SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 8-K
PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
DATE OF REPORT: November 19, 2004 COMMISSION FILE NO. 0-19485
ADVANCED ENERGY RECOVERY, INC.
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(Exact name of Registrant as specified in its charter)
Delaware 84-1069416
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(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification Number)
5799 BROADMOOR, STE 750, MISSION, KS 66218
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(Address of principal executive offices) (Zip Code)
Registrant's Telephone Number (executive office), including Area Code:
(913) 535-1072
ADVANCED FINANCIAL, INC.
5425 MARTINDALE, SHAWNEE, KS 66218
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(Former name or former address, if changed since last report)
ITEM 8.01. OTHER INFORMATION
GulfWest Energy Inc. Joint Venture
On July 21, 2004, the Company entered into a Letter of Intent, subject
to the execution of definitive agreements, with GulfWest Energy Inc. ("GWEI")
located in Houston, Texas, under which the Company and GWEI, through one or more
Joint Venture LLCs, would develop certain oil and gas assets owned by GWEI in
Grimes and Madison County, Texas. Certain of the Madison County reserves, if
developed and produced, are expected to require treatment similar to that
described in the Madisonville Project as discussed later under the Gateway
Energy Corporation Agreement. On October 14, 2004, the Company, through its
wholly owned subsidiary, Allen Drilling Acquisition Company ("ADAC"), became a
member of a Texas LLC (Elgin Holdings, L.L.C.) (the "LLC") ("Elgin") with GWEI
for the purpose of initially developing certain portions of the GWEI oil and gas
asset bases in Madison County and Hardin County, Texas. Participation in the
development of the Grimes County asset base by ADAC was deferred and will not be
a part of this LLC. GWEI contributed certain assets valued at approximately
$540,000, and the Company committed to provide up to $595,000 in initial capital
funding to the LLC. The Company owns 52.5% of the LLC, and hold two of the three
manager positions, such positions filled by Charles A. Holtgraves and Larry J.
Horbach. The various agreement transaction requirements were completed on
November 15, 2004, including the required cash initial capital funding
requirements.
The initial capital funding was raised by ADAC through a private placement
of 595 shares of a new series preferred stock. The Senior Series B Preferred
Stock, Stated Value $1,000 per share provides, among other things, for a
preferential dividend right based on the Company's proportionate interest in the
operations and cash flow from Elgin, and a preferential liquidation right
consisting of a proportionate share of the Company's Capital Account of Elgin.
Charles A. Holtgraves, Larry J. Horbach and Christopher D. Davis are
directors of the Registrant. Mr. Holtgraves and Mr. Horbach are officers of the
Registrant. Entities in which these individuals either control or have an
interest in, have subscribed for 577 of the 595 authorized shares.
Advanced Energy Recovery, Inc., Elgin Holdings, L.L.C. and Gateway Energy
Corporation Agreement
On November 15, 2004, the Registrant and Elgin entered into a License
Agreement (the "Agreement") with Gateway Energy Corporation and certain of its
subsidiaries ("Gateway"). The Agreement, provides, among other things, for the
granting of a sublicense to the Registrant and Elgin to enable Elgin to treat
the gas produced from the leasehold interests owned by Elgin in Madison County,
Texas, which leasehold interests fall within a defined Area of Mutual Interest,
("AMI"). Such AMI is set forth in a long term agreement, sometimes known as the
Madisonville Project Agreement The Madisonville Project is operated under a
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long-term agreement between Gateway, Hanover Compression Limited Partnership,
and Redwood Energy Production, L. P. and is designed to treat gas to remove
impurities from the gas to enable the gas to meet pipeline sales quality
specifications. The Madisonville Project employs the state-of-the-art, patented,
absorption based technology developed by Advanced Extraction Technologies, Inc.,
for which Gateway has the exclusive U. S. license, to remove nitrogen from the
gas. In addition, the Agreement provides that AER and Elgin will dedicate the
gas produced from its interests in the AMI to the Madisonville Project plant and
will advance up to $91,250 to Gateway, in the form of a prepayment, the license
and other fees due Advanced Extraction Technologies ("AET") for the processing
of a minimum of 5,000 Mcf per day. The Agreement further grants to AER or its
designees, an option to participate pari passu with Gateway, subject to certain
limitations, in future projects which require the treatment of natural gas
containing high nitrogen, which projects utilize the AET license held by Gateway
ITEM 7. EXHIBITS
The following exhibits are filed as part of this report.
