of the notice actually receives a return email that acknowledges receipt of the notice. All notices must be addressed to such Parties as designated below. Oral communication does not constitute notice for purposes of this Agreement, and telephone numbers for the Parties are listed below as a matter of convenience only. The originating notice given under any provision of this Agreement shall be deemed delivered only when received by the Party to whom such notice is directed, and the time for such Party to deliver any notice in response to such originating notice shall run from the date the originating notice is received. The second or any responsive notice shall be deemed delivered when received. "Received" for purposes of this Article XVII shall mean actual delivery of the notice to the address of the Party to be notified specified in accordance with this Article XVII. Each Party shall have the right to change its address at any time and/or designate that copies of all such notices be directed to another person at another address, by giving written notice thereof to all other Parties. -23- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 COMPANIA CONSULTORA DE PETROLEO, S.A. RADIAL ENERGY, INC. ------------------------------------- ------------------- Attention: Attention: Ziegler-Peru, Inc. 5065 Westheimer, Suite 810 Houston, Texas 77056 Attention: Edward R. Ziegler 12 Fax: 713 - 850 - 1235 Telephone: 713 - 850 - 0960 Email: EZSAFEOIL@AOL.COM ARTICLE XVIII - APPLICABLE LAW AND DISPUTE RESOLUTION 18.1 APPLICABLE LAWS This Agreement shall be governed by, construed, interpreted and applied in accordance with the laws of the Republic of Peru, excluding any choice of law rules which would refer the matter to the laws of another jurisdiction. 18.2 DISPUTE RESOLUTION (A) Any dispute, controversy or claim arising out of or in relation to or in connection with this Agreement or the operations carried out under this Agreement, including without limitation any dispute as to the construction, validity, interpretation, enforceability or breach of this Agreement, shall be exclusively and finally settled by arbitration in accordance with this Article 18.2. Any Party may submit such a dispute, controversy or claim to arbitration by notice to the other Parties. (B)The arbitration shall be heard and determined by three (3) arbitrators. Each side shall appoint an arbitrator of its choice within thirty (30) Days of the submission of a notice of arbitration. The Party-33appointed arbitrators shall in turn appoint a presiding arbitrator of the tribunal within sixty (60) Days following the appointment of both Party-appointed arbitrators. If the Party-appointed arbitrators cannot reach agreement on a presiding arbitrator of the tribunal and/or one Party refuses to appoint its Party-36appointed arbitrator within said sixty (60) Day period, the appointing authority for the implementation of such procedure shall be the American Arbitration Association, who shall appoint an independent arbitrator who does not have any financial interest in the dispute, controversy or claim. (C) Unless otherwise expressly agreed in writing by the Parties to the arbitration proceedings: (1) The arbitration proceedings shall be held in Lima, Peru; (2) The arbitration proceedings shall be conducted in the English language and the arbitrator(s) shall be fluent in the English language; (3) The arbitrator(s) shall be and remain at all times wholly independent and impartial; (4) The arbitration proceedings shall be conducted under the Arbitration Rules of the American Arbitration Association in effect on the Effective Date of this Agreement. (5) Any procedural issues not determined under the arbitral rules selected pursuant to Article 18.2(C)(4) shall be determined by the arbitration act and any other applicable laws of the Republic of Peru, other than those laws which would refer the matter to another jurisdiction; (6) The costs of the arbitration proceedings (including attorneys' fees and costs) shall be borne in the manner determined by the arbitrator(s); (7) The decision of the sole arbitrator or a majority of the arbitrators, as the case may be, shall be reduced to writing; final and binding without the right of appeal; the sole and exclusive remedy regarding any claims, counterclaims, issues or accountings presented to the arbitrator; made and promptly paid in U.S. dollars free of any deduction or offset; and any costs or fees incident to enforcing the award, shall to the maximum extent permitted by law be charged against the Party resisting such enforcement; -24- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 (8) Consequential, punitive or other similar damages shall not be allowed except those payable to third parties for which liability is allocated among the Parties by the arbitral award; (9) The award shall include interest from the date of any breach or violation of this Agreement, as determined by the arbitral award, and from the date of the award until paid in full, at the Agreed Interest Rate; and (10) Judgment upon the award may be entered in any court having jurisdiction over the person or the assets of the Party owing the judgment or application may be made to such court for a judicial acceptance of the award and an order of enforcement, as the case may be. (11) Whenever the Parties are of more than one nationality, the single arbitrator or the presiding arbitrator, as the case may be, shall not be of the same nationality as any of the Parties or their ultimate parent entities. (12) For purposes of allowing the arbitration provided in this Article XVIII, the enforcement and execution of any arbitration decision and award, and the issuance of any attachment or other interim remedy, no government agency will be involved as to the Contract License as this is a private contract for the Contract Area and Project. (13) The arbitration shall proceed in the absence of a Party who, after due notice, fails to answer or appear. An award shall not be made solely on the default of a Party, but the arbitrator(s) shall require the Party who is present to submit such evidence as the arbitrator(s) may determine is reasonably required to make an award. (14) If an arbitrator should die, withdraw or otherwise become incapable of serving, or refuse to serve, a successor arbitrator shall be selected and appointed in the same manner as the original arbitrator. ARTICLE XIX - ALLOCATION OF COST RECOVERY RIGHTS 19.1 ALLOCATION OF PRODUCTION Where applicable or necessary, each Party's share of Cost Oil, Profit Oil, or similar concepts during each Calendar Quarter shall be determined pursuant to this Article XIX as follows: (A) Oil available to the Parties from the Contract Area during each Calendar Quarter shall be allocated equitably for any and all purposes by type and grade on a pro-rata share of Participating Interests owned, and any oil or interest that is allocated to or re-allocated to the Government in the future will be allocated pro-rata based on the various Party shares of Participating Interests in the Project. ARTICLE XX - GENERAL PROVISIONS 20.1 WARRANTIES AS TO NO PAYMENTS, GIFTS AND LOANS Each of the Parties warrants that neither it nor its affiliates has made or will make, with respect to the matters provided for hereunder, any offer, payment, promise to pay or authorization of the payment of any money, or any offer, gift, promise to give or authorization of the giving of anything of value, directly or indirectly, to or for the use or benefit of any official or employee of the Government or to or for the use or benefit of any political party, official, or candidate unless such offer, payment, gift, promise or authorization is authorized by the written laws or regulations the Republic of Peru, of Canada, or of the United States of America. 20.2 CONFLICTS OF INTEREST (A) Operator undertakes that it shall avoid any conflict of interest between its own interests (including the interests of Affiliates) and the interests of the other Parties in dealing with suppliers, customers and all other organizations or individuals doing or seeking to do business with the Parties in connection with activities contemplated under this Agreement. (B) The provisions of the preceding paragraph shall not apply to: (1) Operator's performance which is in accordance with the local preference laws or policies of the Government; or (2) Operator's acquisition of products or services from an Affiliate, or the sale thereof to an Affiliate, made in accordance with the terms of this Agreement. -25- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 20.3 PUBLIC ANNOUNCEMENTS (A) Operator shall be responsible for the preparation and release of all public announcements and statements regarding this Agreement or the Joint Operations; provided that, no public announcement or statement shall be issued or made unless prior to its release all the Parties have been furnished with a copy of such statement or announcement and the approval of at least two (2) non-affiliated Parties holding fifty percent (50%), or more, of the Participating Interests has been obtained. Where a public announcement or statement becomes necessary or desirable because of danger to or loss of life, damage to property or pollution as a result of activities arising under this Agreement, Operator is authorized to issue and make such announcement or statement without prior approval of the Parties, but shall promptly furnish all the Parties with a copy of such announcement or statement. (B) If a Party wishes to issue or make any public announcement or statement regarding this Agreement or the Joint Operations, it shall not do so unless prior to its release, such Party furnishes all the Parties with a copy of such announcement or statement, and obtains the approval of at least two (2) Parties which are not Affiliates holding fifty percent (50%) or more of the Participating Interests; provided that, notwithstanding any failure to obtain such approval, no Party shall be prohibited from issuing or making any such public announcement or statement if it is necessary to do so in order to comply with the applicable laws, rules or regulations of any government, legal proceedings or stock exchange having jurisdiction over such Party or its Affiliates as set forth in Articles 15.1(A)(3) and (7). (C) Notwithstanding the provisions of this Article XIX, any Party may issue or make public announcements or may make regulatory filings as required by securities or similar laws in any jurisdiction in which it operates or is regulated. 20.4 SUCCESSORS AND ASSIGNS Subject to the limitations on transfer contained in Article XII, this Agreement shall inure to the benefit of and be binding upon the successors and assigns of the Parties. 20.5 WAIVER No waiver by any Party of any one or more defaults by another Party in the performance of this Agreement shall operate or be construed as a waiver of any future default or defaults by the same Party, whether of a like or of a different character. Except as expressly provided in this Agreement no Party shall be deemed to have waived, released or modified any of its rights under this Agreement unless such Party has expressly stated, in writing, that it does waive, release or modify such right. 20.6 SEVERANCE OF INVALID PROVISIONS If and for so long as any provision of this Agreement shall be deemed to be judged invalid for any reason whatsoever, such invalidity shall not affect the validity or operation of any other provision of this Agreement except only so far as shall be necessary to give effect to the construction of such invalidity, and any such invalid provision shall be deemed severed from this Agreement without affecting the validity of the balance of this Agreement. 20.7 MODIFICATIONS Except as is provided in Articles 11.2(B) and 20.6, there shall be no modification of this Agreement or the Contract except by written consent of all Parties. 20.8 HEADINGS The topical headings used in this Agreement are for convenience only and shall not be construed as having any substantive significance or as indicating that all of the provisions of this Agreement relating to any topic are to be found in any particular Article. 20.9 SINGULAR AND PLURAL Reference to the singular includes a reference to the plural and vice versa. 20.10 GENDER Reference to any gender includes a reference to all other genders. 20.11 COUNTERPART EXECUTION This Agreement is executed in three (3) original counterparts and each such counterpart shall be deemed an original Agreement for all purposes; provided no Party shall be bound to this Agreement unless and until all Parties have executed a counterpart. For purposes of assembling all counterparts into one document, Operator is authorized to detach the signature page from one or more counterparts and, after signature thereof by the respective Party, attach each signed signature page to a counterpart. Any Party may file this document of record in any forum or jurisdiction that they desire or require, and Parties agree to sign additional original or notarized copies of the signature page to facilitate recording requirements of other Party(ies). 20.12 ENTIRETY -26- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 This Agreement is the entire agreement of the Parties with respect to the subject matter contained herein and supersedes all prior understandings and negotiations of the Parties, except as to agreements among and/or between the various Parties in entering into the original investments and interest acquisition in the Project which other or additional agreements survive this Agreement until those other agreements are completed or satisfied. IN WITNESS of their agreement each Party has caused its duly authorized representative to sign this instrument on the date indicated below such representative's signature. Notary Compania Consultora de Petroleo, S.A. ("CCP") By: Efren Tomaylla Martinez Title: President Date: -27- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 Radial Energy, Inc. ("Radial") Ziegler-Peru, Inc. ("ZPI") By: (Company Name) (Print or type name) Notary Radial By: G. Leigh Lyons Title: President Date: Notary I, the undersigned Notary have verified that the signer is Edward R. Ziegler, and he swore, verified, and affirmed that he signed this document for the purposes stated therein. - --------------------------------------------- Notary in and for the State of Texas, Signed in Harris County. My Commission Expires: Seal Form For Other Later Signatories Below (Company Name) By: (Print or type name) Title: Date: -28- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 NOTARY Radial Energy, Inc. ("Radial") By: /s/ G. LEIGH LYONS [NOTORY SEAL GOES HERE] ------------------------------ G. Leigh Lyons /s/ JAMES L. CARNEY James L. Carney Title: President Date: May 11, 2006 To witness signature of G. ------------------------------ Leigh Lyons Notary I, the undersigned Notary Ziegler-Peru, Inc. ("ZPI") have verified that the signer is Edward R. Ziegler, and he swore, By: verified, and affirmed that he ------------------------------ signed this document for the purposes stated therein. Edward R. Ziegler -------------------------------- Date: Notary in and for the State of ------------------------------ Texas Signed in Harris County. My Commission Expires: Seal Form For Other Later Signatories Below ------------------------------------ (Company Name) By: --------------------------------- --------------------------------- (Print or type name) Title: ----------------------------- Date: ----------------------------- -28- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 NOTARY Radial Energy, Inc. ("Radial") By: ------------------------------ G. Leigh Lyons Title: President Date: ------------------------------ Notary I, the undersigned Notary Ziegler-Peru, Inc. ("ZPI") have verified that the signer is Edward R. Ziegler, and he swore, By: /s/ EDWARD R. ZIEGLER verified, and affirmed that he ------------------------------ signed this document for the purposes stated therein. Edward R. Ziegler /s/ SHARI P. WADE -------------------------------- Date: 5-10-2006 Notary in and for the State of ------------------------------ Texas Signed in Harris County. My Commission Expires: Seal [NOTARY SEAL GOES HERE] Form For Other Later Signatories Below ------------------------------------ (Company Name) By: --------------------------------- --------------------------------- (Print or type name) Title: ----------------------------- Date: ----------------------------- -28- MODEL FORM INTERNATIONAL OPERATING AGREEMENT - 1995 This Agreement is the entire agreement of the Parties with respect to the subject matter contained herein and supercedes all prior understandings and negotiations of the Parties, except as to agreements among and/or between the various Parties in entering into the original investments and interest acquisition in the Project which other or additional agreements survive this Agreement until those other agreements are completed or satisfied. IN WITNESS of their agreement each Party has caused the duly authorized representative to sign the instrument on the date indicated below each representative's signature. {NOTARY SEAL GOES HERE] COMPANIA CONSULTORA DE PETROLEO, SA ("CCP") By: /s/ EFREN TOMAYLIA MARTINEZ ----------------------------- Efren Tomaylia Martinez DNI: 07851597 Title: President Date: May 11, 2006 --------------------------- EXHIBIT C ACCOUNTING PROCEDURE TO JOA HUAYA ANTICLINE PROJECT EFFECTIVE MAY 5, 2006 TABLE OF CONTENTS SECTION PAGE SECTION I. GENERAL PROVISIONS ............................................. 1 1.1 PURPOSE. . ................................................. 1 1.2 CONFLICT WITH AGREEMENT. . ................................. 1 1.3 DEFINITIONS.. .............................................. 1 1.4 JOINT ACCOUNT RECORDS AND CURRENCY EXCHANGE.. .............. 2 1.5 STATEMENTS AND BILLINGS... ................................. 2 1.6 PAYMENTS AND ADVANCES.. .................................... 3 1.7 ADJUSTMENTS .................. ............................. 6 1.8 AUDITS. . .................................................. 6 1.9 ALLOCATIONS. . ............................................. 8 SECTION II. DIRECT CHARGES ................................................ 8 2.1 LICENSES, PERMITS, ETC. . .................................. 8 2.2 SALARIES, WAGES AND RELATED COSTS.... ...................... 8 2.3 EMPLOYEE RELOCATION COSTS. . ............................... 9 2.4 OFFICES, CAMPS, AND MISCELLANEOUS FACILITIES.. ............. 9 2.5 MATERIAL.. ................................................. 9 2.6 EXCLUSIVELY OWNED EQUIPMENT AND FACILITIES OF OPERATOR AND AFFILIATES. ...........................................9 2.7 SERVICES .................................................. 10 2.8 INSURANCE. . .............................................. 10 2.9 DAMAGES AND LOSSES TO PROPERTY ............................ 11 2.10 LITIGATION AND LEGAL EXPENSES.... ......................... 11 2.11 TAXES AND DUTIES.. ........................................ 11 2.12 ECOLOGICAL AND ENVIRONMENTAL. . ........................... 11 2.13 DECOMMISSIONING (ABANDONMENT) AND RECLAMATION. . .......... 12 2.14 OTHER EXPENDITURES. . ..................................... 12 SECTION III. INDIRECT CHARGES ............................................ 12 3.1 PURPOSE. . ................................................ 12 3.2 AMOUNT.. .................................................. 12 3.3 EXCLUSIONS. . ............................................. 13 SECTION IV. ACQUISITION OF MATERIAL ...................................... 13 4.1 ACQUISITIONS.. ............................................ 13 4.2 MATERIALS FURNISHED BY OPERATOR. . ........................ 13 4.3 PREMIUM PRICES. . ......................................... 14 4.4 WARRANTY OF MATERIAL FURNISHED BY OPERATOR. . ............. 14 SECTION V. DISPOSAL OF MATERIALS ......................................... 15 5.1 DISPOSAL. . ............................................... 15 5.2 MATERIAL PURCHASED BY A PARTY OR AFFILIATE ................ 15 5.3 DIVISION IN KIND. . ....................................... 15 5.4 SALES TO THIRD PARTIES... ................................. 15 SECTION VI. INVENTORIES .................................................. 16 6.1 PERIODIC INVENTORIES - NOTICE AND REPRESENTATION. . ....... 16 6.2 SPECIAL INVENTORIES... .................................... 16 ACCOUNTING PROCEDURE INTRODUCTION Attached to and made part of the Operating Agreement, hereinafter called the "Agreement," effective as of the 5th day of May, 2006, by and between Cia. Consultora De Petroleo, S.A., Ziegler-Peru, Inc., and Radial Energy, Inc. Any other Party or Participating Interest subsequently created will as required in the Agreement, also follow this Accounting Procedure. SECTION I. GENERAL PROVISIONS 1.1 PURPOSE. 1.1.1 The purpose of this Accounting Procedure is to establish equitable methods for determining charges and credits applicable to operations under the Agreement which reflect the costs of Joint Operations to the end that no Party shall gain or lose in relation to other Parties. 20 1.1.2 The Parties agree, however, that if the methods prove unfair or inequitable to Operator or Non-Operators, the Parties shall meet and in good faith endeavor to agree on changes in methods deemed necessary to correct any unfairness or inequity. 1.2 CONFLICT WITH AGREEMENT. In the event of a conflict between the provisions of this Accounting Procedure and the provisions of the Agreement to which this Accounting Procedure is attached, the provisions of the Agreement shall prevail. 1.3 DEFINITIONS. The definitions contained in ARTICLE I of the Agreement to which this Accounting Procedure is attached shall apply to this Accounting Procedure and have the same meanings when used herein. Certain terms used herein are defined as follows: "ACCRUAL BASIS" means that basis of accounting under which costs and benefits are regarded as applicable to the period in which the liability for the cost is incurred or the right to the benefit arises, regardless of when invoiced, paid, or received. "AGREEMENT" means the Huaya Anticline Project JOA with an effective date of May 5, 2006. "CASH BASIS" means that basis of accounting under which only costs actually paid and revenue actually received are included for any period. "COUNTRY OF OPERATIONS" means the Republic of Peru. AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 1 "MATERIAL" means machinery, equipment and supplies acquired and held for use in Joint Operations. "SECONDEES" means technical and professional personnel employed by a Non-Operator or its Affiliate(s) who, with Operator's approval, are loaned to Operator to perform services for, and under the direction and control of, Operator under a secondment agreement. JOINT ACCOUNT RECORDS AND CURRENCY EXCHANGE. 1.4.1 Operator shall at all times maintain and keep true and correct records of the production and disposition of all liquid and 1.4 gaseous Hydrocarbons, and of all costs and expenditures under the Agreement, as well as other data necessary or proper for the settlement of accounts between the Parties hereto in connection with their rights and obligations under the Agreement and to enable Parties to comply with their respective applicable income tax and other laws. 1.4.2 Operator shall maintain accounting records pertaining to Joint Operations in accordance with generally accepted accounting practices used in the international petroleum industry and any applicable statutory obligations of the Country of Operations as well as the provisions of the Contract and the Agreement. 1.4.3 The Joint Account financial records shall be maintained by Operator in the Spanish language and in United States of America ("U.S.") currency and in such other language and currency as may be required by the laws of the Country of Operations or the Contract. Conversions of currency shall be recorded at the rate actually experienced in that conversion. Currency translations for expenditures and receipts shall be recorded at the arithmetic average of the buying and selling exchange rates at the close of business on the last day of the month preceding the current accounting period 1.4.4 Any currency exchange gains or losses shall be credited or charged to the Joint Account, except as otherwise specified in this Accounting Procedure. 1.4.5 This Accounting Procedure shall apply, to Non-Participating, Non-Consent, or Exclusive Operations, if any, in the same manner that it applies to Joint Operations; provided, however, that the charges and credits applicable to Consenting Parties shall be distinguished by an Exclusive Operation Account. For the purpose of determining and calculating the remuneration of the Consenting Parties, including the premiums for Exclusive Operations, the costs and expenditures shall be expressed in U.S. currency (irrespective of the currency in which the expenditure was incurred). 