Exhibit A--The Regulations of Elgin Holdings, L.L.C.
Exhibit B-- The Certificate of Designation, Preferences and Rights of the
Senior Series B Preferred Stock, Stated Value of $1,000 of Allen Drilling
Acquisition Company.
Exhibit C-- The License Agreement between Advanced Energy Recovery, Inc.,
Elgin Holdings, L.L.C. and Gateway Energy Corporation.
Exhibit D-- Press Release.
SIGNATURE
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Company has duly caused this report to be signed on
its behalf by the undersigned thereunto duly authorized.
ADVANCED ENERGY RECOVERY, INC.
(Registrant)
November 18, 2004 By: /s/ Larry J. Horbach
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Larry J. Horbach,
Assistant Secretary
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EXHIBIT A
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REGULATIONS
of
ELGIN HOLDINGS, L.L.C.
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1
REGULATIONS
OF
ELGIN HOLDINGS, L.L.C.
A Texas Limited Liability Company
ARTICLE 1. DEFINITIONS
1.1 Definitions
1.2 Construction
ARTICLE 2. ORGANIZATION
2.1 Formation
2.2 Name
2.3 Registered Office; Registered Agent In The
United States; Other States
2.4 Purposes
2.5 Foreign Qualification
2.6 Term
2.7 No State-Law Partnership
ARTICLE 3. MEMBERSHIPS, DISPOSITIONS OF INTERESTS
3.1 Initial Members
3.2 Preferential Purchase Right
3.3 Restrictions on the Disposition of an Interest
3.4 Additional Members
3.5 Interests in a Member
3.6 Liability to Third Parties
3.7 Lack of Authority
ARTICLE 4. CAPITAL CONTRIBUTIONS
4.1 Contributions and Sharing Ratio
4.2 Subsequent Contributions
4.3 Failure to Contribute
4.4 Return of Contributions
4.5 Advances by Members
4.6 Capital Accounts
ARTICLE 5. ALLOCATIONS AND DISTRIBUTIONS
5.1 Allocations
5.2 Distributions
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ARTICLE 6. MANAGERS
6.1 Management by Managers
6.2 Actions by Managers; Committees; Delegation of Authority
and Duties
6.3 Term of Office
6.4 Meetings
6.5 Approval or Ratification of Acts or Contracts by Members
6.6 Action by Written Consent or Telephone Conference
6.7 Conflicts of Interest
6.8 Officers
ARTICLE 7. MEETINGS OF MEMBERS
7.1 Meetings
7.2 Voting List
7.3 Proxies
7.4 Conduct of Meetings
7.5 Action by Written Consent or Telephone Conference
ARTICLE 8. INDEMNIFICATION
8.1 Right to Indemnification
8.2 Advance Payment
8.3 Indemnification of Officers, Employees, and Agent
8.4 Appearance as a Witness
8.5 Nonexclusivity of Rights
8.6 Insurance
8.7 Member Notification
8.8 Savings Clause
ARTICLE 9. TAXES
9.1 Tax Returns
9.2 Tax Elections
9.3 "Tax Matters Partner."
ARTICLE 10. BOOKS, RECORDS, REPORTS,
10.1 Maintenance of Books
10.2 Reports
10.3 Accounts
ARTICLE 11. DISSOLUTION, LIQUIDATION, AND TERMINATION
11.1 Dissolution
11.2 Liquidation and Termination
11.3 Deficit Capital Accounts
11.4 Articles of Dissolution
ARTICLE 12. GENERAL PROVISIONS
12.1 Offset
12.2 Notices
12.3 Entire Agreement
12.4 Effect of Waiver or Consent
12.5 Amendment or Modification
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12.6 Binding Effect
12.7 Governing Law; Severability
12.8 Further Assurances
12.9 Waiver of Certain Rights
12.10 Indemnification
12.11 Counterparts
EXHIBIT A - Member Sharing Ratio
EXHIBIT B - Initial Contribution of Members
Exhibit B-1 - Description of Interests Contributed by GulfWest
Energy Inc.