1.4.6 The cash basis for accounting shall be used in preparing accounts concerning the Joint Operations. If a "cash" basis for accounting is used, Operator shall show accruals, if any, as memorandum items. STATEMENTS AND BILLINGS. 1.5 AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 2 1.5.1 Unless otherwise agreed by the Parties, Operator shall submit monthly to each Party, on or before the 15th Day of each month, statements of the costs and expenditures incurred during the prior month, indicating by appropriate classification the nature thereof, the corresponding budget category, and the portion of such costs charged to each of the Parties. These statements, as a minimum, shall contain the following information: - advances of funds setting forth the currencies received from each Party, - the share of each Party in total expenditures, - the accrued expenditures, - the current account balance of each Party, - summary of costs, credits, and expenditures on a current month, year-to-date, and inception-to-date basis or other periodic basis, as agreed by Parties (such expenditures shall be grouped by the categories and line items designated in the approved Work Program and Budget submitted by Operator in accordance with ARTICLE 6.4 of the Agreement so as to facilitate comparison of actual expenditures against that work Program and Budget), and - details of unusual charges and credits in excess of U.S. dollars ten thousand (U.S. $ 10,000). 1.5.2 Operator shall, upon request, furnish a description of the accounting classifications or account numbers and definitions used by it on the statements provided to Parties. 1.5.3 Amounts included in the statements and billings shall be expressed in U.S. currency and reconciled to the currencies advanced. 1.5.4 Each Party shall be responsible for preparing its own accounting and tax reports to meet the requirements of the Country of Operations and of all other countries to which it may be subject. Operator, to the extent that the information is reasonably available from the Joint Account records, shall provide Non-Operators in a timely manner with the necessary information to facilitate the discharge of such responsibility. 1.6 PAYMENTS AND ADVANCES. 1.6.1 Upon approval of any Work Program and Budget, if Operator so requests, each Non-Operator shall advance its share of estimated cash requirements for the succeeding one month of operations. Each such cash call shall be equal to the Operator's estimate of the money to be spent in the currencies required to perform its duties under the approved Work Program and Budget during the month concerned. For informational purposes the cash call shall contain an estimate of the funds required for the succeeding two (2) months detailed by AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 3 the categories designated in the approved Work Program and Budget submitted by Operator in accordance with Article 6 of the Agreement. 1.6.2 Each such cash call, detailed by the categories designated in the approved Work Program and Budget submitted by Operator in accordance with Article 6 of the Agreement shall be made in writing and delivered to all Non-Operators not less than fifteen (15) Days before the payment due date. The due date for payment of such advances shall be set by Operator but shall be no sooner than the first Business Day of the month for which the advances are required. All advances shall be made without bank charges. Any charges related to receipt of advances from a Non-Operator shall be borne by that Non-Operator. 1.6.3 Each Non-Operator shall wire transfer its share of the full amount of each such cash call to Operator on or before the due date, in the currencies requested or any other currencies acceptable to Operator and at a bank designated by Operator. If currency provided by a Non-Operator is other than the requested currency, then the entire cost of converting to the requested currency shall be charged to that Non-Operator. 1.6.4 Notwithstanding the provisions of Section 1.6.2, should Operator be required to pay any sums of money for the Joint Operations which were unforeseen at the time of providing the Non-Operators with said estimates of its requirements, Operator may make a written request of the Non-Operators for special advances covering the Non-Operators' share of such payments. Each such Non-Operator shall make its proportional special advances within ten (10) Days after receipt of such notice. 1.6.5 If a Non-Operator's advances exceed its share of cash expenditures, the next succeeding cash advance requirements, after such determination, shall be reduced accordingly. 1.6.6 If Non-Operator's advances are less than its share of cash expenditures, the deficiency shall, at Operator's option, be added to subsequent cash advance requirements or be paid by Non-Operator within ten (10) Days following the receipt of Operator's billing to Non-Operator for such deficiency. 1.6.7 If, under the provisions of the Agreement, Operator is required to segregate funds received from the Parties, any interest received on such funds shall be applied against the next succeeding cash call or, if directed by the Operating Committee, distributed quarterly. The interest thus received shall be allocated to the Parties on an equitable basis taking into consideration date of funding by each Party to the accounts in proportion to the total funding into the account. A monthly statement summarizing receipts, disbursements, transfers to each joint bank account and beginning and ending balances thereof shall be provided by Operator to the Parties. 1.6.8 If Operator does not request Non-Operators to advance their share of estimated cash requirements, each Non-Operator shall pay its share of cash expenditures within ten (10) Days following receipt of Operator's billing. AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 4 1.6.9 Payments of advances or billings shall be made on or before the due date. In accordance with ARTICLE VIII of the Agreement, if these payments are not received by the due date the unpaid balance shall bear and accrue interest from the due date until the payment is received by Operator at the Agreed Interest Rate. For the purpose of determining the unpaid balance and interest owed, Operator shall translate to U.S. currency all amounts owed in other currencies using the currency exchange rate readily available to Operator at the close of the last Business Day prior to the due date for the unpaid balance as quoted by the applicable authority identified in Section 1.4.3 of this Section I. 1.6.10 Subject to governmental regulation, Operator shall have the right, at any time and from time to time, to convert the funds advanced or any part thereof to other currencies to the extent that such currencies are then required for operations. The cost of any such conversion shall be charged to the Joint Account. 1.6.11 Operator shall endeavor to maintain funds held for the Joint Account in bank accounts at a level consistent with that required for the prudent conduct of Joint Operations. 1.6.12 If under the Agreement, Operator is required to segregate funds received from or for the Joint Account, the provisions under this Section 1.6 for payments and advances by Non-Operators shall apply also to Operator. 1.6.13 Funding by Operator 1.6.13.1 Notwithstanding any of the provisions of Sections 1.6.1 through 1.6.6 to the contrary, Operator may elect to fund the costs of the Joint Operations and bill the Non-Operators for such funding pursuant to the provisions of this Section 1.6.13. Operator shall exercise such election by submission of notice to the Non-Operators at the time of submission of any proposed Work Program and Budget to the Parties pursuant to ARTICLE VII of the Agreement. In consideration for such funding, each Non-Operator shall pay Operator the financing charge specified in Section 1.6.13.3. 1.6.13.2 Not later than the tenth (10th) Day after the end of any month for which the Operator has funded the Joint Operations, Operator shall bill each Non-Operator for (1) its share of the cash expenditure, and (2) the financing charge calculated in accordance with Section 1.6.13.3. 1.6.13.3 Operator may charge the Joint Operations interest at a maximum of the monthly LIBOR rate as determined and defined in the Agreement for any Joint Operations funded by the Operator. 1.6.13.4 Notwithstanding the provisions of Section 1.6.8, each bill under this Section 1.6.13 shall be due on the twentieth (20th) day of the month in which the bill was issued, or if such day is not a Business AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 5 Day in the Country of Operations, the first Business Day thereafter. 1.6.13.5 In any subsequent Calendar Year, Operator may elect to adopt a cash call procedure in accordance with Sections 1.6.1 through 1.6.6 by notice submitted to the Non-Operators at the time of submission of any proposed Work Program and Budget to the Parties. ADJUSTMENTS. Payments of any advances or billings 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 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. Failure on the part of a Non-Operator to make claim on Operator for adjustment within such period shall establish the correctness thereof and preclude the filing of exceptions thereto or making claims for adjustment thereon. 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 the Material as provided for in Section VI. Operator shall be allowed to make adjustments to the Joint Account after such twenty-four (24) month period if these adjustments result from audit exceptions outside of this Agreement, third party claims, or Government or Government Oil Company requirements. Any such adjustments shall be subject to audit within the time period specified in Section 1.8.1. AUDITS. 1.8.1 A Non-Operator, upon at least sixty (60) Days advance notice in writing to Operator and all other Non-Operators, shall have the right to audit the Joint Accounts and records of Operator relating to the accounting hereunder for any Calendar Year within the twenty-four (24) month period following the end of such Calendar Year except as otherwise provided in Section 3.1. As provided in ARTICLE 4.2(B)(6) of the Agreement, Non-Operators shall have reasonable access to Operator's personnel and to the facilities, warehouses, and offices directly or indirectly serving Joint Operations. The cost of each such audit shall be borne by Non-Operators conducting the audit. Where there are two or more Non-Operators, the Non-Operators shall make every reasonable effort to conduct joint or simultaneous audits in a manner that will result in a minimum of inconvenience to the Operator. Non-Operators must take written exception to and make claim upon the Operator for all discrepancies disclosed by said audit within said twenty-four (24) month period. Operator shall endeavor to produce information from its Affiliates reasonably necessary to support charges from those Affiliates to the Joint Account other than those charges referred to in Section 3.1. If an Affiliate considers such information confidential or proprietary or if such Affiliate will not allow the Non- AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 6 Operators to audit its accounts, the statutory auditor of the Affiliate shall be used to confirm the details and facts as required, provided such statutory auditor is an internationally recognized firm of public accountants. The auditing Non-Operator may instruct the statutory auditor on the scope of such confirmation; however, the scope shall be subject to the approval of the Affiliate in question, such approval not to be unreasonably withheld. Should the statutory auditor of the Affiliate decline to act in such capacity, or not be an internationally recognized independent firm of public accountants, the auditing Non-Operators shall select an internationally recognized independent firm of public accountants to carry out such confirmation, subject to the approval of the Affiliate in question, such approval not to be unreasonably withheld. The cost of such audit by the statutory auditor or the independent firm of public accountants, as the case may be, shall be charged to the Joint Account. 1.8.3 Any information obtained by a Non-Operator under the provisions of this Section 1.8 which does not relate directly to the Joint Operations shall be kept confidential and shall not be disclosed to any party, except as would otherwise be permitted by the Agreement. 1.8.4 In the event that the Operator is required by law or the Contract to employ a public accounting firm to audit the Joint Account and records of Operator relating to the accounting hereunder, the cost thereof shall be a charge against the Joint Account, and a copy of the audit shall be furnished to each Party. 1.8.5 At the conclusion of each audit, the Parties shall endeavor to settle outstanding matters expeditiously. To this end the Parties conducting the audit will make a reasonable effort to prepare and distribute a written report to the Operator and all the Parties who participated in the audit as soon as possible and in any event within ninety (90) Days after the conclusion of each audit. The report shall include all claims arising from such audit together with comments pertinent to the operation of the accounts and records. Operator shall make a reasonable effort to reply to the report in writing as soon as possible and in any event no later than ninety (90) Days after receipt of the report. Should the Non-Operators consider that the report or reply requires further investigation of any item therein, the Non-Operators shall have the right to conduct further investigation in relation to such matter notwithstanding the provisions of Sections 1.7 and 1.8.1 that the period of twenty-four (24) months may have expired. However, conducting such further investigation shall not extend the twenty-four (24) month period for taking written exception to and making a claim upon the Operator for all discrepancies disclosed by said audit. Such further investigations shall be commenced within thirty (30) Days and be concluded within sixty (60) Days after the receipt of such report or reply, as the case may be. 1.8.6 All adjustments resulting from an audit agreed between the Operator and the Non-Operator conducting the audit shall be reflected promptly in the Joint Account by the Operator and reported to the Non-Operator(s). If any dispute shall arise in connection with an audit, it shall be reported to and discussed by the Operating Committee, and, unless otherwise agreed by the parties to the dispute, resolved in accordance with the provisions of Article XVIII of the Agreement (Dispute and Arbitration sections). If all the parties to the dispute so AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 7 agree, the adjustment(s) may be referred to an independent expert agreed to by the parties to the dispute. At the election of the parties to the dispute, the decision of the expert will be binding upon such parties. Unless otherwise agreed, the cost of such expert will be shared equally by all parties to the dispute. 1.9 ALLOCATIONS. If it becomes necessary to allocate any costs or expenditures to or between Joint Operations and any other operations, such allocation shall be made on an equitable basis. For informational purposes only, Operator shall furnish a description of its allocation procedures pertaining to these costs and expenditures and its rates for personnel and other charges, along with each proposed Work Program and Budget. SECTION II. DIRECT CHARGES Operator shall charge the Joint Account with all costs and expenditures incurred in connection with Joint Operations. It is also understood that charges for services normally provided by an operator such as those contemplated in Sections 2.7.2 and 2.7.3 which are provided by a Party's Affiliate shall reflect the cost to the Affiliate, excluding profit, for performing such services, except as otherwise provided in Section 2.6, Section 2.7.1, and Section 2.5.1 if selected. 26 The costs and expenditures shall be recorded as required for the settlement of accounts between the Parties hereto in connection with the rights and obligations under this Agreement and for purposes of complying with the tax laws of the Country of Operations and of such other countries to which any of the Parties may be subject. Without in any way limiting the generality of the foregoing, chargeable costs and expenditures shall include: 2.1 LICENSES, PERMITS, ETC. All costs, if any, attributable to the acquisition, maintenance, renewal or relinquishment of licenses, permits, contractual and/or surface rights acquired for Joint Operations and bonuses paid in accordance with the Contract when paid by Operator in accordance with the provisions of the Agreement. 2.2 SALARIES, WAGES AND RELATED COSTS. Salaries, wages and related costs include everything constituting the employees' total compensation, as well as the cost to Operator of holiday, vacation, sickness, disability benefits, living and housing allowances, travel time, bonuses, and other customary allowances applicable to the salaries and wages chargeable hereunder, as well as the costs to Operator for employee benefits, including but not limited to employee group life insurance, group medical insurance, hospitalization, retirement, severance payments AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 8 required by the laws or regulations of the Country of Operations and other benefit plans of a like nature applicable to labor costs of Operator. All costs associated with organizational restructuring (e.g., separation benefits, relocation costs, asset disposition costs) of Operator or its Affiliates, other than those costs which are directly related to employees of Operator who are directly engaged in Joint Operations on a full time basis, will require the approval of the Parties to be chargeable to the Joint Account. Any costs associated with Country of Operations benefit plans which are not currently funded shall be accrued and not be paid by Non-Operators, unless otherwise approved by the Operating Committee, until the same are due and payable to the employee, upon withdrawal of a Party pursuant to the Agreement and then only by the withdrawing Party, or upon termination of the Agreement, whichever occurs first. 2.3 EMPLOYEE RELOCATION COSTS. No employee relocation costs will be charged to the Joint Operations unless approved by the Operating Committee. Employee relocation costs are those costs to permanently move an employee and his family and dependents from one area of residence to another. Employee relocation costs are different than travel and housing/camp expenses that may be set forth in other sections. 2.4 OFFICES, CAMPS, AND MISCELLANEOUS FACILITIES. Cost of maintaining any offices, sub-offices, camps with meals and lodging, warehouses, housing, and other facilities of the Operator and/or Affiliates directly serving the Joint Operations. If such facilities serve operations in addition to the Joint Operations the costs shall be allocated to the properties served on an equitable basis. 2.5 MATERIAL. Cost, net of discounts taken by Operator, of Material purchased or furnished by Operator. Such costs shall include, but are not limited to, export brokers' fees, transportation charges, loading, unloading fees, export and import duties and license fees associated with the procurement of Material and in-transit losses, if any, not covered by insurance. So far as it is reasonably practical and consistent with efficient and economical operation, only such Material shall be purchased for, and the cost thereof charged to, the Joint Account as may be required for immediate use. 2.6 EXCLUSIVELY OWNED EQUIPMENT AND FACILITIES OF OPERATOR AND AFFILIATES. Charges for exclusively owned equipment, facilities, and utilities of Operator or any of its Affiliates at rates not to exceed the average commercial rates of non-affiliated third parties then prevailing for like equipment, facilities, and utilities for use in the area where the same are used hereunder. On request, Operator shall furnish Non-Operators a list of rates and the basis of application. Such rates shall be revised from time to time if found to be either excessive or insufficient, but not more than once every six months. AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 9 Exclusively owned drilling tools and other equipment lost in the hole or damaged beyond repair may be charged at replacement cost less depreciation plus transportation costs to deliver like equipment to the location where used. 2.7 SERVICES. 2.7.1 The charges for services provided by third parties, including the Affiliates of the respective Parties which have contracted with Operator to perform services that are normally provided by third parties, other than those services covered by Section 2.7.2 and Section 2.7.3, shall be chargeable to the Joint Account. Such charges for services by the Affiliates of the respective Parties shall not exceed those currently prevailing if performed by non-affiliated third parties, considering quality and availability of services. 2.7.2 The cost of services performed by Operator's Affiliates technical and professional staffs not located within the Country of Operation shall be chargeable to the Joint Account. The individual rates shall include salaries and wages of such technical and professional personnel, lost time, governmental assessments, and employee benefits. Costs shall also include all support costs necessary for such technical and professional personnel to perform such services, such as, but not limited to, rent, utilities, support staff, drafting, telephone and other communication expenses, computer support, supplies, depreciation, and other reasonable expenses. 2.7.3 The cost of services performed with the approval of Operator by the technical and professional staffs of the Non-Operators and the Affiliates of the respective Non-Operators, including the cost to such Affiliates and Non-Operators of their respective Secondees, shall be chargeable to the Joint Account. The individual rates shall include salaries and wages of such technical and professional personnel and Secondees, lost time, governmental assessments, and employee benefits. Costs (other than for Secondees) shall also include all support costs necessary for such technical and professional personnel to perform such services, such as, but not limited, to rent, utilities, support staff, drafting, telephone and other communication expenses, computer support, supplies, depreciation, and other reasonable expenses. 2.7.4 A Non-Operator shall bill Operator for direct costs of services and of Secondees charged under the provisions of Section 2.7.3 on or before the last day of each month for charges for the preceding month, to which charges Non-Operator shall not add an administrative overhead rate. Within thirty (30) Days after receipt of a bill for such charges, Operator shall pay the amount due thereon. INSURANCE. Premiums paid for insurance required by law or the Agreement to be carried for the benefit of the Joint Operations. 2.8 AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 10 2.9 DAMAGES AND LOSSES TO PROPERTY. 2.9.1 All costs or expenditures necessary to replace or repair damages or losses incurred by fire, flood, storm, theft, accident, or any other cause shall be chargeable to the Joint Account. Costs shall be listed separately in the monthly statement of costs and expenditures. 2.9.2 Credits for settlements received from insurance carried for the benefit of Joint Operations and from others for losses or damages to Joint Property or Materials shall be chargeable to the Joint Account. Each Party shall be credited with its Participating Interest share thereof except where such receipts are derived from insurance purchased by Operator for less than all Parties in which event such proceeds shall be credited to those Parties for whom the insurance was purchased in the proportion of their respective contributions toward the insurance coverage. 2.9.3 Expenditures incurred in the settlement of all losses, claims, damages, judgments, and other expenses for the account of Joint Operations shall be chargeable to the Joint Account. 2.10 LITIGATION AND LEGAL EXPENSES. The costs and expenses of litigation and legal services necessary for the protection of the Joint Operations under this Agreement as follows: 2.10.1 Legal services necessary or expedient for the protection of the Joint Operations, and all costs and expenses of litigation, arbitration or other alternative dispute resolution procedure, including reasonable attorneys' fees and expenses, together with all judgments obtained against the Parties or any of them arising from the Joint Operations. 