EXHIBIT C - Use of ADAC's Initial Contribution
EXHIBIT D - Distributions to Members
EXHIBIT E - Responsibilities of Operator
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REGULATIONS
OF
ELGIN HOLDINGS, L.L.C.
A Texas Limited Liability Company
These REGULATIONS OF ELGIN HOLDINGS, L.L.C. (`Regulations"), dated as of
this 14th day of October 2004 are (a) adopted by the Managers (as defined below)
and (b) executed and agreed to, for good and valuable consideration, by the
Members listed on the signature page attached hereto.
ARTICLE I. DEFINITIONS
1.1 Definitions. As used in these Regulations, the following terms have the
following meanings:
"Act" means the Texas Limited Liability Company Act and any successor statute,
as amended from time to time.
"ADAC" mean Allen Drilling Acquisition Company.
"Affiliate" means (i) any Legal Entity controlling, controlled by or under
common control with another Legal Entity, (ii) a Legal Entity owning or
controlling ten percent (10%) or more of the outstanding voting securities of
such other Legal Entity, (iii) any officer or director of such other Legal
Entity, and (iv) if such other Legal Entity is an officer or director, any
company for which such Legal Entity acts as officer or director.
"Assignee" means any Legal Entity that acquires Membership Interests or any
portion thereof through a Disposition, but who is not admitted as a Member. An
Assignee shall have no right to be admitted to the Company as a Member except in
accordance with Section 3.3(b). Subject to the terms of this Agreement, an
Assignee has the rights of an assignee under the Act. The Assignee of a sold or
merged Legal Entities Member is the Legal Entity or Legal Entities to whom the
sold or merged Member's Membership Interests are assigned. The Assignee of a
sold or merged Member is the shareholder, partner, member or other equity owner
or owners of the dissolved Member to whom such Member's Membership Interests are
assigned by the Legal Entity conducting the liquidation or winding up of such
Member. The Assignee of a Bankrupt Member is the bankruptcy estate until such
time there is a Legal Entity or Legal Entities (if any) to whom such Bankrupt
Member's Membership Interests are assigned by order of the bankruptcy court or
other governmental authority having jurisdiction over such Bankruptcy; or, in
the event of a general assignment for the benefit of creditors, the creditor to
which such Membership Interests are assigned.
"Bankrupt" or Bankruptcy" means (except to the extent a Supermajority Interest
consents otherwise) any Member (a) that (i) makes a general assignment for the
benefit of creditors; (ii) files a voluntary bankruptcy petition; (iii) becomes
the subject of an order for relief or is declared insolvent in any federal or
state bankruptcy or insolvency proceedings; (iv) files a petition or answer
seeking for the Member a reorganization, arrangement, composition, readjustment,
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liquidation, dissolution, or similar relief under any law; (v) files an answer
or other pleading admitting or failing to contest the material allegations of a
petition filed against the Member in a proceeding of the type described in sub
clauses (i) through (iv) of this clause (a); or (vi) seeks, consents to, or
acquiesces in the appointment of a trustee, receiver, or liquidator of the
Member's or of all or any substantial part of the Member's properties; or (b)
against which, a proceeding seeking reorganization, arrangement, composition,
readjustment, liquidation, dissolution, or similar relief under any law has been
commenced and one hundred twenty (120) days have expired without dismissal
thereof or with respect to which, without the Member's consent or acquiescence,
a trustee, receiver, or liquidator of the Member or of all or any substantial
part of the Member's properties has been appointed and ninety (90) days have
expired without the appointment's having been vacated or stayed, or ninety (90)
days have expired after the date or expiration of a stay, if the appointment has
not previously been vacated.
"Business Day" means any day other than a Saturday, a Sunday, or a holiday on
which national banking associations in the State of Texas are closed.
"Capital Contribution" means any contribution by a Member to the capital of the
Company.
"Code" means the Internal Revenue Code of 1986 and any successor statute, as
amended from time to time.