2.10.2 If the Parties hereunder shall so agree, actions or claims affecting the Joint Operations hereunder may be handled by the legal staff of one or any of the Parties hereto; and a charge commensurate with the reasonable costs of providing and furnishing such services rendered may be made by the Party providing such service to Operator for the Joint Account, but no such charges shall be made until approved by the Parties. 2.11 TAXES AND DUTIES. All taxes, duties, assessments and governmental charges, of every kind and nature, assessed or levied upon or in connection with the Joint Operations, other than any that are measured by or based upon the revenues, income and net worth of a Party. 2.12 ECOLOGICAL AND ENVIRONMENTAL. AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 11 Costs incurred on the Joint Property as a result of statutory regulations for archaeological and geophysical surveys relative to identification and protection of cultural resources and/or other environmental or ecological surveys as may be required by any regulatory authority. Also, costs to provide or have available pollution containment and removal equipment plus costs of actual control, clean up and remediation resulting from responsibilities associated with Hydrocarbon contamination as required by all applicable laws and regulations. 2.13 DECOMMISSIONING (ABANDONMENT) AND RECLAMATION. Costs incurred for decommissioning (abandonment) and reclamation of the Joint Property, including costs required by governmental or other regulatory authority or by the Contract. 2.14 OTHER EXPENDITURES. Any other costs and expenditures incurred by Operator for the necessary and proper conduct of the Joint Operations in accordance with approved Work Programs and Budgets and not covered in this Section II or in Section III. 20 SECTION III. INDIRECT CHARGES 3.1 PURPOSE. Operator shall charge the Joint Account monthly for the cost of indirect services and related office costs of Operator not otherwise provided in this Accounting Procedure. Indirect costs chargeable under this Section III represent the cost of general assistance and support services provided by Operator and its Affiliates. These costs are such that it is not practical to identify or associate them with specific projects but are for services which provide the Joint Operations with needed and necessary resources which Operator requires and provide a real benefit to Joint Operations. No cost or expenditure included under Section II shall be included or duplicated under this Section III. The charges under Section III are not subject to audit under Sections 1.8.1 and 1.8.2 other than to verify that the overhead percentages are applied correctly to the expenditure basis. 3.2 AMOUNT. 3.2.1 The indirect charge defined in Section 3.1 shall be U.S. dollars six thousand (U.S. $ 6,000) per month for the 100% Joint Operation and Project, plus an additional charge of 0.35% of the Hydrocarbon gross revenues for the Project from each preceding month billed with the current month indirect charge. AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 12 3.2.2 The Operating Committee may adjust the amount or basis of calculation for the charge in Section 3.1 and 3.2.1 every six months. 3.2.3 No annual assessment will be made based on the cost of expenditures. 3.3 EXCLUSIONS. The expenditures used to calculate the monthly indirect charge shall not include the indirect charge (calculated either as a percentage of expenditures or as a minimum monthly charge), rentals on surface rights acquired and maintained for the Joint Account, guarantee deposits, pipeline tariffs, concession acquisition costs, bonuses paid in accordance with the Contract, royalties and taxes on production or revenue to the Joint Account paid by Operator, expenditures associated with major construction projects for which a separate indirect charge is established hereunder, payments to third parties in settlement of claims, and other similar items. Credits arising from any government subsidy payments, disposition of Material, and receipts from third parties for settlement of claims shall not be deducted from total expenditures in determining such indirect charge. SECTION IV. ACQUISITION OF MATERIAL 4.1 ACQUISITIONS. Materials purchased for the Joint Account shall be charged at net cost paid by the Operator. The price of Materials purchased shall include, but shall not be limited to export broker's fees, insurance, transportation charges, loading and unloading fees, import duties, license fees, and demurrage (retention charges) associated with the procurement of Materials, and applicable taxes, less all discounts taken. 4.2 MATERIALS FURNISHED BY OPERATOR. Materials required for operations shall be purchased for direct charge to the Joint Account whenever practicable, except the Operator may furnish such Materials from its stock under the following conditions: 4.2.1 NEW MATERIALS (CONDITION "A"). New Materials transferred from the warehouse or other properties of Operator shall be priced at net cost determined in accordance with Section 4.1 above as if Operator had purchased such new Material just prior to its transfer. Such net costs shall in no event exceed the then current market price. 4.2.2 USED MATERIALS (CONDITIONS "B" AND "C"). AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 13 4.2.2.1 Material which is in sound and serviceable condition and suitable for use without repair or reconditioning shall be classed as Condition "B" and priced at seventy-five percent (75%) of such new purchase net cost at the time of transfer. 4.2.2.2 Materials not meeting the requirements of Section 4.2.2.1 above, but which can be made suitable for use after being repaired or reconditioned, shall be classed as Condition "C" and priced at fifty percent (50%) of such new purchase net cost at the time of transfer. The cost of reconditioning shall also be charged to the Joint Account provided the Condition "C" price, plus cost of reconditioning, does not exceed the Condition "B" price; and provided that Material so classified meet the requirements for Condition "B" Material upon being repaired or reconditioned. 4.2.2.3 Material which cannot be classified as Condition "B" or Condition "C", shall be priced at a value commensurate with its use. 4.2.2.4 Tanks, derricks, buildings, and other items of Material involving erection costs, if transferred in knocked-down condition, shall be graded as to condition as provided in this Section 4.2.2 of Section IV, and priced on the basis of knocked-down price of like new Material. 4.2.2.5 Material including drill pipe, casing and tubing, which is no longer useable for its original purpose but is useable for some other purpose, shall be graded as to condition as provided in this Section 4.2.2 of Section IV. Such Material shall be priced on the basis of the current price of items normally used for such other purpose if sold to third parties. PREMIUM PRICES. 4.3 Whenever Material is not readily obtainable at prices specified in Sections 4.1 and 4.2 of this Section IV because of national emergencies, strikes or other unusual causes over which Operator has no control, Operator may charge the Joint Account for the required Material at Operator's actual cost incurred procuring such Material, in making it suitable for use, and moving it to the Contract Area, provided that notice in writing, including a detailed description of the Material required and the required delivery date, is furnished to Non-Operators of the proposed charge. Operator is not required to accept Material furnished in kind by that Non-Operator. If Operator fails to submit proper notification prior to billing Non-Operators for such Material, Operator shall only charge the Joint Account on the basis of the price allowed during a "normal" pricing period in effect at time of movement. WARRANTY OF MATERIAL FURNISHED BY OPERATOR. 4.4 OPERATOR NOR OTHER SUPPLYING PARTIES WARRANT THE CONDITION OR FITNESS FOR THE PURPOSE INTENDED OF ANY MATERIAL FURNISHED TO THE PROJECT. IN CASE DEFECTIVE AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 14 MATERIAL IS FURNISHED BY OPERATOR FOR THE JOINT ACCOUNT, CREDIT SHALL NOT BE PASSED TO THE JOINT ACCOUNT UNTIL ADJUSTMENT HAS BEEN RECEIVED BY OPERATOR FROM THE MANUFACTURERS OR THEIR AGENTS. SECTION V. DISPOSAL OF MATERIALS 5.1 DISPOSAL. Operator shall be under no obligation to purchase the interest of Non-Operators in new or used surplus Materials. Operator shall have the right to dispose of Materials but shall advise and secure prior agreement of the Operating Committee of any proposed disposition of Materials having an original cost to the Joint Account either individually or in the aggregate of ten thousand U.S. Dollars (U.S. $ 10,000) or more. When Joint Operations are relieved of Material charged to the Joint Account, Operator shall advise each Non-Operator of the original cost of such Material to the Joint Account so that the Parties may eliminate such costs from their asset records. Credits for Material sold by Operator shall be made to the Joint Account in the month in which payment is received for the Material. Any Material sold or disposed of under this Section shall be on an "as is, where is" basis without guarantees or warranties of any kind or nature. Costs and expenditures incurred by Operator in the disposition of Materials shall be charged to the Joint Account. 5.2 MATERIAL PURCHASED BY A PARTY OR AFFILIATE. Proceeds received from Material purchased from the Joint Property by a Party or an Affiliate thereof shall be credited by Operator to the Joint Account, with new Material valued in the same manner as new Material under Section 4.2.1 and used Material valued in the same manner as used Material under Section 4.2.2, unless otherwise agreed by the Operating Committee. 5.3 DIVISION IN KIND. Division of Material in kind, if made between the Parties, shall be in proportion to their respective interests in such Material. Each Party will thereupon be charged individually with the value (determined in accordance with the procedure set forth in Section 5.2) of the Material received or receivable by it. 5.4 SALES TO THIRD PARTIES. Proceeds received from Material purchased from the Joint Property by third parties shall be credited by Operator to the Joint Account at the net amount collected by Operator from the buyer. If the sales price is less than that determined in accordance with the procedure set forth in Section 5.2, then approval by the Operating Committee shall be required prior to the sale. Any claims by the buyer for defective materials or otherwise shall be charged back to the Joint Account if and when paid by Operator. AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 15 SECTION VI. INVENTORIES 6.1 PERIODIC INVENTORIES - NOTICE AND REPRESENTATION. At reasonable intervals, but at least annually, inventories shall be taken by Operator of all Material held in warehouse stock on which detailed accounting records are normally maintained. The expense of conducting periodic inventories shall be charged to the Joint Account. Operator shall give Non-Operators written notice at least sixty Days (60) in advance of its intention to take inventory, and Non-Operators, at their sole cost and expense, shall each be entitled to have a representative present. The failure of any Non-Operator to be represented at such inventory shall bind such Non-Operator to accept the inventory taken by Operator, who shall in that event furnish each Non- Operator with a reconciliation of overages and shortages. Inventory adjustments to the Joint Account shall be made for overages and shortages. Any adjustment equivalent to ten thousand U.S. Dollars (U.S. $ 10,000) or more shall be brought to the attention of the Operating Committee. 6.2 SPECIAL INVENTORIES. Whenever there is a sale or change of interest in the Agreement, a special inventory may be taken by the Operator provided the seller and/or purchaser of such interest agrees to bear all of the expense thereof. In such cases, both the seller and the purchaser shall be entitled to be represented and shall be governed by the inventory so taken. END OF ACCOUNTING PROCEDURE AIPN MODEL INTERNATIONAL ACCOUNTING PROCEDURE MAY 17, 2000 PAGE 16 EX-10.5 6 ex10-5.txt EMPLOYMENT AGREEMENT BY AND BETWEEN RADIAL ... EXHIBIT 10.5 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of the 10th day of March, 2006, by and between BV Pharmaceutical Inc., a Nevada corporation (hereinafter called "Corporation"), and Gregory Leigh Lyons (hereinafter called "Executive"). WITNESSETH: __________ In consideration of the compensation payable to Executive by the Corporation pursuant to this Agreement, and the mutual promises, covenants, representations and warranties contained herein, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Parties hereto agree as follows: 1. EMPLOYMENT AND POSITION. The Corporation hereby employs the Executive as Chief Executive Officer of the Corporation, and the Executive hereby accepts said employment and agrees to render such services to the Corporation on the terms and conditions set forth in this Agreement. During the term of this Agreement, the Executive shall report directly and solely to the board of directors and shall have such executive responsibilities to and shall perform such executive services for the Corporation as may be consistent with his titles. All other officers (excluding the President) and employees of the Corporation shall report, directly or indirectly, to the Executive. 2. TERM. Subject to the provisions for extension and termination set forth in this Agreement, the initial term of this Agreement will begin on April 1, 2006 and shall terminate on April 1, 2009 unless sooner terminated ("Initial Term"), provided that the term of this Agreement and the Executive's employment hereunder shall be deemed to be extended for additional terms of one-year each (each, an "Additional Term") commencing on the day after the expiration of the Initial Term or the previous Additional Term unless either party elects to terminate this Agreement at the end of the Initial Term or any Additional Term by giving the other party written notice of such election at least sixty (60) days before the expiration thereof. The Initial Term and all Additional Terms shall be referred to collectively as the "Term". 3. COMPENSATION. As compensation for all services to be performed by the Executive under this Agreement, the Corporation shall compensate Executive as follows: (a) BASE COMPENSATION. The Corporation shall pay the Executive base compensation ("Base Salary") equal to One Hundred Eighty Thousand U.S. Dollars ($180,000) per annum, which may be increased from time to time in such amounts as are determined by the Board of Directors of the Corporation and shall not be decreased without the Executive's written consent. The term "Base Salary" shall refer to the Base Salary as so increased. The Base Salary will be payable in installments in accordance with the Corporation's regular payroll practices from time to time. The Base Salary and all other remuneration paid to the Executive shall be subject to applicable employment and income tax withholding taxes. (b) BONUS. In addition to the Base Salary, the Corporation shall pay the Executive during the term of this Agreement on each anniversary of the commencement of the Initial Term such bonus payments as may be determined by the Board of Directors of the Corporation based upon the Corporation's achievement of the goals set forth in the Corporation's business plan as in effect from time to time. (c) STOCK GRANT. The Board of Directors of the Corporation may, from time to time, in the Board's sole discretion grant the Executive shares of the Corporation's restricted Common Stock, and/or warrants and/or options to purchase restricted shares of Common Stock, in amounts deemed appropriate by the Board, based on the Executive's performance of his duties (the "Stock Grant") The stock included in the Stock Grant shall be duly authorized, legally issued, fully paid and non-assessable upon the issuance thereof. The Corporation is under no obligation or duty to issue any Stock Grant to Executive. (d) BENEFITS. During the Term of this Agreement, the Executive shall be eligible to participate in the standard fringe benefits package and incentive compensation plans generally made available to the executive management employees of the Corporation, as such benefits may be determined or changed from time to time by the Board of Directors of the Corporation. The fringe benefit programs will include at a minimum reasonable hospital and major medical insurance coverage for Executive and the family of the Executive. Without limiting the generality of the foregoing, the Corporation shall at a minimum reimburse the Executive for the amount of Blue Cross insurance coverage costing approximately $800 per month at the time this Agreement is entered into and shall increase such reimbursement as the cost of such coverage is increased by the provider thereof from time to time. (e) EXPENSES. During the Term of this Agreement, the Corporation shall reimburse the Executive for any and all expenses reasonably incurred by the Executive incident to the performance of the duties imposed upon Executive hereunder and which are substantiated in accordance with reasonable policies and procedures of the Corporation in effect from time to time. (f) AUTO ALLOWANCE. During the Term of this Agreement, the Corporation shall pay to the Executive an automobile allowance of Four Hundred Dollars ($400) a month in addition to the Executive's Base Salary. 4. OFFICE. The Corporation will maintain an appropriately appointed and furnished executive office in a location selected by the Executive at his discretion from time to time, with a computer and such additional equipment and office furnishings as are necessary to carry out the responsibilities of the office of the Chief Operating Officer The Corporation shall provide the Executive with secretarial and other administrative staff and support services suitable to the Executive's duties and responsibilities hereunder. Without limiting the generality of the foregoing sentence, the Corporation shall at a minimum pay One Thousand Dollars ($1,000.00) per month towards the rental and administrative expense of the Executive's office. 5. TERMINATION. (a) DEATH OR DISABILITY. This Agreement shall terminate automatically upon the Executive's death. -2- The Corporation shall be entitled to terminate this Agreement because of the Executive's disability during the Term. Such termination shall only become effective if (i) one hundred and eighty (180) days shall elapse after the date on which the Corporation gives the Executive written notice of its intention to effect such a termination based on disability, and (ii) during such 180-day period the Executive shall not have returned to full-time performance of the Executive's duties. (b) TERMINATION BY THE CORPORATION. The Corporation may terminate this Agreement for Cause at any time during the Term, at which time the Term shall end. The Corporation shall give the Executive written notice of such termination, setting forth in reasonable detail the specific conditions that it considers to constitute Cause, and termination shall be effective thirty (30) days after the delivery of such notice. For purposes of this Agreement, the term "Cause" shall mean, when used with respect to the termination of this Agreement by the Corporation, the conviction of the Executive by a court of competent jurisdiction of a felony involving a crime of fraud or a financial crime against the Corporation, such as embezzlement or other theft from the Corporation. (c) TERMINATION BY EXECUTIVE. The Executive may terminate this Agreement for Good Reason at any time during the Term, at which time the Term shall end. The Executive shall give the Corporation written notice of such termination, setting forth in reasonable detail the specific conditions that the Executive considers to constitute Good Reason, and termination shall be effective thirty (30) days after the delivery of such notice. For purposes of this Agreement, the term "Good Reason" means (a) any failure by the Corporation to comply with any provision of this Agreement, other than an isolated, insubstantial and inadvertent failure that is not taken in bad faith and is remedied by the Corporation within thirty (30) days after receipt of notice thereof from the Executive; or (b) the assignment to the Executive of any duties or responsibilities inconsistent in any material respect with those customarily associated with the positions held by the Executive during the Term. 6. OBLIGATIONS OF THE CORPORATION UPON TERMINATION (a) TERMINATION FOR OTHER THAN GOOD REASON, FOR DEATH OR DISABILITY, OR FOR CAUSE. If, during the Term, the Corporation terminates this Agreement due to the death or disability of the Executive in accordance with Section 5(a) or for Cause in accordance with Section 5(b), or the Executive terminates this Agreement other than for Good Reason in accordance with Section 5(c), then the Corporation shall pay to the Executive (or in the event of termination of employment by reason of the Executive's death, his legal representative or his estate if no representative has been appointed) in a lump sum in cash, within 30 days after the date of Termination, an amount equal to the accrued but unpaid salary pursuant to Section 3(a) and the bonuses as to which the goals set forth on Exhibit B have been achieved but which have not been paid in accordance with Section 3(b) (even if the deadline for such achievement has not yet occurred). (b) TERMINATION FOR GOOD REASON OR OTHER THAN FOR CAUSE. If the Executive terminates this Agreement for Good Reason pursuant to Section 5(c) or the Corporation terminates this Agreement other than pursuant to Section 5(b) for -3- Cause, then the Corporation shall pay to the Executive, in a lump sum in cash within 30 days after the date of Termination, an amount equal to two hundred fifty percent (250%) of the salary that the Corporation would have been obligated to pay the Executive pursuant to Section 3(a) during the Calculation Period if the Agreement had remained unterminated until the end of the Calculation Period plus the amount of all bonuses set forth on Exhibit B, except for any bonus for which the deadline for achievement has passed that was not earned on such deadline, and less any salary that has already been paid. As used herein, "Calculation Period" shall mean the period (i) beginning on the first day of the Initial Term and (ii) ending on (A) the last day of the Initial Term if termination occurs more than sixty (60) days before the end of the Initial Term, (B) the last day of the first Additional Term if termination occurs sixty (60) days or fewer from the end of the Initial Term or during such Additional Term before sixty (60) days from the end thereof, or (C) the last day of the next succeeding Additional Term if termination occurs sixty (60) days or less from the end of any Additional Term. (c) OBLIGATION TO REIMBURSE EXPENSES. The obligation of the Corporation under Sections 3(d)-(f) shall survive the termination of this agreement. 7. CONFIDENTIAL INFORMATION. (a) NONDISCLOSURE. The Executive shall not, during or after the period during which he is employed by the Corporation, and for five (5) years thereafter, disclose any Confidential Information (as such term is defined herein) to any Person for any reason or purpose whatsoever, other than in connection with the performance of his duties under this Agreement. The term "Confidential Information" shall mean all confidential information of or relating to the Corporation and any of its Affiliates, including without limitation, financial information and data, business plans and information regarding prospects and opportunities (such as, by way of example only, client and customer lists and acquisition, disposition, expansion, product development and other strategic plans), but does not include any information that is or becomes public knowledge by means other than the Executive's breach or nonobservance of his obligations described in this Section 7. Notwithstanding the foregoing, the Executive may disclose such Confidential Information as he may be legally required to do so in connection with any legal or regulatory proceeding; provided, however, that the Executive shall provide the Corporation with prior notice of any such required or potentially required disclosure and the Corporation may at its own expense seek appropriate confidential treatment of any such Confidential Information that may be so required to be disclosed in connection with any such legal or regulatory proceeding. The Executive's obligation to refrain from disclosing any Confidential Information under this Section 7 shall continue in effect in accordance with its terms following any termination of this Agreement. The Executive acknowledges that he will not use any Confidential Information for any reason after his employment with the Corporation is terminated other than as permitted in this Section 7. (b) INJUNCTIVE RELIEF. The Executive acknowledges and agrees that the Corporation will have no adequate remedy at law, and would be irreparably harmed, if the Executive breaches or threatens to breach any of the provisions of this Section 7. The Executive agrees that the Corporation shall be entitled to equitable and/or injunctive relief, on an ex parte basis, without notice and without bond, to prevent any breach or threatened breach of this Section 7, and to specific performance of each of the terms of this Section 7 in addition to any other legal or equitable remedies that the Corporation may have. The -4- Executive further agrees that he shall not, in any equity proceeding relating to the enforcement of the terms of this Section 7, raise the defense that the Corporation has an adequate remedy at law. (c) SPECIAL SEVERABILITY; SURVIVABILITY. The terms and provisions of this Section 7 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected. This Section 7 shall survive the expiration or termination of this Agreement. 8. FULL SETTLEMENT; MITIGATION. The Corporation's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Corporation may have against the Executive or others other than a claim, right or action for fraud. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 10. INDEMNIFICATION. The Corporation shall pay or indemnify the Executive to the full extent permitted by Nevada law for all expenses, costs, liabilities and legal fees which the Executive may incur in the discharge of his duties hereunder. 11. NOTICES. All demands, notices, requests, consents and other communications required or permitted under this Agreement shall be in writing and shall be personally delivered or sent by facsimile machine (with a confirmation copy sent by one of the other methods authorized in this Section 11), commercial (including FedEx) or U.S. Postal Service overnight delivery service, or, deposited with the U.S. Postal Service mailed first class, registered or certified mail, postage prepaid, as set forth below: If to Corporation, addressed to: BV Pharmaceutical Inc. Suite 2410 West Georgia Street Vancouver, British Columbia Canada V6E 2N7 Attention: CEO Fax: (604) 682-5564 If to the Executive: Gregory Leigh Lyons 6932 Holeman Avenue Blaine, WA 98230 Cell: (360) 305-5438 Notices shall be deemed given upon the earliest to occur of (i) receipt by the party to whom such notice is directed; (ii) if sent by facsimile machine, on the day (other than a Saturday, Sunday or legal holiday in the jurisdiction to which such notice is directed) such notice is sent if sent (as evidenced by the -5- facsimile confirmed receipt) prior to 5:00 p.m. Pacific Time and, if sent after 5:00 p.m. Pacific Time, on the day (other than a Saturday, Sunday or legal holiday in the jurisdiction to which such notice is directed) after which such notice is sent; (iii) on the first business day (other than a Saturday, Sunday or legal holiday in the jurisdiction to which such notice is directed) following the day the same is deposited with the commercial carrier if sent by commercial overnight delivery service; or (iv) the fifth day (other than a Saturday, Sunday or legal holiday in the jurisdiction to which such notice is directed) following deposit thereof with the U.S. Postal Service as aforesaid. Each party, by notice duly given in accordance therewith may specify a different address for the giving of any notice hereunder. 12. BINDING EFFECT; BENEFITS. This Agreement will be binding upon and will inure to the benefit of the parties hereto and their respective heirs, successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective heirs, successors, executors, administrators or assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. There are no third party beneficiaries to this Agreement. 13. ENTIRE AGREEMENT. This Agreement constitutes the final written expression of all of the agreements between the Parties with respect to the subject matter hereof and supersedes all understandings and negotiations concerning the matters specified herein. No addition to or modification of any provision of this Agreement will be binding upon any party unless made in writing and signed by the party to be bound. 14. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the internal laws of the State of Washington, without reference to principles of conflict of laws. Executive expressly consents to the sole and exclusive jurisdiction of the state courts in the State of Washington for resolution of any dispute hereunder, and consents to sole and exclusive venue in Whatcom County, Washington. The prevailing party in any dispute resolution process shall be entitled, in addition to an award determined by such process, to an award of attorneys' fees, costs and expenses incurred in such process. 15 WITHHOLDING. The Corporation may withhold from any amounts payable under this Agreement such taxes as shall be required to be withheld pursuant to any applicable law or regulation. 16. HEADINGS. Headings of the Sections of this Agreement are for the convenience of the parties only, and will be given no substantive or interpretive effect whatsoever. 17. NO CONFLICT. The Executive represents and warrants that performance of the terms of this Agreement will not breach or conflict with any agreement entered into by the Executive, and that the Executive will not enter into any agreement in conflict herewith. 18. ASSIGNABILITY. Neither party hereto may assign any of its or his rights or obligations hereunder without the prior written consent of the other party hereto, which consent may be withheld in the sole discretion of such other party. 19. WAIVERS. The failure or delay of the Corporation at any time to require performance by the Executive of any provision of this Agreement, even if known, will not affect the right of the Corporation to require performance of that -6- provision or to exercise any right, power or remedy hereunder, and any waiver by the Corporation of any breach of any provision of this Agreement should not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself, or a waiver of any right, power or remedy under this Agreement. No notice to or demand on the Executive in any case will, of itself, entitle the Executive to any other or further notice or demand in similar or other circumstances. 20. CONSTRUCTION. Unless the context of this Agreement otherwise clearly requires, (i) references in this Agreement to the plural include the singular, the singular the plural, the masculine the feminine, the feminine the masculine and the part the whole and (ii) the word "or" will not be construed as exclusive and the word "including" will not be construed as limiting. 21. NO STRICT CONSTRUCTION. This Agreement has been prepared jointly and will not be strictly construed against either party. 22. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all of which shall together constitute one and the same agreement. IN WITNESS WHEREOF, the Corporation and the Executive have executed this Agreement on the day and year first above written. BV PHARMACEUTICAL INC. By: /s/ LEE SOUTHERN ---------------- Lee Southern, Member Board of Directors EXECUTIVE /s/ G. LEIGH LYONS ------------------- Gregory Leigh Lyons EX-10.6 7 ex10-6.txt EMPLOYMENT AGREEMENT BY AND BETWEEN RADIAL ... EXHIBIT 10.6 EMPLOYMENT AGREEMENT THIS EMPLOYMENT AGREEMENT (this "Agreement") is made and entered into as of the 1st day of June, 2006, by and between BV Pharmaceutical Inc., a Nevada corporation (hereinafter called "Corporation"), and Omar Michel Hayes (hereinafter called "Executive"). WITNESSETH: In consideration of the compensation payable to Executive by the Corporation pursuant to this Agreement, and the mutual promises, covenants, representations and warranties contained herein, and other good and valuable consideration the receipt and sufficiency of which is hereby acknowledged, the Parties hereto agree as follows: 1. EMPLOYMENT AND POSITION. The Corporation hereby employs the Executive as Chief Operating Officer of the Corporation, and the Executive hereby accepts said employment and agrees to render such services to the Corporation on the terms and conditions set forth in this Agreement. During the term of this Agreement, the Executive shall report directly and solely to the President and the board of directors and shall have such executive responsibilities to and shall perform such executive services for the Corporation as may be consistent with his titles. All other officers (excluding the President) and employees of the Corporation shall report, directly or indirectly, to the Executive. (a) CONDITION PRECEDENT. The commencement, validity and enforceability of this Agreement are strictly conditioned upon Executive first complying with and satisfying any and all applicable U.S., state, Canadian and provincial laws, rules and regulations governing Executive's right to be employed by and work in the jurisdiction in which Executive is assigned to work and/or perform duties for the Corporation, specifically including, but not limited to, immigration, employment and tax laws, rules and regulations. 2. TERM. Subject to the provisions for extension and termination set forth in this Agreement, the initial term of this Agreement will begin on June 1, 2006 and shall terminate on May 31, 2009 unless sooner terminated ("Initial Term"), provided that the term of this Agreement and the Executive's employment hereunder shall be deemed to be extended for additional terms of one-year each (each, an "Additional Term") commencing on the day after the expiration of the Initial Term or the previous Additional Term unless either party elects to terminate this Agreement at the end of the Initial Term or any Additional Term by giving the other party written notice of such election at least sixty (60) days before the expiration thereof. The Initial Term and all Additional Terms shall be referred to collectively as the "Term". 3. COMPENSATION. As compensation for all services to be performed by the Executive under this Agreement, the Corporation shall compensate Executive as follows: (a) BASE COMPENSATION. The Corporation shall pay the Executive base compensation ("Base Salary") equal to One Hundred Thirty Two Thousand U.S. Dollars ($132,000) per annum, which may be increased from time to time in such amounts as are determined by the Board of Directors of the Corporation and shall not be decreased without the Executive's written consent. The term "Base Salary" shall refer to the Base Salary as so increased. The Base Salary will be payable in installments in accordance with the Corporation's regular payroll practices from time to time. The Base Salary and all other remuneration paid to the Executive shall be subject to applicable employment and income tax withholding taxes. (b) BONUS. In addition to the Base Salary, the Corporation shall pay the Executive during the term of this Agreement on each anniversary of the commencement of the Initial Term such bonus payments as may be determined by the Board of Directors of the Corporation based upon the Corporation's achievement of the goals set forth in the Corporation's business plan as in effect from time to time. (c) STOCK GRANT. The Board of Directors of the Corporation may, from time to time, in the Board's sole discretion grant the Executive shares of the Corporation's restricted Common Stock, and/or warrants and/or options to purchase restricted shares of Common Stock, in amounts deemed appropriate by the Board, based on the Executive's performance of his duties (the "Stock Grant") The stock included in the Stock Grant shall be duly authorized, legally issued, fully paid and non-assessable upon the issuance thereof. The Corporation is under no obligation or duty to issue any Stock Grant to Executive. (d) BENEFITS. During the Term of this Agreement, the Executive shall be eligible to participate in the standard fringe benefits package and incentive compensation plans generally made available to the executive management employees of the Corporation, as such benefits may be determined or changed from time to time by the Board of Directors of the Corporation. The fringe benefit programs will include at a minimum reasonable hospital and major medical insurance coverage for Executive and the family of the Executive. Without limiting the generality of the foregoing, the Corporation shall at a minimum reimburse the Executive for the amount of Blue Cross insurance coverage costing approximately $800 per month at the time this Agreement is entered into and shall increase such reimbursement as the cost of such coverage is increased by the provider thereof from time to time. (e) EXPENSES. During the Term of this Agreement, the Corporation shall reimburse the Executive for any and all expenses reasonably incurred by the Executive incident to the performance of the duties imposed upon Executive hereunder and which are substantiated in accordance with reasonable policies and procedures of the Corporation in effect from time to time. (f) AUTO ALLOWANCE. During the Term of this Agreement, the Corporation shall pay to the Executive an automobile allowance of Four Hundred Dollars ($400) a month in addition to the Executive's Base Salary. 4. OFFICE. The Corporation will maintain an appropriately appointed and furnished executive office in a location selected by the Executive at his discretion from time to time, with a computer and such additional equipment and office furnishings as are necessary to carry out the responsibilities of the office of the Chief Operating Officer The Corporation shall provide the Executive with secretarial and other administrative staff and support services suitable to the Executive's duties and responsibilities hereunder. Without limiting the generality of the foregoing sentence, the Corporation shall at a minimum pay One Thousand Dollars ($1,000.00) per month towards the rental and administrative expense of the Executive's office. -2- 5. TERMINATION. (a) DEATH OR DISABILITY. This Agreement shall terminate automatically upon the Executive's death. The Corporation shall be entitled to terminate this Agreement because of the Executive's disability during the Term. Such termination shall only become effective if (i) one hundred and eighty (180) days shall elapse after the date on which the Corporation gives the Executive written notice of its intention to effect such a termination based on disability, and (ii) during such 180-day period the Executive shall not have returned to full-time performance of the Executive's duties. (b) TERMINATION BY THE CORPORATION. The Corporation may terminate this Agreement for Cause at any time during the Term, at which time the Term shall end. The Corporation shall give the Executive written notice of such termination, setting forth in reasonable detail the specific conditions that it considers to constitute Cause, and termination shall be effective thirty (30) days after the delivery of such notice. For purposes of this Agreement, the term "Cause" shall mean, when used with respect to the termination of this Agreement by the Corporation, the conviction of the Executive by a court of competent jurisdiction of a felony involving a crime of fraud or a financial crime against the Corporation, such as embezzlement or other theft from the Corporation. (c) TERMINATION BY EXECUTIVE. The Executive may terminate this Agreement for Good Reason at any time during the Term, at which time the Term shall end. The Executive shall give the Corporation written notice of such termination, setting forth in reasonable detail the specific conditions that the Executive considers to constitute Good Reason, and termination shall be effective thirty (30) days after the delivery of such notice. For purposes of this Agreement, the term "Good Reason" means (a) any failure by the Corporation to comply with any provision of this Agreement, other than an isolated, insubstantial and inadvertent failure that is not taken in bad faith and is remedied by the Corporation within thirty (30) days after receipt of notice thereof from the Executive; or (b) the assignment to the Executive of any duties or responsibilities inconsistent in any material respect with those customarily associated with the positions held by the Executive during the Term. 6. OBLIGATIONS OF THE CORPORATION UPON TERMINATION (a) TERMINATION FOR OTHER THAN GOOD REASON, FOR DEATH OR DISABILITY, OR FOR CAUSE. If, during the Term, the Corporation terminates this Agreement due to the death or disability of the Executive in accordance with Section 5(a) or for Cause in accordance with Section 5(b), or the Executive terminates this Agreement other than for Good Reason in accordance with Section 5(c), then the Corporation shall pay to the Executive (or in the event of termination of employment by reason of the Executive's death, his legal representative or his estate if no representative has been appointed) in a lump sum in cash, within 30 days after the date of Termination, an amount equal to the accrued but unpaid -3- salary pursuant to Section 3(a) and the bonuses as to which the goals set forth on Exhibit B have been achieved but which have not been paid in accordance with Section 3(b) (even if the deadline for such achievement has not yet occurred). (b) TERMINATION FOR GOOD REASON OR OTHER THAN FOR CAUSE. If the Executive terminates this Agreement for Good Reason pursuant to Section 5(c) or the Corporation terminates this Agreement other than pursuant to Section 5(b) for Cause, then the Corporation shall pay to the Executive, in a lump sum in cash within 30 days after the date of Termination, an amount equal to two hundred fifty percent (250%) of the salary that the Corporation would have been obligated to pay the Executive pursuant to Section 3(a) during the Calculation Period if the Agreement had remained unterminated until the end of the Calculation Period plus the amount of all bonuses set forth on Exhibit B, except for any bonus for which the deadline for achievement has passed that was not earned on such deadline, and less any salary that has already been paid. As used herein, "Calculation Period" shall mean the period (i) beginning on the first day of the Initial Term and (ii) ending on (A) the last day of the Initial Term if termination occurs more than sixty (60) days before the end of the Initial Term, (B) the last day of the first Additional Term if termination occurs sixty (60) days or fewer from the end of the Initial Term or during such Additional Term before sixty (60) days from the end thereof, or (C) the last day of the next succeeding Additional Term if termination occurs sixty (60) days or less from the end of any Additional Term. (c) OBLIGATION TO REIMBURSE EXPENSES. The obligation of the Corporation under Sections 3(d)-(f) shall survive the termination of this agreement. 7. CONFIDENTIAL INFORMATION. (a) NONDISCLOSURE. The Executive shall not, during or after the period during which he is employed by the Corporation, and for five (5) years thereafter, disclose any Confidential Information (as such term is defined herein) to any Person for any reason or purpose whatsoever, other than in connection with the performance of his duties under this Agreement. The term "Confidential Information" shall mean all confidential information of or relating to the Corporation and any of its Affiliates, including without limitation, financial information and data, business plans and information regarding prospects and opportunities (such as, by way of example only, client and customer lists and acquisition, disposition, expansion, product development and other strategic plans), but does not include any information that is or becomes public knowledge by means other than the Executive's breach or nonobservance of his obligations described in this Section 7. Notwithstanding the foregoing, the Executive may disclose such Confidential Information as he may be legally required to do so in connection with any legal or regulatory proceeding; provided, however, that the Executive shall provide the Corporation with prior notice of any such required or potentially required disclosure and the Corporation may at its own expense seek appropriate confidential treatment of any such Confidential Information that may be so required to be disclosed in connection with any such legal or regulatory proceeding. The Executive's obligation to refrain from disclosing any Confidential Information under this Section 7 shall continue in effect in accordance with its terms following any termination of this Agreement. The Executive acknowledges that he will not use any Confidential Information for any reason after his employment with the Corporation is terminated other than as permitted in this Section 7. -4- (b) INJUNCTIVE RELIEF. The Executive acknowledges and agrees that the Corporation will have no adequate remedy at law, and would be irreparably harmed, if the Executive breaches or threatens to breach any of the provisions of this Section 7. The Executive agrees that the Corporation shall be entitled to equitable and/or injunctive relief, on an ex parte basis, without notice and without bond, to prevent any breach or threatened breach of this Section 7, and to specific performance of each of the terms of this Section 7 in addition to any other legal or equitable remedies that the Corporation may have. The Executive further agrees that he shall not, in any equity proceeding relating to the enforcement of the terms of this Section 7, raise the defense that the Corporation has an adequate remedy at law. (c) SPECIAL SEVERABILITY; SURVIVABILITY. The terms and provisions of this Section 7 are intended to be separate and divisible provisions and if, for any reason, any one or more of them is held to be invalid or unenforceable, neither the validity nor the enforceability of any other provision of this Agreement shall thereby be affected. This Section 7 shall survive the expiration or termination of this Agreement. 8. FULL SETTLEMENT; MITIGATION. The Corporation's obligation to make the payments provided for in, and otherwise to perform its obligations under, this Agreement shall not be affected by any set-off, counterclaim, recoupment, defense or other claim, right or action that the Corporation may have against the Executive or others other than a claim, right or action for fraud. In no event shall the Executive be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to the Executive under any of the provisions of this Agreement and such amounts shall not be reduced, regardless of whether the Executive obtains other employment. 10. INDEMNIFICATION. The Corporation shall pay or indemnify the Executive to the full extent permitted by Nevada law for all expenses, costs, liabilities and legal fees which the Executive may incur in the discharge of his duties hereunder. 11. NOTICES. All demands, notices, requests, consents and other communications required or permitted under this Agreement shall be in writing and shall be personally delivered or sent by facsimile machine (with a confirmation copy sent by one of the other methods authorized in this Section 11), commercial (including FedEx) or U.S. Postal Service overnight delivery service, or, deposited with the U.S. Postal Service mailed first class, registered or certified mail, postage prepaid, as set forth below: If to Corporation, addressed to: BV Pharmaceutical Inc. Suite 2410 West Georgia Street Vancouver, British Columbia Canada V6E 2N7 Attention: CEO Fax: (604) 682-5564 If to the Executive: Omar Michel Hayes ______________________ ______________________ Fax: -5- Notices shall be deemed given upon the earliest to occur of (i) receipt by the party to whom such notice is directed; (ii) if sent by facsimile machine, on the day (other than a Saturday, Sunday or legal holiday in the jurisdiction to which such notice is directed) such notice is sent if sent (as evidenced by the facsimile confirmed receipt) prior to 5:00 p.m. Pacific Time and, if sent after 5:00 p.m. Pacific Time, on the day (other than a Saturday, Sunday or legal holiday in the jurisdiction to which such notice is directed) after which such notice is sent; (iii) on the first business day (other than a Saturday, Sunday or legal holiday in the jurisdiction to which such notice is directed) following the day the same is deposited with the commercial carrier if sent by commercial overnight delivery service; or (iv) the fifth day (other than a Saturday, Sunday or legal holiday in the jurisdiction to which such notice is directed) following deposit thereof with the U.S. Postal Service as aforesaid. Each party, by notice duly given in accordance therewith may specify a different address for the giving of any notice hereunder. 