"Commitment" means, subject in each case to adjustments on account of
Dispositions of Membership Interests permitted by these Regulations, (a) in the
case of a Member executing these Regulations as of the date of these Regulations
or a Legal Entity acquiring that Membership Interest, the amount specified for
that Member as its commitment on Exhibit A, and (b) in the case of a Membership
Interest issued pursuant to Section 3.4, the Commitment established pursuant
thereto.
"Company" means Elgin Holdings, L.L.C., a Texas limited liability company.
"Default" means with respect to any Member, (a) the failure of such Member to
contribute, within ten (10) days of the date required, all or any portion of a
Capital Contribution that such Member is required to make as provided in these
Regulations; or (b) the failure of a Member to comply in any material respect
with any of its other agreements, covenants, or obligations under this
Agreement, or the failure of any representation or warranty made by a Member in
this Agreement to have been true and correct in all material respects at the
time it was made, in each case if such default is not cured by the applicable
Member within thirty (30) days of its receiving notice of such Default from the
Managers or any other Member (or, if such Default is not capable of being cured
within such thirty (30) day period, if such Member fails to promptly commence
substantial efforts to cure such default or to prosecute such curative efforts
to completion with continuity and diligence).
"Default Interest Rate" means a rate per annum equal to the lesser of (a) the
Prime Rate plus three percent (3%), and (b) the maximum rate permitted by
applicable law.
"Delinquent Member" has the meaning given that term in Section 4.3(a).
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"Dispose," "Disposing," or "Disposition" means a sale, assignment, transfer,
exchange, mortgage, pledge, grant of a security interest, or other disposition
or encumbrance (including, without limitation, by operation of law), or the acts
thereof.
"Encumbrance" a security interest, lien, pledge, mortgage, or other encumbrance,
whether such encumbrance be voluntary, involuntary, or by operation of law.
"GulfWest" means GulfWest Energy Inc.
"Legal Entity" has the meaning given that term in Article 3 of the Articles of
Organization.
"Lending Member" has the meaning given that term in Section 4.3(a) (ii) (C).
"Majority in Interest" means one or more Members having among them more than 50%
of the Sharing Ratios of all Members.
"Manager" means the Persons named in the Articles as initial managers of the
Company and any Person hereafter designated as a Manager of the Company as
provided in these Regulations.
"Member" means any Legal Entity executing these Regulations as of the date of
these Regulations as a member or hereafter admitted to the Company as a member
as provided in these Regulations, but does not include any Legal Entity who has
ceased to be a member in the Company.
"Membership Interest" means the interest of a Member in the Company, including,
without limitation, rights to distributions (liquidating or otherwise),
allocations, information, and to consent or approve.
"Operator" means Setex Oil and Gas Company, a wholly owned subsidiary of
GulfWest Energy Inc.
"Prime Rate" means a rate per annum equal to the lesser of (a) a varying rate
per annum that is equal to the interest rate described as the prime rate (or the
lowest of such rates if more than one rate is quoted) in the "Money Rates" table
(or any future substitute therefore) published in the Wall Street Journal as of
the last date of publishing immediately preceding the date of the promissory
note or creation of other obligation hereunder and, thereafter, adjusted twice
annually as of the first day in each year that such publication is published and
the first day in July in each year that such publication is published, and (b)
the maximum rate permitted by applicable law. As used herein, the "Prime Rate"
shall be the rate of interest. "Proceeding" has the meaning given that term in
Section 8.1.
"Supermajority Interest" means one or more Members having among them more than
75% of the Sharing Ratios of all Members.
"Sharing Ratio" with respect to any Member means, subject in each case to
adjustments on account of Dispositions of Membership Interests or otherwise
permitted by these Regulations, (a) in the case of a Member executing these
7
Regulations as of the date of these Regulations or a Person acquiring those
Membership Interests, the percentage specified for that Member as its Sharing
Ratio on Exhibit A, and (b) in the case of Membership Interests issued pursuant
to Section 3.4, the Sharing Ratio established pursuant thereto.
"TBCA" means the Texas Business Corporation Act and any successor statute, as
amended from time to time.