12. BINDING EFFECT; BENEFITS. This Agreement will be binding upon and will inure to the benefit of the parties hereto and their respective heirs, successors and assigns. Notwithstanding anything contained in this Agreement to the contrary, nothing in this Agreement, expressed or implied, is intended to confer on any person other than the parties hereto or their respective heirs, successors, executors, administrators or assigns any rights, remedies, obligations or liabilities under or by reason of this Agreement. There are no third party beneficiaries to this Agreement. 13. ENTIRE AGREEMENT. This Agreement constitutes the final written expression of all of the agreements between the Parties with respect to the subject matter hereof and supersedes all understandings and negotiations concerning the matters specified herein. No addition to or modification of any provision of this Agreement will be binding upon any party unless made in writing and signed by the party to be bound. 14. GOVERNING LAW. This Agreement will be governed by and construed in accordance with the internal laws of the State of Texas, without reference to principles of conflict of laws. Executive expressly consents to the sole and exclusive jurisdiction of the state courts in the State of Texas for resolution of any dispute hereunder, and consents to sole and exclusive venue in Harris County, Texas. The prevailing party in any dispute resolution process shall be entitled, in addition to an award determined by such process, to an award of attorneys' fees, costs and expenses incurred in such process. 15 WITHHOLDING. The Corporation may withhold from any amounts payable under this Agreement such taxes as shall be required to be withheld pursuant to any applicable law or regulation. 16. HEADINGS. Headings of the Sections of this Agreement are for the convenience of the parties only, and will be given no substantive or interpretive effect whatsoever. 17. NO CONFLICT. The Executive represents and warrants that performance of the terms of this Agreement will not breach or conflict with any agreement entered into by the Executive, and that the Executive will not enter into any agreement in conflict herewith. -6- 18. ASSIGNABILITY. Neither party hereto may assign any of its or his rights or obligations hereunder without the prior written consent of the other party hereto, which consent may be withheld in the sole discretion of such other party. 19. WAIVERS. The failure or delay of the Corporation at any time to require performance by the Executive of any provision of this Agreement, even if known, will not affect the right of the Corporation to require performance of that provision or to exercise any right, power or remedy hereunder, and any waiver by the Corporation of any breach of any provision of this Agreement should not be construed as a waiver of any continuing or succeeding breach of such provision, a waiver of the provision itself, or a waiver of any right, power or remedy under this Agreement. No notice to or demand on the Executive in any case will, of itself, entitle the Executive to any other or further notice or demand in similar or other circumstances. 20. CONSTRUCTION. Unless the context of this Agreement otherwise clearly requires, (i) references in this Agreement to the plural include the singular, the singular the plural, the masculine the feminine, the feminine the masculine and the part the whole and (ii) the word "or" will not be construed as exclusive and the word "including" will not be construed as limiting. 21. NO STRICT CONSTRUCTION. This Agreement has been prepared jointly and will not be strictly construed against either party. 22. COUNTERPARTS. This Agreement may be executed in any number of counterparts, each of which when so executed and delivered shall be deemed an original, but all of which shall together constitute one and the same agreement. IN WITNESS WHEREOF, the Corporation and the Executive have executed this Agreement on the day and year first above written. BV PHARMACEUTICAL INC. By: /s/ G. LEIGH LYONS ------------------ G. Leigh Lyons, Chief Executive Officer EXECUTIVE /s/ OMAR MICHEL HAYES --------------------- Omar Michel Hayes -7- EX-10.7 8 ex10-7.txt ASSIGNMENT AGREEMENT BY AND BETWEEN RADIAL ... EXHIBIT 10.7 ASSIGNMENT AGREEMENT THIS AGREEMENT (the "Assignment Agreement") is made and entered into on this 27th day of June, 2006, between: PIN PETROLEUM PARTNERS LTD, a company incorporated under the laws of the Province of British Columbia, having an office address of Suite 2410, 650 West Georgia Street, Vancouver, British Columbia, Canada, V6B 4N7 (the "Assignor") AND: RADIAL ENERGY INC., a company organized under the laws of the State of Nevada, having an office at Suite 223, 1313 East Maple Street, Bellingham, Washington, USA, 98225 (the "Assignee") WHEREAS, the Assignor has certain rights and obligations under three Assignment Agreements dated May 23, 2005, August 24, 2005 and August 24, 2005, respectively, with Skyline Energy, LLC, to properties located in Cherokee County, Texas, known as the Junction Prospect, the Northwest Jacksonville Prospect and the Highway 79 Prospect (hereinafter collectively referred to as the "Cherokee Agreements"), copies of which are attached hereto as Schedules A, B and C; and WHEREAS, the Assignor wishes to assign all of its rights and obligations in the Cherokee Agreements to the Assignee; and WHEREAS, the Assignee accepts such assignment and has agreed to be bound by the Cherokee Agreements. NOW THEREFORE in consideration of the mutual covenants and agreements contained herein, IT IS HEREBY AGREED by the Assignor and the Assignee as follows: 1. The Assignor hereby assigns and transfers to the Assignee all of its rights and obligations in, to, and under the Cherokee Agreements, subject to all the terms and conditions thereof. 2. The Assignee hereby agrees to assume all of the Assignor's rights and obligations under the Cherokee Agreements. 3. The Assignor reaffirms and represents and warrants that: 2 (a) the Cherokee Agreements are valid and in full force and effect, and that the representations and warranties contained in the Cherokee Agreements are true and correct on the date hereof; (b) it has not entered into any negotiations, arrangements or agreements (either oral or written) relating to the Cherokee Agreements; (c) the Cherokee Agreements and all of Assignor's rights, titles and interests therein and thereto are free and clear of any and all liens, charges, encumbrances and claims of whatsoever nature; (d) Assignor has any and all corporate action necessary and/or required under all applicable laws, rules and regulations, including corporate governance law in British Columbia, in order to transfer its rights, titles and interests in, to and under the Cherokee Agreements to Assignee; and (e) Assignor has full right and authority to enter into this Assignment Agreement and transfer, assign and convey to Assignee all of Assignor's rights, titles and interests relating to the Cherokee Agreements. 4. As consideration for the assignment of the Cherokee Agreements, the Assignee agrees to: (a) pay to the Assignor the sum of Seven Hundred Thousand Dollars ($700,000) in US funds within ninety (90) days from the date of this Assignment Agreement; and (b) grant to the Assignor an overriding royalty interest in the sum of four percent (4%) from the Assignee's share of net revenue interest, pursuant to the Cherokee Agreements. 5. In the event the Assignee fails to make payment to the Assignor pursuant to item 4(a) hereof, after Assignor gives Assignee written notice of such failure, then the Assignor shall, at its option: (a) be entitled, upon written notice of its intent to do so, have the rights and obligations under the Cherokee Agreements transferred hereunder revert back to the Assignor; or (b) receive from the Assignee a penalty payment in the amount of One Hundred Twenty percent (120%) of the consideration set out in item 4(a) hereof, and at the option of the Assignor, such sum shall be convertible into securities of the Assignee at a price equal to the lowest offering price of the Assignees securities to the general public during the current fiscal period. 6. By executing this Assignment Agreement, the Assignor and Assignee confirm their intention to execute and deliver as promptly as practicable any other documentation which may be required to give effect to this Assignment Agreement, and to obtain the approval, agreement, and consent of their respective Boards of Directors or governing bodies with respect to this Assignment Agreement. The parties shall also cooperate in Assignee's compliance with applicable state and federal securities laws, rules and regulations. This Assignment Agreement and the execution hereof shall be strictly confidential between the parties and no notice or press release relating to this Assignment Agreement shall be given by either party without the prior written consent of the other party. Each party shall provide information concerning terms of this Assignment Agreement and the execution hereof only to its respective management and employees, and then, only on a "need-to-know" basis. 3 7. This Assignment Agreement may not be amended or otherwise modified except by an instrument in writing signed by both parties. 8. This Assignment Agreement shall be governed by and interpreted in accordance with the laws of the State of Nevada and the parties irrevocably attorn to the jurisdiction of the courts of Washoe County, Nevada. All disputes which may arise under, out of, in connection with or in relation to this Agreement shall be submitted to and finally settled by arbitration, which shall be subject to the provisions of the Commercial Arbitration Rules of the American Arbitration Association ("AAA") in effect from time to time, be conducted in Reno, Nevada, by a single arbitrator under (and appointed in accordance with) the rules established for domestic commercial arbitrations under the AAA in effect from time to time, be administered by the AAA ,and be conducted in the English language. The prevailing party in any such arbitration shall be entitled, in addition to an award from the arbitrator, an award of all costs, expenses and attorney fees incurred in the arbitration. 9. If any one or more of the provisions contained herein should be invalid, illegal or unenforceable in any respect in any jurisdiction, the validity, legality and enforceability of such provisions shall not in any way be affected or impaired thereby in any other jurisdiction and the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. 10. This Agreement constitutes and contains the entire agreement and understanding between the parties and supersedes all prior agreements, memoranda, correspondence, communications, negotiations and representations, whether oral or written, express or implied, statutory or otherwise, between the parties or any of them with respect to the subject matter hereof. 11. This Agreement may not be assigned without the prior written consent of the Assignor. 12. This Agreement may be executed in counterpart, each of which such counterpart, whether in original or facsimile form, notwithstanding the date or dates upon which this Agreement is executed and delivered by any of the parties, shall be deemed to be an original and all of which will constitute one and the same agreement, effective as of the reference date given above. IN WITNESS WHEREOF, the Assignor and the Assignee have executed this Assignment Agreement on the day and year first written above. PIN PETROLEUM PARTNERS LTD. /s/ WILLIAM FRIESEN ________________________________ Per: William Friesen, President RADIAL ENERGY INC. /s/ G. LEIGH LYONS _______________________________ Per: G. Leigh Lyons, President SCHEDULE "A" ____________ Skyline Energy, LLC 2301 Dublin Circle Pearland, Texas 77581 Tele: 281-481-0881 Fax: 281-481-5645 May 23, 2005 See Exhibit "A" for Addressees Re: Junction Prospect Cherokee County, Texas (the "Prospect") Gentlemen: This agreement (hereinafter referred to as "Agreement") is made and entered into by and between Skyline Energy, L.L.C., who address is 2301 Dublin Circle, Pearland, Texas 77581 (hereinafter referred to as "Assignor") and the signatory parties identified on Exhibit "A" and "A-l" relative to the leasehold interest more fully described in Exhibit "B" attached hereto and incorporated herein for all purposes, (hereinafter singularly referred to as "Assignee" or collectively as "Assignees"). Subject to elections made to the contrary, it is agreed that all rights and benefits as well as all risks, costs and expenses granted herein unto Assignees shall be owned and borne by each Assignee in the percentage set forth next to his name in Exhibit "A-l" hereto. Assignor represents that it is the present owner of all right, title and interest in and to the oil and gas leases more fully described in Exhibit "B" attached hereto and incorporated herein for all purposes. Said leases cover 500 +- gross, more or less, out of the J. Merrill Survey, A-564, and the D. Earl Survey, A-260, Cherokee County, Texas (hereinafter referred to as the "Leases"). The Leases cover the lands shaded yellow on the plat attached hereto as Exhibit "C" which is incorporated herein for all purposes. Assignee is desirous of acquiring from Assignor the undivided interest herein described in the Leases and participating in the drilling of a Test Well, as defined below, for oil and gas thereon subject to the terms, conditions, reservations and limitations herein provided. The parties therefore agree as follows: With respect to the Leases, Assignor represents and warrants to Assignee that: 1. Assignor owns each of the Leases free and clear of any liens, security interests or encumbrances of any kind placed thereon by Assignor. 2. To the best of Assignor's knowledge, the Leases are in full force and effect, are valid and subsisting leases, and all rentals and other payments due under the Leases have been properly and timely paid, and all conditions necessary to keep the Leases in force have been fully performed. 3. To the best of Assignor's knowledge, no suit, action or other proceeding is pending before any court or governmental agency and no cause of action exists that relates to the Leases or that might result in impairment or loss of Assignee's title to any portion of the Leases. 1. Consideration _____________ For and in consideration of the sums set. forth herein, Assignor agrees to assign, in accordance with Section 9.I. below, and with warranty of title, by, through and under Assignor, but not otherwise, and further subject to the terms, reservations and conditions of this Agreement, the leasehold interest in the Leases to each Assignee in the proportions set forth in Exhibit "A-l" beside Assignee's name; provided, however, as a condition precedent to such assignment, Assignee shall have paid to Assignor its pro rata share of the Initial Consideration, defined as eight eighths (8/8ths) of the cost of the Leases, legal fees, and geological and administrative costs through the date hereof, and which is set forth on Exhibit "A-l" hereto, and its pro rata share of Estimated Dry Hole Costs, as hereinafter defined. The Initial Consideration is comprised of the following sums: Land and Legal Costs Geological and Administrative Costs to Date $195,000.00 ___________ Total Initial Consideration $195,000.00 =========== It is further agreed that attached hereto as Exhibit "A-2" which is incorporated herein for all purposes is an Authority for Expenditure ("AFE") which sets forth the estimated costs necessary to drill the Test Well to Total Depth, evaluate same with a triple combination log and plug and abandon same if a dry hole ("Estimated Dry Hole Costs"). By execution of this Agreement, Assignor and Assignee do each agree to bear and pay their respective share of the Estimated Dry Hole Costs of the Test Well. Such actual drilling costs which shall include, without limitation, surface damage and restoration costs. Assignee agrees to bear and pay for their proportionate share {Assignee's "Before Prospect Payout Interest") of the costs associated with the drilling and development of the prospect before Prospect Payout as hereinafter defined, and their proportionate share (Assignee's "After Prospect Payout Interest") of the costs associated with the prospect after Prospect Payout, as hereinafter defined. Operator shall notify each Assignee of the estimated spud date of the Test Well and request the advance payment of Assignee's Estimated Dry Hole Costs. Each Assignee shall advance to Operator its share of the Estimated Dry Hole Costs within fifteen (15) days from the date of receipt of said notification. Should any party fail or refuse to timely forward to Operator its share of the Estimated Dry Hole Costs within said fifteen (15) day period, then Operator shall notify such party by certified mail that it is delinquent in making such payment. It is understood that Operator shall not request the advance payment of the Estimated Dry Hole Costs prior to thirty (30) days in advance of the estimated spud date of the Test Well. Should any Assignee fail to pay Operator its share of the Estimated Dry Hole Costs, such Assignee shall further forfeit its right to participate in the drilling of the Test Well and this Agreement shall be of no further force and effect with respect to such forfeiting Assignee whereupon such Assignee shall forfeit, as liquidated damages and not as a penalty, its share of the Initial Consideration previously paid to Assignor hereunder. Notwithstanding any terms contained in this Agreement to the contrary, upon payment of the Initial Consideration by Assignee to Assignor, Assignor shall have no liability to any Assignee or to Operator in the event any Assignee subsequently fails to fund its share of the Estimated Dry Hole Costs; provided, however, should another party fail to fund the Initial Consideration resulting in the failure of the Test Well to be drilled to total depth, Assignor agrees it will promptly refund Assignee's share of the Initial Consideration. Additionally, except as otherwise provided in the Operating Agreement, Assignor shall have no liability to Assignee for any acts or omissions of Operator in any way associated with the drilling of the Test Well or any other well which may be drilled under the terms of this Agreement. In the event that Operator does not commence actual drilling operations for the Test Well on or before February 28, 2 005, this Agreement shall terminate and Assignor shall immediately refund the Initial Consideration to Assignee; provided, however, the commencement date for the Test Well shall be extended in the event the Test Well is not timely spudded due to delays caused by the drilling contractor. In the event this Agreement terminates, Assignee shall have no obligation with respect to any costs or liabilities incurred by Assignor with respect to this Agreement and Operator agrees to indemnify and hold Assignee harmless against any and all costs, expenses, claims, demands and causes of action of whatsoever kind or character, including court costs and attorneys' fees, arising out of any operations conducted, commitment made or any action taken or omitted with respect to the Leases in the event the Test Well is not timely spudded by the Operator as herein provided. 2. Test Well _________ On or before February 28, 2 006, Oakwood Energy, Inc. as initial operator (the "Operator"), shall commence operations for the drilling of a test well (hereinafter referred to as the "Test Well") at a location on the Leases as designated on the AFE, and shall thereafter diligently and in a good and workmanlike manner proceed to cause the drilling of the Test Well to the stratigraphic equivalent of the lesser of either (i) a true vertical depth of approximately 5,000 feet beneath the surface of the earth or (ii) a depth sufficient to test the upper Woodbine Sands as seen at a depth sufficient to test the upper Woodbine Sands as seen at a depth of 4,790' to 4912' in the Feldman Oil & Gas #1 McDonald, Total Depth 5155' (hereinafter referred to as "Total Depth"); provided, however, Assignor may at its sole option extend the Test Well commencement date subject to rig availability. 3. Substitute Well _______________ In the event the Test Well is lost or junked due to mechanical difficulty, or there is encountered in the drilling thereof salt, domal formation, cavity, igneous rock, heaving shale, high pressure gas, saltwater flow or such other conditions which render further drilling impracticable, unduly difficult or expensive by ordinary standards of the oil industry, then in lieu of drilling to Total Depth, Assignees, for a period of ninety (90) days after abandoning said Test Well, for any of the reasons above noted, shall have the option to commence, or cause to be commenced, actual drilling of a substitute well. Such well shall be drilled at a mutually acceptable location, in a like manner and under the same terms and conditions to the depth specified for the Test Well, and the term "Test Well" as used herein shall be construed to include any substitute well drilled under the terms of this Agreement; provided, however, in the event Assignee does not elect to participate in the substitute well, Assignee shall forfeit the Initial Consideration previously paid to Assignor. 4. Operating Agreement ___________________ Except as otherwise set forth herein, all operations on the lands covered by the Leases shall be conducted in accordance with the terms of this Agreement and the Operating Agreement attached as Exhibit "D" which designates Oakwood Energy, INC. as operator and which is executed contemporaneously herewith. In the event of a conflict between the terms of this Agreement and the Operating Agreement, the terms of this Agreement shall prevail and control. 5. Overriding Royalty __________________ It is agreed and understood that Assignor hereby reserves unto itself, or its designees, an overriding royalty burdening the lands covered by the Leases equal to twenty-five percent (25%) less presently existing leasehold burdens thereby delivering Assignee its pro rata share of a seventy-five percent of eight-eights (75% of 8/8ths) net revenue interest. In the event any of the Leases do not cover a full mineral interest, or Assignor does not own the full leasehold interest therein, then the overriding royalty herein reserved shall be proportionately reduced. Furthermore, should any of the Leases cover less than all of the lands included within a pooled unit allocated to any well drilled pursuant to the terms hereof, such overriding royalty reserved by Assignor herein shall be further reduced and paid in proportion to the total number of surface acres covered by the Leases included within the pooled unit bears to the total number of surface acres within said unit. 6. Well Information ________________ Assignee or its representatives shall have access at its own risk and at all times to the location and derrick floor during the drilling of any well hereunder. Each Assignee shall further be entitled to all information concerning any well drilled hereunder and the Leases unless any such party is delinquent in the payment of its joint interest billings to Operator for a period greater than thirty (30) days in which event Operator at its sole option may withhold any information to such delinquent party. 7. Area of Mutual Interest _______________________ The parties hereto hereby establish an Area of Mutual Interest ("AMI") which covers and includes all lands depicted within the area one (1) mile outside the perimeter of the lands covered by the Leases which are depicted on the plat attached hereto as Exhibit "C". In the event that any party hereto hereafter acquires an oil and gas leasehold interest, or contractual right to earn an oil and gas leasehold interest, covering lands lying in whole or in part within the AMI, the acquiring party shall, in writing, offer to assign, without warranty of title, to the nonacquiring parties, within ten (10) days of purchase or acquisition, the entire proportionate interest which the nonacquiring parties are ratably entitled to acquire within the AMI under this Agreement. Such notice shall include a copy of the lease or contract, paid draft and other pertinent and available data. Each nonacquiring party shall, within ten (l0) days after receipt of such offer, elect whether to purchase such interest by paying the acquiring parties such nonacquiring party's proportionate part of the actual cost and expenses, if any, incurred by the acquiring party in acquiring such lease or contract. Failure by any nonacquiring party to timely notify the acquiring party shall be deemed an election by such nonacquiring party not to acquire its ratable interest in the leasehold interest offered. When any nonacquiring party elects not to acquire its ratable interest from the acquiring party, such nonacquiring party's interest in such lease or contract which is the subject of such offer shall be offered to the parties electing to acquire its proportionate share of such non-acquiring party's interest and shall not be subject to this Agreement but an operating agreement identical to Exhibit D, after allowing for nonjoinder by the non-acquiring party. Unless otherwise mutually agreed, this AMI shall terminate six (6) months after the expiration of the last lease within the AMI. All interests under this paragraph shall be offered on either a Before Prospect Payout Basis or After Prospect Payout Basis based on the occurrence of Prospect Payout. 8. Prospect Payout _______________ Upon the occurrence of "Prospect Payout" as defined below, Assignor shall back-in against the interest of Assignee in the Leases for a twenty-five percent of eight-eighths (25% of 8/8ths) working interest whereupon the parties shall own the After Prospect Payout interests set forth in Exhibit "A-l" hereto. All costs and expenses incurred prior to the occurrence of Prospect Payout shall be borne by the parties in accordance with their respective Before Prospect Payout interests set forth in Exhibit "A-l" hereto. "Prospect Payout" is defined as and shall occur at 12:01 a.m. on the first day of the month following the day when the net proceeds received by Assignee out of production from the Test Well and all subsequent wells drilled on. the prospect (after first deducting the production and severance taxes, and all royalty payments effective as of the effective date of this Agreement, lessor's royalty, overriding royalties including, without limitations, the overriding royalties reserved by Assignor herein, non-participating royalties, and production payments) shall equal the sum of Assignee's share of the: (a) Initial Consideration; (b) cost of land and legal costs and all costs for leases; acquired by Assignee within the AMI prior to the occurrence of Prospect Payout or other land related costs and land maintenance costs, geological cost, seismic costs, or other non-drilling related costs incurred by Assignee prior to Prospect Payout; (c) the costs of drilling, testing, evaluating, completing and equipping the Test Well and all subsequent wells drilled on the prospect, prior to Prospect Payout into the point of sale which includes but is not limited to the wellhead, tank batteries, gathering lines and all other related surface equipment and facilities; and (d) the operating costs, and reworking or re-completing costs incurred on such wells during the payout period. The Operator agrees to provide all parties to this Agreement with quarterly payout statements. 9. Miscellaneous _____________ A. Paragraph Headings The paragraph headings inserted in this Agreement are utilized solely for reference purposes and do not constitute substantive matter to be considered in construing the terms of this Agreement. B. Time is of the Essence It is specifically understood and agreed that time is of the essence hereunder. C. Liability It is not the purpose of this Agreement to create a partnership, mining partnership, partnership for a specific purpose, joint venture, or any other relationship which would render the parties liable as partners, associates, or joint venturers. D. Entire Agreement This Agreement shall constitute the entire Agreement between the parties hereto and supersedes any prior agreements, promises, negotiations or representations, whether written or oral, not expressly set forth in this Agreement. No variations, modifications, or changes herein or hereof shall be effective unless evidenced by written document executed by the parties hereto. E. Counterparts This Agreement may be executed in any number of counterparts and each counterpart so executed shall be deemed an original for all purposes and shall be binding upon each party executing same whether or not executed by all parties. F. Governing Law This Agreement shall be governed by the laws of the State of Texas. G. Binding Agreement The terms, covenants and conditions of this Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and to their respective heirs, executors, administrators, successors and assigns, and such terms, covenants and conditions shall be deemed as covenants running with the lands and leases covered hereby. It is stipulated, however, that no assignment or transfer by or, however accomplished, of any right, title or interest acquired hereunder shall relieve such party of any liability or obligation herein assumed, except with written consent of the other party. H. Acceptance If the foregoing fully sets forth your understanding of our agreement, please so indicate by execution in the space provided below and return one (1) fully executed original hereof together with your share of the Initial Consideration described in Section 1. hereof. If this Agreement is not accepted and returned within fifteen (15) days from the date hereof with your share of the Initial Consideration, this Agreement shall be voidable by any party and such shares of Initial Consideration shall be returned promptly to the Assignee. I. Delivery of Assignment With Assignee's tendering of its pro-rata share of the Initial Consideration and its pro-rata share of the Estimated Dry Hole Costs as provided herein, Assignor shall upon request provide Assignee with complete lease purchase packages for the Leases. Assignor shall record an assignment of the Leases to the Assignee and upon receipt provide Assignee with a copy of such recorded assignment. J. Notices All notices required under this agreement shall be made to the parties at the addresses and fax numbers identified in Exhibit "A". K. Well Data Requirements Assignor shall provide or cause to be provided certain well data required by Assignee in all wells in which Assignee is a participant. Such requirements will be fully identified under separate cover. L. Delay Rental Payments Any and all delay rental payments shall be paid by Assignor and invoiced to Assignee based on it current working interest. Delay rentals accruing (if any) prior to reaching casing point in the Test Well shall be a proportionate obligation on the part of all parties; however after such a time same shall be the subject of future recommendations and elections. Very truly yours, SKYLINE ENERGY, L.L.C. By: /s/ DONNIE JONES ___________________________ Donnie Jones, President AGREED TO AND ACCEPTED THIS 8th DAY OF September 2005 Pin Petroleum Partners Inc. By: /s/ WILLIAM FRIESEN _______________________________ Name: _________________________ Title: ________________________ AGREED TO AND ACCEPTED THIS ________ DAY OF_________, 2005 G-White By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________ DAY OF_________, 2005 Oakwood Energy, Inc. By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________DAY OF_________, 2005 Stardust Energy, Inc. By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________ DAY OF_________, 2005 Blake Cmajadalka By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________DAY OF _________, 2005 Miller Resources, Inc. By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________DAY OF_________, 2005 By:____________________________ Name:__________________________ Title:_________________________ EXHIBIT "A" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL ADDRESSEES Pin Petroleum Partners Inc. Suite 2410, 650 West Georgia Street P. O. Box 11524 Vancouver, British Columbia, Canada, V6B 4N7 Telephone: 604-689-8336 Telecopy: 604-682-5564 Oakwood Energy, INC. P. O. Box 297 Jourdanton, Texas 78026 Attention: Barry Laidlaw Telephone: 830-769-3955 Telecopy: 830-769-2261 Miller Resources, Inc. P. O. Box 2128 Traverse City, MI 49685-2128 Attn: John Miller Telephone: 231-941-0073 Telecopy: Stardust Energy, Inc. Attention: Don Shepherd P 0 Box 150909 Austin, Texas 78715 Telephone: 281-685-9917 Telecopy: Blake Cmajdalka 2415 Hanston Ct. Pearland Texas, 77584 Telephone: Telecopy: Skyline Energy, LLC 2301 Dublin Circle Pearland, Texas 77581 Attn: Donnie Jones Telephone: 281-481-0881 Telecopy: 281-481-5645
EXHIBIT "A-l" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED August 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL Party Before Prospect Payout After Prospect Payout Initial Interest Interest Consideration __________________________________________________________________________________________________________ Pin Petroleum 30.00% 22.500% $58,500.00 Partners Inc. __________________________________________________________________________________________________________ G-White 5.00% 3.750% $9,750.00 __________________________________________________________________________________________________________ Oakwood Energy, Inc . 2.00% 1.500% $3,900.00 __________________________________________________________________________________________________________ Miller Energy, Inc . 2.00% 1.500% $3,900.00 __________________________________________________________________________________________________________ Stardust Energy, Inc . 1.50% 1.125% $2,925.00 __________________________________________________________________________________________________________ Blake Cmajakaika 1.00% .750% $1,950.00 __________________________________________________________________________________________________________ Skyline Energy, L.L.C. 58.500% 68.875% NA Etal __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ Total 100% 100% __________________________________________________________________________________________________________
EXHIBIT "A-2" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL AFE TO BE FURNISHED BY MLC OPERATING LP EXHIBIT "B" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL THE LEASES 1. Oil, Gas and Mineral Lease dated, September 20, 2004 by and between, Donald L. Dick, et ux, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume __________________________, Page ________, Deed Records, Cherokee County, Texas. 2. Oil, Gas and Mineral Lease dated, September 29, 2004 , by and between Mary John Spence Trust I & II , as Lessors, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume _______________________________, Page _________ , Deed Records, Cherokee County, Texas. 3. Oil, Gas and Mineral Lease dated, October 1, 2004, by and between Michael Theron Ragsdale, as Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Joseph Merril Survey, A-564, Cherokee County, Texas, and recorded in Volume ___________________________, Page ________, Deed Records, Cherokee County, Texas. 4. Oil, Gas and Mineral Lease dated, October 1, 2004, by and between, Sue Ragsdale Smith as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Survey, A-, Cherokee County, Texas, and recorded in Volume_____, Page _____, Deed Records, Cherokee County, Texas 5. Oil, Gas and Mineral Lease dated, October 1,2004, by and between, Julie Ragsdale Young, as Lesser, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume , Page____________________________________, Deed Records, Cherokee County, Texas . 6. Oil, Gas and Mineral Lease dated, October 1, 2004, by and between, Amy Ragsdale Duncan, as Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Joseph Merril1 Survey, A-5 64, Cherokee County, Texas, and recorded in Volume __________________________ , Page __________, Deed Records, Cherokee County, Texas. 7. Oil, Gas and Mineral Lease dated, October 1, 2004, by and between, Edward Baxter Ragsdale, as Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume 169 8, Page 192, Deed Records, Cherokee County, Texas. 8. Oil, Gas and Mineral Lease dated, October 1, 2 004, by and between, Karen Ragsdale Reininger, as Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume __________________________ , Page __________, Deed Records, Cherokee County, Texas. 9. Oil, Gas and Mineral Lease dated, October 1, 2004, by and between, Baxter A. Ragsdale, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume __________________, Page _______, Deed. Records, Cherokee County, Texas. 10. Oil, Gas and Mineral Lease dated, October 4, 2004, by and between Sue Ragsdale Bean, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume___________________, Page_________, Deed Records, Cherokee County, Texas. 11. Oil, Gas and Mineral Lease dated, October 4, 2004, by and between, Amy Bean Mellin, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume___________________, Page ________, Deed Records, Cherokee County, Texas. 12. Oil, Gas and Mineral Lease dated, October 4, 2004, by and between, Clay Arnold Bean, as Lessors, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume__________________, Page_________, Deed Records, Cherokee County, Texas. 13. Oil, Gas and Mineral Lease dated, October 15, 2004, by and between, H. D. Industries Inc., as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume __________________________ , Page __________, Deed Records, Cherokee County, Texas. 14. Oil, Gas and Mineral Lease dated, October 18, 2004 by and between, Jean Haberle Coley, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume_______________________, Page _________, Deed Records, Cherokee County, Texas. 15. 011, Gas and Mineral Lease dated, October 18, 2004, by and between, Janet G. Holley, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume __________________ Page__________, Deed Records, Cherokee County, Texas." 16. 011, Gas and Mineral Lease dated, November 4, 2004 by and between, William M. Withers dec'd, rep. by Hugh L. McCulley, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A- 564, Cherokee County, Texas, and recorded in Volume _____________________________ , Page ________, Deed Records, Cherokee County, Texas. 17. Oil, Gas and Mineral Lease dated, January 13, 2005 by and between, Drake Sales, Inc., as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-260, Cherokee County, Texas, and recorded in Volume __________________, Page ________, Deed Records, Cherokee County, Texas. 18. Oil, Gas and Mineral Lease dated, January 13, 2005, by and between, Ellis Lynn Cook, et ux, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Isaac Reynolds Survey, A-72 8, Cherokee County, Texas, and recorded in Volume __ , Page __________________________________, Deed Records, Cherokee County, Texas. 19. Oil, Gas and Mineral Lease dated, January 14, 2005, by and between, Jack W. Powell et ux, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Issac Reynolds Survey, A-728, Cherokee County, Texas, and recorded in Volume ___________________________, Page _________, Deed Records, Cherokee County, Texas. 20. Oil, Gas and Mineral Lease dated, January 31, 2005, by and between, Bessie Lorene & John R. Ragsdale, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Issac Reynolds Survey, A-728, Cherokee County, Texas, and recorded in Volume _________________________________, Page _________, Deed Records, Cherokee County, Texas. 21. Oil, Gas and Mineral Lease dated, February 14, 2005, by and between, Dannie R. McDaniel, et ux, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Issac Reynolds Survey, A-728, Cherokee County, Texas, and recorded in Volume _________________________________, Page ________, Deed Records, Cherokee County, Texas. 22. Oil, Gas and Mineral Lease dated, February 14, 20C5, by and between, Dannie R. McDaniel, his wife, Deborah K. McDaniel and Arlene Bailey, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Issac Reynolds Survey, A-728, Cherokee County, Texas, and recorded in Volume ________, Page _______, Deed Records, Cherokee County, Texas. 23. Oil, Gas and Mineral Lease dated, March 8, 2005, by and between, Charles A. Gudermuth, individually and as Independent Executor of the Estate of Beulah Gudermuth, Deceased, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume _______________________________ , Page __________, Deed Records, Cherokee County, Texas. 24. Oil, Gas and Mineral Lease dated, March 9, 2005, by and between, Mr. & Mrs. Ray Neil Earle, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume ___________________________, Page __________, Deed Records, Cherokee County, Texas. 25. 0il, Gas and Mineral Lease dated, March 9, 2005, by and between, Earle's Chapel Cemetary Association, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume__________________________________Page ___________, Deed Records, Cherokee County, Texas. 26. Oil Gas and Mineral Lease dated, April 1, 2005, by and between, Barbara J. Earle, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-260, Cherokee County, Texas, and recorded in Volume__________________, Page__________, Deed Records, Cherokee County, Texas. 27. Oil, Gas and Mineral Lease dated, April 20, 2005, by and between, Jack D. Earle, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-260, Cherokee County, Texas, and recorded in Volume _____________, Page ________, Deed Records, Cherokee County, Texas. 28. Oil, Gas and Mineral Lease dated, April 25, 2005, by and between, Gary Mims, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-260, Cherokee County, Texas, and recorded in Volume _____________ , Page _________, Deed Records, Cherokee County, Texas. 29. Oil, Gas and Mineral Lease dated, April 27, 2005, by and between, Jack N. Reynolds Jr. & Wife, Deborah, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Joseph Merrill Survey, A-564, Cherokee County, Texas, and recorded in Volume ________________________________, Page ._______, Deed Records, Cherokee County, Texas. 30. Oil, Gas and Mineral Lease dated, April 20, 2005, by and between, Ray Neil Earle, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-260, Cherokee County, Texas, and recorded in Volume _____________, Page ________, Deed Records, Cherokee County, Texas. 31. Oil, Gas and Mineral Lease dated, April 19, 2005, by and between, Barbara Mims Lewis, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-260, Cherokee County, Texas, and recorded in Volume___________________, Page ________, Deed Records, Cherokee County, Texas. 32. Oil, Gas and Mineral Lease dated, April 20, 2005, by and between, Virgina E. Osborne, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-564, Cherokee County, Texas, and recorded in Volume___________________, Page ________, Deed Records, Cherokee County, Texas. 33. Oil, Gas and Mineral Lease dated, April 20, 2 005, by and between. Jack C. Earle, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-260, Cherokee County, Texas, and recorded in Volume _____________ , Page_________, Deed Records, Cherokee County, Texas. 34. Oil, Gas and Mineral Lease dated, April 20, 2005, by and between, Betty Earle Raines, et ux, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-260, Cherokee County, Texas, and recorded in Volume_______________________, Page _________, Deed Records, Cherokee County, Texas. 35. Oil, Gas and Mineral Lease dated, April 25, 2005, by and between, Mary Virginia Bowery, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-260, Cherokee County, Texas, and recorded in Volume_______________________, Page___________Deed Records, Cherokee County, Texas. 36. Oil, Gas and Mineral Lease dated, April 25, 2 005, by and between, Charles Mitchell Earle, as Lesser, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-260, Cherokee County, Texas, and recorded in Volume___________________, Page_________, Deed Records, Cherokee County, Texas. 37. Oil, Gas and Mineral Lease dated, May 2, 2005, by and between, Bobby D. Mims, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Drury Earle Survey, A-260, Cherokee County, Texas, and recorded in Volume _____________, Page ________, Deed Records, Cherokee County, Texas. EXHIBIT "C" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL [Attach Plat] [Junction Prospect Cherokee Co., Texas Map Appears Here] EXHIBIT "D" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL JOA TO BE FURNISHED BY MLC OPERATING LP SCHEDULE "B" ____________ SKYLINE ENERGY, LLC 2301 Dublin Circle Pearland, Texas 77581 Tele: 281-481-0881 Fax: 281-481-5645 August 24, 2005 See Exhibit "A" for Addressees Re: Northwest Jacksonville Prospect Cherokee County, Texas (the "Prospect") This agreement (hereinafter referred to as "Agreement") is made and entered into by and between Skyline Energy, L.L.C., who address is 2301 Dublin Circle, Pearland, Texas 77581 (hereinafter referred to as "Assignor") and the signatory parties identified on Exhibit "A" and "A-l" relative to the leasehold interest more fully described in Exhibit "B" attached hereto and incorporated herein for all purposes, (hereinafter singularly referred to as "Assignee" or collectively as "Assignees"). Subject to elections made to the contrary, it is agreed that all rights and benefits as well as all risks, costs and expenses granted herein unto Assignees shall be owned and borne by each Assignee in the percentage set forth next to his name in Exhibit "A-l" hereto. Assignor represents that it is the present owner of all right, title and interest in and to the oil and gas leases more fully described in Exhibit "B" attached hereto and incorporated herein for all purposes. Said leases cover 350 +- gross, more or less, out of the Jose Pineda West Four League Grant Survey, A-40, Cherokee County, Texas (hereinafter referred to as the "Leases"). The Leases cover the lands shaded yellow on the plat attached hereto as Exhibit "C" which is incorporated herein for all purposes. Assignee is desirous of acquiring from Assignor the undivided interest herein described in the Leases and participating in the drilling of a Test Well, as defined below, for oil and gas thereon subject to the terms, conditions, reservations and limitations herein provided. The parties therefore agree as follows: With respect to the Leases, Assignor represents and warrants to Assignee that: 1. Assignor owns each of the Leases free and clear of any liens, security interests or encumbrances of any kind placed thereon by Assignor. 2. To the best of Assignor's knowledge, the Leases are in full force and effect, are valid and subsisting leases, and all rentals and other payments due under the Leases have been properly and timely paid, and all conditions necessary to keep the Leases in force have been fully performed. 3. To the best of Assignor's knowledge, no suit, action or other proceeding is pending before any court or governmental agency and no cause of action exists that relates to the Leases or that might result in impairment or loss of Assignee's title to any portion of the Leases. 