"Unanimous Interest" means all of the Members.
Other terms defined herein have the meanings so given them.
1.2 Construction. Whenever the context requires, the gender of all words used in
these Regulations includes the masculine, feminine, and neuter. All references
to Articles and Sections refer to articles and sections of these Regulations,
and all references to Exhibits are to Exhibits attached hereto, each of which is
made a part hereof for all purposes.
ARTICLE 2. ORGANIZATION
2.1 Formation. The Company has been organized as a Texas limited liability
company by the filing of Articles of Organization ("Articles") pursuant to the
Act and the issuance of a Certificate of Organization for the Company by the
Secretary of State of Texas.
2.2 Name. The name of the Company is ELGIN HOLDINGS, L.L.C.. All Company
business shall be conducted in that name or such other names that comply with
applicable law as the Managers may select from time to time.
2.3 Registered Office; Registered Agent; Principal Office in the United States;
Other States. The registered office of the Company required by the Act to be
maintained in the State of Texas shall be the office of the initial registered
agent named in the Articles or such other office (which need not be a place of
business of the Company) as the Managers may designate from time to time in the
manner provided by law. The registered agent of the Company in the State of
Texas shall be the initial registered agent named in the Articles or such other
Legal Entity or Legal Entities as the Managers may designate from time to time
in the manner provided by law. The principal office of the Company in the United
States shall be at such place as the Managers may designate from time to time,
which need not be in the State of Texas, and the Company shall maintain records
there as required by article 2.22 of the Act and shall keep a record of the
street address of such principal office at the registered office of the Company
in the State of Texas. The Company may have such other offices as the Managers
may designate from time to time.
2.4 Purposes. The purposes of the Company are those set forth in the Articles.
2.5 Foreign Qualification. Prior to the Company's conducting business in any
jurisdiction other than Texas, the Managers shall cause the Company to comply,
to the extent procedures are available and those matters are reasonably within
the control of the Managers, with all requirements necessary to qualify the
Company as a foreign limited liability company in that jurisdiction. At the
request of the Managers, each Member shall execute, acknowledge, swear to, and
deliver all certificates and other instruments conforming with these Regulations
8
that are necessary or appropriate to qualify, continue, and terminate the
Company as a foreign limited liability company in all such jurisdictions in
which the Company may conduct business.
2.6 Term. The Company commenced on the date the Secretary of State of Texas
issued a Certificate of Organization for the Company and shall continue in
existence for the period fixed in the Articles, subject to amendment or
extension in accordance with applicable law.
2.7 No State-Law Partnership. The Members intend that the Company not be a
partnership (including, without limitation, a limited partnership or joint
venture), and that no Member or Manager be a partner or joint venture of any
other Member or manager, for any purposes other than federal and state tax
purposes, and these Regulations may not be construed to suggest otherwise.
ARTICLE 3. MEMBERSHIP, DISPOSITIONS OF INTERESTS
3.1 Initial Members. The initial Members of the Company are the Legal Entities
executing these Regulations as Members, each of which is admitted to the Company
as a Member effective contemporaneously with the execution by such Legal Entity
of these Regulations.
3.2 Preferential Purchase Right. A Member desiring to Dispose ("Transferor") of
all or any part of such Member's Interest (or rights therein) pursuant to a bona
fide offer from another Legal Entity shall first give written notice (the
"Initial Notice") to the other Members and to the Company stating the Interests
(or rights therein) ("Assigned Interest) to be transferred, the name and address
of the proposed transferee, the sales price, and the terms of payment. The
Initial Notice shall be deemed to be an offer by the Transferor to sell the
Assigned Interest to the Company and to the other Members in accordance with
this Section 3.2 at the price and on the terms stated in the Initial Notice.
Within thirty (30) days after the receipt of the Initial Notice, the Company
shall have the option, subject to the terms of this Section 3.2, to purchase all
or any portion of the Assigned Interest by giving written notice to the Members
specifying the portion of the Assigned Interest proposed to be purchased
("Notice of Exercise"). If such option is not timely exercised as to all of the
Assigned Interest, the other Members shall have the option to purchase all of
the Assigned Interest remaining unpurchased (but not less than all of the
remaining Assigned Interest) which may be exercised by giving Notice of Exercise
within forty-five (45) days after the receipt of the Initial Notice. Such right
to purchase shall be allocated among the other Members who have timely exercised
their respective options in such proportions as may be agreed upon by them, or,
in the absence of agreement, pro rata in accordance with their Sharing Ratios.