1. Consideration _____________ For and in consideration of the sums set. forth herein, Assignor agrees to assign, in accordance with Section 9.I. below, and with warranty of title, by, through and under Assignor, but not otherwise, and further subject to the terms, reservations and conditions of this Agreement, the leasehold interest in the Leases to each Assignee in the proportions set forth in Exhibit "A-l" beside Assignee's name; provided, however, as a condition precedent to such assignment, Assignee shall have paid to Assignor its pro rata share of the Initial Consideration, defined as eight eighths (8/8ths) of the cost of the Leases, legal fees, and geological and administrative costs through the date hereof, and which is set forth on Exhibit "A-l" hereto, and its pro rata share of Estimated Dry Hole Costs, as hereinafter defined. The Initial Consideration is comprised of the following sums: Land and Legal Costs Geological and Administrative Costs to Date $170,000.00 ___________ Total Initial Consideration $170,000.00 =========== It is further agreed that attached hereto as Exhibit "A-2" which is incorporated herein for all purposes is an Authority for Expenditure ("AFE") which sets forth the estimated costs necessary to drill the Test Well to Total Depth, evaluate same with a triple combination log and plug and abandon same if a dry hole ("Estimated Dry Hole Costs"). By execution of this Agreement, Assignor and Assignee do each agree to bear and pay their respective share of the Estimated Dry Hole Costs of the Test Well. Such actual drilling costs which shall include, without limitation, surface damage and restoration costs. Assignee agrees to bear and pay for their proportionate share {Assignee's "Before Prospect Payout Interest") of the costs associated with the drilling and development of the prospect before Prospect Payout as hereinafter defined, and their proportionate share (Assignee's "After Prospect Payout Interest") of the costs associated with the prospect after Prospect Payout, as hereinafter defined. Operator shall notify each Assignee of the estimated spud date of the Test Well and request the advance payment of Assignee's Estimated Dry Hole Costs. Each Assignee shall advance to Operator its share of the Estimated Dry Hole Costs within fifteen (15) days from the date of receipt of said notification. Should any party fail or refuse to timely forward to Operator its share of the Estimated Dry Hole Costs within said fifteen (15) day period, then Operator shall notify such party by certified mail that it is delinquent in making such payment. It is understood that Operator shall not request the advance payment of the Estimated Dry Hole Costs prior to thirty (30) days in advance of the estimated spud date of the Test Well. Should any Assignee fail to pay Operator its share of the Estimated Dry Hole Costs, such Assignee shall further forfeit its right to participate in the drilling of the Test Well and this Agreement shall be of no further force and effect with respect to such forfeiting Assignee whereupon such Assignee shall forfeit, as liquidated damages and not as a penalty, its share of the Initial Consideration previously paid to Assignor hereunder. Notwithstanding any terms contained in this Agreement to the contrary, upon payment of the Initial Consideration by Assignee to Assignor, Assignor shall have no liability to any Assignee or to Operator in the event any Assignee subsequently fails to fund its share of the Estimated Dry Hole Costs; provided, however, should another party fail to fund the Initial Consideration resulting in the failure of the Test Well to be drilled to total depth, Assignor agrees it will promptly refund Assignee's share of the Initial Consideration. Additionally, except as otherwise provided in the Operating Agreement, Assignor shall have no liability to Assignee for any acts or omissions of Operator in any way associated with the drilling of the Test Well or any other well which may be drilled under the terms of this Agreement. In the event that Operator does not commence actual drilling operations for the Test Well on or before February 28, 2 005, this Agreement shall terminate and Assignor shall immediately refund the Initial Consideration to Assignee; provided, however, the commencement date for the Test Well shall be extended in the event the Test Well is not timely spudded due to delays caused by the drilling contractor. In the event this Agreement terminates, Assignee shall have no obligation with respect to any costs or liabilities incurred by Assignor with respect to this Agreement and Operator agrees to indemnify and hold Assignee harmless against any and all costs, expenses, claims, demands and causes of action of whatsoever kind or character, including court costs and attorneys' fees, arising out of any operations conducted, commitment made or any action taken or omitted with respect to the Leases in the event the Test Well is not timely spudded by the Operator as herein provided. 2. Test Well _________ On or before February 28, 2006, MLC Operating LP, as initial operator (the "Operator"), shall commence operations for the drilling of a test well (hereinafter referred to as the "Test Well") at a location on the Leases as designated on the AFE, and shall thereafter diligently and in a good and workmanlike manner proceed to cause the drilling of the Test Well to the stratigraphic equivalent of the lesser of either (i) a true vertical depth of approximately 5,000 feet beneath the surface of the earth or (ii) a depth sufficient to test the upper Woodbine Sands as seen at a depth sufficient to test the upper Woodbine Sands as seen at a depth of 4,790' to 4912' in the Feldman Oil & Gas #1 McDonald, Total Depth 5155' (hereinafter referred to as "Total Depth"); provided, however, Assignor may at its sole option extend the Test Well commencement date subject to rig availability. 3. Substitute Well _______________ In the event the Test Well is lost or junked due to mechanical difficulty, or there is encountered in the drilling thereof salt, domal formation, cavity, igneous rock, heaving shale, high pressure gas, saltwater flow or such other conditions which render further drilling impracticable, unduly difficult or expensive by ordinary standards of the oil industry, then in lieu of drilling to Total Depth, Assignees, for a period of ninety (90) days after abandoning said Test Well, for any of the reasons above noted, shall have the option to commence, or cause to be commenced, actual drilling of a substitute well. Such well shall be drilled at a mutually acceptable location, in a like manner and under the same terms and conditions to the depth specified for the Test Well, and the term "Test Well" as used herein shall be construed to include any substitute well drilled under the terms of this Agreement; provided, however, in the event Assignee does not elect to participate in the substitute well, Assignee shall forfeit the Initial Consideration previously paid to Assignor. 4. Operating Agreement ___________________ Except as otherwise set forth herein, all operations on the lands covered by the Leases shall be conducted in accordance with the terms of this Agreement and the Operating Agreement attached as Exhibit "D" which designates Oakwood Energy, INC. as operator and which is executed contemporaneously herewith. In the event of a conflict between the terms of this Agreement and the Operating Agreement, the terms of this Agreement shall prevail and control. 5. Overriding Royalty __________________ It is agreed and understood that Assignor hereby reserves unto itself, or its designees, an overriding royalty burdening the lands covered by the Leases equal to twenty-five percent (25%) less presently existing leasehold burdens thereby delivering Assignee its pro rata share of a seventy-five percent of eight-eights (75% of 8/8ths) net revenue interest. In the event any of the Leases do not cover a full mineral interest, or Assignor does not own the full leasehold interest therein, then the overriding royalty herein reserved shall be proportionately reduced. Furthermore, should any of the Leases cover less than all of the lands included within a pooled unit allocated to any well drilled pursuant to the terms hereof, such overriding royalty reserved by Assignor herein shall be further reduced and paid in proportion to the total number of surface acres covered by the Leases included within the pooled unit bears to the total number of surface acres within said unit. 6. Well Information ________________ Assignee or its representatives shall have access at its own risk and at all times to the location and derrick floor during the drilling of any well hereunder. Each Assignee shall further be entitled to all information concerning any well drilled hereunder and the Leases unless any such party is delinquent in the payment of its joint interest billings to Operator for a period greater than thirty (30) days in which event Operator at its sole option may withhold any information to such delinquent party. 7. Area of Mutual Interest _______________________ The parties hereto hereby establish an Area of Mutual Interest ("AMI") which covers and includes all lands depicted within the area one (1) mile outside the perimeter of the lands covered by the Leases which are depicted on the plat attached hereto as Exhibit "C". In the event that any party hereto hereafter acquires an oil and gas leasehold interest, or contractual right to earn an oil and gas leasehold interest, covering lands lying in whole or in part within the AMI, the acquiring party shall, in writing, offer to assign, without warranty of title, to the nonacquiring parties, within ten (10) days of purchase or acquisition, the entire proportionate interest which the nonacquiring parties are ratably entitled to acquire within the AMI under this Agreement. Such notice shall include a copy of the lease or contract, paid draft and other pertinent and available data. Each nonacquiring party shall, within ten (l0) days after receipt of such offer, elect whether to purchase such interest by paying the acquiring parties such nonacquiring party's proportionate part of the actual cost and expenses, if any, incurred by the acquiring party in acquiring such lease or contract. Failure by any nonacquiring party to timely notify the acquiring party shall be deemed an election by such nonacquiring party not to acquire its ratable interest in the leasehold interest offered. When any nonacquiring party elects not to acquire its ratable interest from the acquiring party, such nonacquiring party's interest in such lease or contract which is the subject of such offer shall be offered to the parties electing to acquire its proportionate share of such non-acquiring party's interest and shall not be subject to this Agreement but an operating agreement identical to Exhibit D, after allowing for nonjoinder by the non-acquiring party. Unless otherwise mutually agreed, this AMI shall terminate six (6) months after the expiration of the last lease within the AMI. All interests under this paragraph shall be offered on either a Before Prospect Payout Basis or After Prospect Payout Basis based on the occurrence of Prospect Payout. 8. Prospect Payout _______________ Upon the occurrence of "Prospect Payout" as defined below, Assignor shall back-in against the interest of Assignee in the Leases for a twenty-five percent of eight-eighths (25% of 8/8ths) working interest whereupon the parties shall own the After Prospect Payout interests set forth in Exhibit "A-l" hereto. All costs and expenses incurred prior to the occurrence of Prospect Payout shall be borne by the parties in accordance with their respective Before Prospect Payout interests set forth in Exhibit "A-l" hereto. "Prospect Payout" is defined as and shall occur at 12:01 a.m. on the first day of the month following the day when the net proceeds received by Assignee out of production from the Test Well and all subsequent wells drilled on. the prospect (after first deducting the production and severance taxes, and all royalty payments effective as of the effective date of this Agreement, lessor's royalty, overriding royalties including, without limitations, the overriding royalties reserved by Assignor herein, non-participating royalties, and production payments) shall equal the sum of Assignee's share of the: (a) Initial Consideration; (b) cost of land and legal costs and all costs for leases; acquired by Assignee within the AMI prior to the occurrence of Prospect Payout or other land related costs and land maintenance costs, geological cost, seismic costs, or other non-drilling related costs incurred by Assignee prior to Prospect Payout; (c) the costs of drilling, testing, evaluating, completing and equipping the Test Well and all subsequent wells drilled on the prospect, prior to Prospect Payout into the point of sale which includes but is not limited to the wellhead, tank batteries, gathering lines and all other related surface equipment and facilities; and (d) the operating costs, and reworking or re-completing costs incurred on such wells during the payout period. The Operator agrees to provide all parties to this Agreement with quarterly payout statements. 9. Miscellaneous _____________ A. Paragraph Headings The paragraph headings inserted in this Agreement are utilized solely for reference purposes and do not constitute substantive matter to be considered in construing the terms of this Agreement. B. Time is of the Essence It is specifically understood and agreed that time is of the essence hereunder. C. Liability It is not the purpose of this Agreement to create a partnership, mining partnership, partnership for a specific purpose, joint venture, or any other relationship which would render the parties liable as partners, associates, or joint venturers. D. Entire Agreement This Agreement shall constitute the entire Agreement between the parties hereto and supersedes any prior agreements, promises, negotiations or representations, whether written or oral, not expressly set forth in this Agreement. No variations, modifications, or changes herein or hereof shall be effective unless evidenced by written document executed by the parties hereto. E. Counterparts This Agreement may be executed in any number of counterparts and each counterpart so executed shall be deemed an original for all purposes and shall be binding upon each party executing same whether or not executed by all parties. F. Governing Law This Agreement shall be governed by the laws of the State of Texas. G. Binding Agreement The terms, covenants and conditions of this Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and to their respective heirs, executors, administrators, successors and assigns, and such terms, covenants and conditions shall be deemed as covenants running with the lands and leases covered hereby. It is stipulated, however, that no assignment or transfer by or, however accomplished, of any right, title or interest acquired hereunder shall relieve such party of any liability or obligation herein assumed, except with written consent of the other party. H. Acceptance If the foregoing fully sets forth your understanding of our agreement, please so indicate by execution in the space provided below and return one (1) fully executed original hereof together with your share of the Initial Consideration described in Section 1. hereof. If this Agreement is not accepted and returned within fifteen (15) days from the date hereof with your share of the Initial Consideration, this Agreement shall be voidable by any party and such shares of Initial Consideration shall be returned promptly to the Assignee. I. Delivery of Assignment With Assignee's tendering of its pro-rata share of the Initial Consideration and its pro-rata share of the Estimated Dry Hole Costs as provided herein, Assignor shall upon request provide Assignee with complete lease purchase packages for the Leases. Assignor shall record an assignment of the Leases to the Assignee and upon receipt provide Assignee with a copy of such recorded assignment. J. Notices All notices required under this agreement shall be made to the parties at the addresses and fax numbers identified in Exhibit "A". K. Well Data Requirements Assignor shall provide or cause to be provided certain well data required by Assignee in all wells in which Assignee is a participant. Such requirements will be fully identified under separate cover. L. Delay Rental Payments Any and all delay rental payments shall be paid by Assignor and invoiced to Assignee based on it current working interest. Delay rentals accruing (if any) prior to reaching casing point in the Test Well shall be a proportionate obligation on the part of all parties; however after such a time same shall be the subject of future recommendations and elections. Very truly yours, SKYLINE ENERGY, L.L.C. By: /s/ DONNIE JONES ___________________________ Donnie Jones, President AGREED TO AND ACCEPTED THIS 8th DAY OF September 2005 Pin Petroleum Partners Inc. By: /s/ WILLIAM FRIESEN _______________________________ Name: _________________________ Title: ________________________ AGREED TO AND ACCEPTED THIS ________ DAY OF_________, 2005 G-White By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________ DAY OF_________, 2005 Oakwood Energy, Inc. By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________DAY OF_________, 2005 Stardust Energy, Inc. By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________ DAY OF_________, 2005 Blake Cmajadalka By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________DAY OF _________, 2005 Miller Resources, Inc. By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________DAY OF_________, 2005 By:____________________________ Name:__________________________ Title:_________________________ EXHIBIT "A" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED MAY 23, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL ADDRESSEES Pin Petroleum Partners Inc. Suite 2410, 650 West Georgia Street P. O. Box 11524 Vancouver, British Columbia, Canada, V6B 4N7 Telephone: 604-689-8336 Telecopy: 604-682-5564 G-White Investments 6524 Riverhill Dr. Plano, Texas 75024 Attention: Glen Gee Telephone: 469-384-4834 Telecopy: Oakwood Energy, INC. P. O. Box 297 Jourdanton, Texas 78026 Attention: Barry Laidlaw Telephone: 830-769-3955 Telecopy: 830-769-2261 Miller Resources, Inc. P. O. Box 2128 Traverse City, MI 49685-2128 Attn: John Miller Telephone: 231-941-0073 Telecopy: Stardust Energy, Inc. Attention: Don Shepherd P 0 Box 150909 Austin, Texas 78715 Telephone: 281-685-9917 Telecopy: Blake Cmajdalka 2415 Hanston Ct. Pearland Texas, 77584 Telephone: Telecopy: Skyline Energy, LLC 2301 Dublin Circle Pearland, Texas 77581 Attn: Donnie Jones Telephone: 281-481-0881 Telecopy: 281-481-5645
EXHIBIT "A-l" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED August 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL Party Before Prospect Payout After Prospect Payout Initial Interest Interest Consideration __________________________________________________________________________________________________________ Pin Petroleum 30.00% 22.500% $51,000.00 Partners Inc. __________________________________________________________________________________________________________ G-White 5.00% 3.750% $8,500.00 __________________________________________________________________________________________________________ Oakwood Energy, Inc . 2.00% 1.500% $3,400.00 __________________________________________________________________________________________________________ Miller Energy, Inc . 2.00% 1.500% $3,400.00 __________________________________________________________________________________________________________ Stardust Energy, Inc . 1.50% 1.125% $2,550.00 __________________________________________________________________________________________________________ Blake Cmajakaika 1.00% .750% $1,700.00 __________________________________________________________________________________________________________ Skyline Energy, L.L.C. 58.500% 66.625% NA Etal __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ Total 100% 100% __________________________________________________________________________________________________________
EXHIBIT "A-2" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL AFE TO BE FURNISHED BY MLC OPERATING LP EXHIBIT "B" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL THE LEASES 1. Oil, Gas and Mineral Lease dated, August 10, 2004 by and between, Wilburn Ray Smith, etux, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda Survey, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 2. Oil, Gas and Mineral Lease dated, August 10, 2004 , by and between Lloyd E. Elliot Jr., etux, as Lessors, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda Survey, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 3. Oil, Gas and Mineral Lease dated, August 10, 2004, by and between Larry D. Campbell, etux, as Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Jose Pineda Survey, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 4. Oil, Gas and Mineral Lease dated, September 8, 2004, by and between, Jacksonville Independent School District, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda Survey, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 5. Oil, Gas and Mineral Lease dated, September 13, 2004, by and between, Patsy Jean Scott Boyd, separate property, as Lessors, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Jose Pineda Survey, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 6. Oil, Gas and Mineral Lease dated, September 13, 2004, by and between, Bill Willis, etux as Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Jose Pineda Survey, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 7. Oil, Gas and Mineral Lease dated, September 29, 2004, by and between, Spence Living Trust, etal, as Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Jose Pineda Survey, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 8. Oil, Gas and Mineral Lease dated, February 28, 2005, by and between, Ernestine P. Finley, as Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Jose Pineda Survey, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 9. Oil, Gas and Mineral Lease dated, February 28, 2005, by and between, Rufus Eugene Finley as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda Survey, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 10. Oil, Gas and Mineral Lease dated, March 15, 2005, by and between Joann Moore, etux, as Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda Survey, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. EXHIBIT "C" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL [Attach Plat] [NW Jacksonville Prospect Cherokee Co., Texas Map Appears Here] EXHIBIT "D" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL JOA TO BE FURNISHED BY MLC OPERATING LP SCHEDULE "C" ____________ SKYLINE ENERGY, LLC 2301 Dublin Circle Pearland, Texas 77581 Tele: 281-481-0881 Fax: 281-481-5645 August 24, 2005 See Exhibit "A" for Addressees Re: Northwest Jacksonville Prospect Cherokee County, Texas (the "Prospect") This agreement (hereinafter referred to as "Agreement") is made and entered into by and between Skyline Energy, L.L.C., who address is 2301 Dublin Circle, Pearland, Texas 77581 (hereinafter referred to as "Assignor") and the signatory parties identified on Exhibit "A" and "A-l" relative to the leasehold interest more fully described in Exhibit "B" attached hereto and incorporated herein for all purposes, (hereinafter singularly referred to as "Assignee" or collectively as "Assignees"). Subject to elections made to the contrary, it is agreed that all rights and benefits as well as all risks, costs and expenses granted herein unto Assignees shall be owned and borne by each Assignee in the percentage set forth next to his name in Exhibit "A-l" hereto. Assignor represents that it is the present owner of all right, title and interest in and to the oil and gas leases more fully described in Exhibit "B" attached hereto and incorporated herein for all purposes. Said leases cover 322 +- gross and 315+- net acres,, more or less, out of the Jose Pineda West Four League Grant Survey, A-40, Cherokee County, Texas (hereinafter referred to as the "Leases"). The Leases cover the lands shaded yellow on the plat attached hereto as Exhibit "C" which is incorporated herein for all purposes. Assignee is desirous of acquiring from Assignor the undivided interest herein described in the Leases and participating in the drilling of a Test Well, as defined below, for oil and gas thereon subject to the terms, conditions, reservations and limitations herein provided. The parties therefore agree as follows: With respect to the Leases, Assignor represents and warrants to Assignee that: 1. Assignor owns each of the Leases free and clear of any liens, security interests or encumbrances of any kind placed thereon by Assignor. 2. To the best of Assignor's knowledge, the Leases are in full force and effect, are valid and subsisting leases, and all rentals and other payments due under the Leases have been properly and timely paid, and all conditions necessary to keep the Leases in force have been fully performed. 3. To the best of Assignor's knowledge, no suit, action or other proceeding is pending before any court or governmental agency and no cause of action exists that relates to the Leases or that might result in impairment or loss of Assignee's title to any portion of the Leases. 1. Consideration _____________ For and in consideration of the sums set. forth herein, Assignor agrees to assign, in accordance with Section 9.I. below, and with warranty of title, by, through and under Assignor, but not otherwise, and further subject to the terms, reservations and conditions of this Agreement, the leasehold interest in the Leases to each Assignee in the proportions set forth in Exhibit "A-l" beside Assignee's name; provided, however, as a condition precedent to such assignment, Assignee shall have paid to Assignor its pro rata share of the Initial Consideration, defined as eight eighths (8/8ths) of the cost of the Leases, legal fees, and geological and administrative costs through the date hereof, and which is set forth on Exhibit "A-l" hereto, and its pro rata share of Estimated Dry Hole Costs, as hereinafter defined. The Initial Consideration is comprised of the following sums: Land and Legal Costs Geological and Administrative Costs to Date $185,000.00 ___________ Total Initial Consideration $185,000.00 =========== It is further agreed that attached hereto as Exhibit "A-2" which is incorporated herein for all purposes is an Authority for Expenditure ("AFE") which sets forth the estimated costs necessary to drill the Test Well to Total Depth, evaluate same with a triple combination log and plug and abandon same if a dry hole ("Estimated Dry Hole Costs"). By execution of this Agreement, Assignor and Assignee do each agree to bear and pay their respective share of the Estimated Dry Hole Costs of the Test Well. Such actual drilling costs which shall include, without limitation, surface damage and restoration costs. Assignee agrees to bear and pay for their proportionate share {Assignee's "Before Prospect Payout Interest") of the costs associated with the drilling and development of the prospect before Prospect Payout as hereinafter defined, and their proportionate share (Assignee's "After Prospect Payout Interest") of the costs associated with the prospect after Prospect Payout, as hereinafter defined. Operator shall notify each Assignee of the estimated spud date of the Test Well and request the advance payment of Assignee's Estimated Dry Hole Costs. Each Assignee shall advance to Operator its share of the Estimated Dry Hole Costs within fifteen (15) days from the date of receipt of said notification. Should any party fail or refuse to timely forward to Operator its share of the Estimated Dry Hole Costs within said fifteen (15) day period, then Operator shall notify such party by certified mail that it is delinquent in making such payment. It is understood that Operator shall not request the advance payment of the Estimated Dry Hole Costs prior to thirty (30) days in advance of the estimated spud date of the Test Well. Should any Assignee fail to pay Operator its share of the Estimated Dry Hole Costs, such Assignee shall further forfeit its right to participate in the drilling of the Test Well and this Agreement shall be of no further force and effect with respect to such forfeiting Assignee whereupon such Assignee shall forfeit, as liquidated damages and not as a penalty, its share of the Initial Consideration previously paid to Assignor hereunder. Notwithstanding any terms contained in this Agreement to the contrary, upon payment of the Initial Consideration by Assignee to Assignor, Assignor shall have no liability to any Assignee or to Operator in the event any Assignee subsequently fails to fund its share of the Estimated Dry Hole Costs; provided, however, should another party fail to fund the Initial Consideration resulting in the failure of the Test Well to be drilled to total depth, Assignor agrees it will promptly refund Assignee's share of the Initial Consideration. Additionally, except as otherwise provided in the Operating Agreement, Assignor shall have no liability to Assignee for any acts or omissions of Operator in any way associated with the drilling of the Test Well or any other well which may be drilled under the terms of this Agreement. In the event that Operator does not commence actual drilling operations for the Test Well on or before February 28, 2 005, this Agreement shall terminate and Assignor shall immediately refund the Initial Consideration to Assignee; provided, however, the commencement date for the Test Well shall be extended in the event the Test Well is not timely spudded due to delays caused by the drilling contractor. In the event this Agreement terminates, Assignee shall have no obligation with respect to any costs or liabilities incurred by Assignor with respect to this Agreement and Operator agrees to indemnify and hold Assignee harmless against any and all costs, expenses, claims, demands and causes of action of whatsoever kind or character, including court costs and attorneys' fees, arising out of any operations conducted, commitment made or any action taken or omitted with respect to the Leases in the event the Test Well is not timely spudded by the Operator as herein provided. 2. Test Well _________ On or before February 28, 2006, MLC Operating LP, as initial operator (the "Operator"), shall commence operations for the drilling of a test well (hereinafter referred to as the "Test Well") at a location on the Leases as designated on the AFE, and shall thereafter diligently and in a good and workmanlike manner proceed to cause the drilling of the Test Well to the stratigraphic equivalent of the lesser of either (i) a true vertical depth of approximately 5,000 feet beneath the surface of the earth or (ii) a depth sufficient to test the upper Woodbine Sands as seen at a depth sufficient to test the upper Woodbine Sands as seen at a depth of 4,790' to 4912' in the Feldman Oil & Gas #1 McDonald, Total Depth 5155' (hereinafter referred to as "Total Depth"); provided, however, Assignor may at its sole option extend the Test Well commencement date subject to rig availability. 3. Substitute Well _______________ In the event the Test Well is lost or junked due to mechanical difficulty, or there is encountered in the drilling thereof salt, domal formation, cavity, igneous rock, heaving shale, high pressure gas, saltwater flow or such other conditions which render further drilling impracticable, unduly difficult or expensive by ordinary standards of the oil industry, then in lieu of drilling to Total Depth, Assignees, for a period of ninety (90) days after abandoning said Test Well, for any of the reasons above noted, shall have the option to commence, or cause to be commenced, actual drilling of a substitute well. Such well shall be drilled at a mutually acceptable location, in a like manner and under the same terms and conditions to the depth specified for the Test Well, and the term "Test Well" as used herein shall be construed to include any substitute well drilled under the terms of this Agreement; provided, however, in the event Assignee does not elect to participate in the substitute well, Assignee shall forfeit the Initial Consideration previously paid to Assignor. 4. Operating Agreement ___________________ Except as otherwise set forth herein, all operations on the lands covered by the Leases shall be conducted in accordance with the terms of this Agreement and the Operating Agreement attached as Exhibit "D" which designates Oakwood Energy, INC. as operator and which is executed contemporaneously herewith. In the event of a conflict between the terms of this Agreement and the Operating Agreement, the terms of this Agreement shall prevail and control. 5. Overriding Royalty __________________ It is agreed and understood that Assignor hereby reserves unto itself, or its designees, an overriding royalty burdening the lands covered by the Leases equal to twenty-five percent (25%) less presently existing leasehold burdens thereby delivering Assignee its pro rata share of a seventy-five percent of eight-eights (75% of 8/8ths) net revenue interest. In the event any of the Leases do not cover a full mineral interest, or Assignor does not own the full leasehold interest therein, then the overriding royalty herein reserved shall be proportionately reduced. Furthermore, should any of the Leases cover less than all of the lands included within a pooled unit allocated to any well drilled pursuant to the terms hereof, such overriding royalty reserved by Assignor herein shall be further reduced and paid in proportion to the total number of surface acres covered by the Leases included within the pooled unit bears to the total number of surface acres within said unit. 6. Well Information ________________ Assignee or its representatives shall have access at its own risk and at all times to the location and derrick floor during the drilling of any well hereunder. Each Assignee shall further be entitled to all information concerning any well drilled hereunder and the Leases unless any such party is delinquent in the payment of its joint interest billings to Operator for a period greater than thirty (30) days in which event Operator at its sole option may withhold any information to such delinquent party. 7. Area of Mutual Interest _______________________ The parties hereto hereby establish an Area of Mutual Interest ("AMI") which covers and includes all lands depicted within the area one (1) mile outside the perimeter of the lands covered by the Leases which are depicted on the plat attached hereto as Exhibit "C". In the event that any party hereto hereafter acquires an oil and gas leasehold interest, or contractual right to earn an oil and gas leasehold interest, covering lands lying in whole or in part within the AMI, the acquiring party shall, in writing, offer to assign, without warranty of title, to the nonacquiring parties, within ten (10) days of purchase or acquisition, the entire proportionate interest which the nonacquiring parties are ratably entitled to acquire within the AMI under this Agreement. Such notice shall include a copy of the lease or contract, paid draft and other pertinent and available data. Each nonacquiring party shall, within ten (l0) days after receipt of such offer, elect whether to purchase such interest by paying the acquiring parties such nonacquiring party's proportionate part of the actual cost and expenses, if any, incurred by the acquiring party in acquiring such lease or contract. Failure by any nonacquiring party to timely notify the acquiring party shall be deemed an election by such nonacquiring party not to acquire its ratable interest in the leasehold interest offered. When any nonacquiring party elects not to acquire its ratable interest from the acquiring party, such nonacquiring party's interest in such lease or contract which is the subject of such offer shall be offered to the parties electing to acquire its proportionate share of such non-acquiring party's interest and shall not be subject to this Agreement but an operating agreement identical to Exhibit D, after allowing for nonjoinder by the non-acquiring party. Unless otherwise mutually agreed, this AMI shall terminate six (6) months after the expiration of the last lease within the AMI. All interests under this paragraph shall be offered on either a Before Prospect Payout Basis or After Prospect Payout Basis based on the occurrence of Prospect Payout. 8. Prospect Payout _______________ Upon the occurrence of "Prospect Payout" as defined below, Assignor shall back-in against the interest of Assignee in the Leases for a twenty-five percent of eight-eighths (25% of 8/8ths) working interest whereupon the parties shall own the After Prospect Payout interests set forth in Exhibit "A-l" hereto. All costs and expenses incurred prior to the occurrence of Prospect Payout shall be borne by the parties in accordance with their respective Before Prospect Payout interests set forth in Exhibit "A-l" hereto. "Prospect Payout" is defined as and shall occur at 12:01 a.m. on the first day of the month following the day when the net proceeds received by Assignee out of production from the Test Well and all subsequent wells drilled on. the prospect (after first deducting the production and severance taxes, and all royalty payments effective as of the effective date of this Agreement, lessor's royalty, overriding royalties including, without limitations, the overriding royalties reserved by Assignor herein, non-participating royalties, and production payments) shall equal the sum of Assignee's share of the: (a) Initial Consideration; (b) cost of land and legal costs and all costs for leases; acquired by Assignee within the AMI prior to the occurrence of Prospect Payout or other land related costs and land maintenance costs, geological cost, seismic costs, or other non-drilling related costs incurred by Assignee prior to Prospect Payout; (c) the costs of drilling, testing, evaluating, completing and equipping the Test Well and all subsequent wells drilled on the prospect, prior to Prospect Payout into the point of sale which includes but is not limited to the wellhead, tank batteries, gathering lines and all other related surface equipment and facilities; and (d) the operating costs, and reworking or re-completing costs incurred on such wells during the payout period. The Operator agrees to provide all parties to this Agreement with quarterly payout statements. 9. Miscellaneous _____________ A. Paragraph Headings The paragraph headings inserted in this Agreement are utilized solely for reference purposes and do not constitute substantive matter to be considered in construing the terms of this Agreement. B. Time is of the Essence It is specifically understood and agreed that time is of the essence hereunder. C. Liability It is not the purpose of this Agreement to create a partnership, mining partnership, partnership for a specific purpose, joint venture, or any other relationship which would render the parties liable as partners, associates, or joint venturers. D. Entire Agreement This Agreement shall constitute the entire Agreement between the parties hereto and supersedes any prior agreements, promises, negotiations or representations, whether written or oral, not expressly set forth in this Agreement. No variations, modifications, or changes herein or hereof shall be effective unless evidenced by written document executed by the parties hereto. E. Counterparts This Agreement may be executed in any number of counterparts and each counterpart so executed shall be deemed an original for all purposes and shall be binding upon each party executing same whether or not executed by all parties. F. Governing Law This Agreement shall be governed by the laws of the State of Texas. G. Binding Agreement The terms, covenants and conditions of this Agreement shall be binding upon, and shall inure to the benefit of, the parties hereto and to their respective heirs, executors, administrators, successors and assigns, and such terms, covenants and conditions shall be deemed as covenants running with the lands and leases covered hereby. It is stipulated, however, that no assignment or transfer by or, however accomplished, of any right, title or interest acquired hereunder shall relieve such party of any liability or obligation herein assumed, except with written consent of the other party. H. Acceptance If the foregoing fully sets forth your understanding of our agreement, please so indicate by execution in the space provided below and return one (1) fully executed original hereof together with your share of the Initial Consideration described in Section 1. hereof. If this Agreement is not accepted and returned within fifteen (15) days from the date hereof with your share of the Initial Consideration, this Agreement shall be voidable by any party and such shares of Initial Consideration shall be returned promptly to the Assignee. I. Delivery of Assignment With Assignee's tendering of its pro-rata share of the Initial Consideration and its pro-rata share of the Estimated Dry Hole Costs as provided herein, Assignor shall upon request provide Assignee with complete lease purchase packages for the Leases. Assignor shall record an assignment of the Leases to the Assignee and upon receipt provide Assignee with a copy of such recorded assignment. J. Notices All notices required under this agreement shall be made to the parties at the addresses and fax numbers identified in Exhibit "A". K. Well Data Requirements Assignor shall provide or cause to be provided certain well data required by Assignee in all wells in which Assignee is a participant. Such requirements will be fully identified under separate cover. L. Delay Rental Payments Any and all delay rental payments shall be paid by Assignor and invoiced to Assignee based on it current working interest. Delay rentals accruing (if any) prior to reaching casing point in the Test Well shall be a proportionate obligation on the part of all parties; however after such a time same shall be the subject of future recommendations and elections. Very truly yours, SKYLINE ENERGY, L.L.C. By: /s/ DONNIE JONES ___________________________ Donnie Jones, President AGREED TO AND ACCEPTED THIS 8th DAY OF September 2005 Pin Petroleum Partners Inc. By: /s/ WILLIAM FRIESEN _______________________________ Name: _________________________ Title: ________________________ AGREED TO AND ACCEPTED THIS ________ DAY OF_________, 2005 G-White By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________ DAY OF_________, 2005 Oakwood Energy, Inc. By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________DAY OF_________, 2005 Stardust Energy, Inc. By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________ DAY OF_________, 2005 Blake Cmajadalka By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________DAY OF _________, 2005 Miller Resources, Inc. By:____________________________ Name:__________________________ Title:_________________________ AGREED TO AND ACCEPTED THIS ________DAY OF_________, 2005 By:____________________________ Name:__________________________ Title:_________________________ EXHIBIT "A" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED MAY 23, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL ADDRESSEES Pin Petroleum Partners Inc. Suite 2410, 650 West Georgia Street P. O. Box 11524 Vancouver, British Columbia, Canada, V6B 4N7 Telephone: 604-689-8336 Telecopy: 604-682-5564 Oakwood Energy, INC. P. O. Box 297 Jourdanton, Texas 78026 Attention: Barry Laidlaw Telephone: 830-769-3955 Telecopy: 830-769-2261 Miller Resources, Inc. P. O. Box 2128 Traverse City, MI 49685-2128 Attn: John Miller Telephone: 231-941-0073 Telecopy: Stardust Energy, Inc. Attention: Don Shepherd P 0 Box 150909 Austin, Texas 78715 Telephone: 281-685-9917 Telecopy: Blake Cmajdalka 2415 Hanston Ct. Pearland Texas, 77584 Telephone: Telecopy: Skyline Energy, LLC 2301 Dublin Circle Pearland, Texas 77581 Attn: Donnie Jones Telephone: 281-481-0881 Telecopy: 281-481-5645
EXHIBIT "A-l" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED August 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL Party Before Prospect Payout After Prospect Payout Initial Interest Interest Consideration __________________________________________________________________________________________________________ Pin Petroleum 30.00% 22.500% $55,500.00 Partners Inc. __________________________________________________________________________________________________________ G-White 5.00% 3.750% $9,250.00 __________________________________________________________________________________________________________ Oakwood Energy, Inc . 2.00% 1.500% $3,700.00 __________________________________________________________________________________________________________ Miller Energy, Inc . 2.00% 1.500% $3,700.00 __________________________________________________________________________________________________________ Stardust Energy, Inc . 1.50% 1.125% $2,775.00 __________________________________________________________________________________________________________ Blake Cmajakaika 1.00% .750% $1,850.00 __________________________________________________________________________________________________________ Skyline Energy, L.L.C. 58.500% 66.625% NA Etal __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ __________________________________________________________________________________________________________ Total 100% 100% __________________________________________________________________________________________________________
EXHIBIT "A-2" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL AFE TO BE FURNISHED BY MLC OPERATING LP EXHIBIT "B" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL THE LEASES 1. Oil, Gas and Mineral Lease dated, January 12, 2005 by and between, George Station, Individually and as Trustee, Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 2. Oil, Gas and Mineral Lease dated, March 4, 2005 by and between Regions Bank, Trustee for Lisa Barber Helton, et al, Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 3. Oil, Gas and Mineral Lease dated, March 28, 2005 by and between Marvin J. Angle, et ux, Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 4. Oil, Gas and Mineral Lease dated, March 28, 2005, by and between, Gordon F. Thrall, Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 5. Oil, Gas and Mineral Lease dated, March 28, 2005, by and between, Sybil Lucas Spiers, Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 6. Oil, Gas and Mineral Lease dated, March 28, 2005, by and between, Martha Ann Wheeler, Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 7. Oil, Gas and Mineral Lease dated, March 28, 2005, by and between, Marijane Wernsman, Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 8. Oil, Gas and Mineral Lease dated, May 27, 2005 by and between, Hawkins Revocable Trust, Lessor, and Skyline Energy, L.L.C, as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 9. Oil, Gas and Mineral Lease dated, May 27, 2005, by and between, Donald W. Hawkins, Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 10. Oil, Gas and Mineral Lease dated, April 4, 2005, by and between Chardonnay 1, Ltd., Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 11. Oil, Gas and Mineral Lease dated, April 5, 2005, by and between, Thomas A. Woyt, et ux, Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 12. Oil, Gas and Mineral Lease dated, April 4, 2005, by and between, F. B. and M. L. Elliott Living Trust, Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 13. Oil, Gas and Mineral Lease dated, April 4, 2005, by and between, Maxine Thompson, Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 14. Oil, Gas and Mineral Lease dated, April 5, 2005by and between, Steven J. Berry, et ux, Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. 15. 011, Gas and Mineral Lease dated, May 11, 2005, by and between, Frank Saye, et ux, Lessor, and Skyline Energy, L.L.C., as Lessee, covering certain lands in the Jose Pineda West Four League Grant, A-40, Cherokee County, Texas, and recorded in Volume _____, Page _____, Deed Records, Cherokee County, Texas. EXHIBIT "C" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL [Attach Plat] [Hwy 79 Prospect Cherokee Co., Texas Map Appears Here] EXHIBIT "D" ATTACHED TO AND MADE A PART OF THAT CERTAIN PARTICIPATION AGREEMENT DATED AUGUST 24, 2005 BY AND BETWEEN SKYLINE ENERGY, L.L.C. AND PIN PETROLEUM PARTNERS INC., ETAL JOA TO BE FURNISHED BY MLC OPERATING LP EX-31.1 9 ex31-1.txt CERTIFICATIONS OF THE CHIEF EXECUTIVE OFFICER ... EXHIBIT 31.1 CERTIFICATIONS I, G. Leigh Lyons, certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of Radial Energy Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting. 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Dated: August 17, 2006 /s/ G. Leigh Lyons --------------------------------------------- G. LEIGH LYONS PRESIDENT, CHIEF EXECUTIVE OFFICER, AND CHIEF FINANCIAL OFFICER (PRINCIPAL EXECUTIVE OFFICER) EX-31.2 10 ex31-2.txt CERTIFICATIONS OF THE CHIEF FINANCIAL OFFICER ... EXHIBIT 31.2 CERTIFICATIONS I, G. Leigh Lyons, certify that: 1. I have reviewed this Quarterly Report on Form 10-QSB of Radial Energy Inc.; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the small business issuer as of, and for, the periods presented in this report; 4. The small business issuer's other certifying officer(s) and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) for the small business issuer and have: a. Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the small business issuer, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b. Evaluated the effectiveness of the small business issuer's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and c. Disclosed in this report any change in the small business issuer's internal control over financial reporting that occurred during the small business issuer's most recent fiscal quarter (the small business issuer's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the small business issuer's internal control over financial reporting. 5. The small business issuer's other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the small business issuer's auditors and the audit committee of the small business issuer's board of directors (or persons performing the equivalent functions): a. All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the small business issuer's ability to record, process, summarize and report financial information; and b. Any fraud, whether or not material, that involves management or other employees who have a significant role in the small business issuer's internal control over financial reporting. Dated: August 17, 2006 /s/ G. Leigh Lyons --------------------------------------------- G. LEIGH LYONS PRESIDENT, CHIEF EXECUTIVE OFFICER, AND CHIEF FINANCIAL OFFICER (PRINCIPAL FINANCIAL OFFICER) EX-32.1 11 ex32-1.txt CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER ... EXHIBIT 32.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Quarterly Report of Radial Energy Inc. (the "Company") on Form 10-QSB for the quarterly period ended June 30, 2006, as filed with the Securities and Exchange Commission on August 17, 2006 (the "Report"), I, G. Leigh Lyons, President, Chief Executive Officer, and Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that: 1. The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and 2. The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. By: /S/ G. LEIGH LYONS ------------------------------------ G. Leigh Lyons President, Chief Executive Officer, and Chief Financial Officer August 17, 2006 A signed original of this written statement required by Section 906 of the Sarbanes-Oxley Act of 2002 ("Section 906"), or other document authenticating, acknowledging, or otherwise adopting the signature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. -----END PRIVACY-ENHANCED MESSAGE-----