If the option of the Company under this Section 3.2 is exercised as to only a
portion of the Assigned Interest and the remaining Members fail to exercise
their options such that all of the remaining Assigned Interest is purchased,
then the exercise of the option by the Company and other Members under this
Section 3.2 shall be deemed void and not exercised; provided that any such
Disposition remains subject to the provisions of Section 3.3. Any purchase
hereunder shall be consummated within thirty (30) days after the date the last
Notice of Exercise is received by Transferor. If the Assigned Interest is not
purchased in full by the Company and/or the Members, the Transferor shall be
free to Dispose of the Assigned Interest, provided that the Disposition shall be
in strict compliance with the terms of the Initial Notice and the sale shall be
subject to Section 3.3.
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3.3 Restrictions on the Disposition of an Interest. (a) Except for Disposition
to the Company or a Member pursuant to the exercise of an option as described in
Section 3.2, a Disposition of an Interest may not be effected without the
consent of (i) a majority of the Managers who are Members (excluding any Manager
who is making such Disposition), or (ii) if there are no Managers who are
Members, then by a Supermajority Interest. Any attempted Disposition by a Member
of an interest or right, or any part thereof, in or in respect of the Company
other than in accordance with this Section 3.3 shall be, and is hereby declared,
null and void ab initio.
(b) Subject to the provisions of Section 3.3(c), 3.3(d) and 3.3(e), (i) a Legal
Entity to whom an interest in the Company is transferred in compliance with
Sections 3.2 and 3.3(a) has the right to be admitted to the Company as a Member
with the same Sharing Ratio and the Commitment as the Transferor, if (A) the
Transferor grants the transferee the right to be so admitted, and (B) such
transfer is consented to in accordance with Section 3.3(a), and (ii) the Company
or a Lending Member, with the permission of the Company, which may be withheld
in its sole discretion, grants the purchaser of a Delinquent Member's interest
in the Company at a foreclosure of the security interest therein granted
pursuant to Section 4.3(b) the right to be admitted to the Company as a Member
with a Sharing Ratio and Commitment as they may agree, provided that the Sharing
Ratio and Commitment of the purchaser of a Delinquent Member's interest in the
Company shall be no greater than the Sharing Ratio and the Commitment of the
Delinquent Member immediately prior to the date of the purchase of such Member's
interest.
(c) The Company shall not recognize for any purpose any purported Disposition of
a Membership Interest unless and until the provisions of this Section 3.3 have
been satisfied and the Managers have received, on behalf of the Company, a
document (a "Notice of Disposition") which (i) has been executed by both the
Transferor (or if the transfer is on account of the death, incapacity, or
liquidation of the Transferor, its representative) and the Legal Entity to which
the Membership Interest thereof is Disposed, (ii) includes the notice address of
the Legal Entity to be admitted to the Company as a Member and such Legal
Entity's agreement to be bound by these Regulations in respect of the Membership
Interest being obtained, (iii) sets forth the Sharing Ratios and the Commitments
after the Disposition of the Legal Entity to which the Membership Interest is
Disposed (which together must total the Sharing Ratio and the Commitment of the
Transferor before the Disposition), and (iv) contains a representation and
warranty by the Transferor and Transferee that the Disposition was made in
accordance with all applicable laws and regulations (including securities laws).
Each Disposition and, if applicable, admission complying with the provisions of
this Section 3.3(c), is effective as of the first day of the calendar month
immediately succeeding the month in which the Managers receive the notification
of Disposition and the other requirements of this Section 3.3 have been met.
(d) For the right of a Member to Dispose of a Membership Interest or of any
person to be admitted to the Company in connection therewith to exist or be
exercised, (i) either (A) the Membership Interest subject to the Disposition or
admission must be registered under the Securities Act of 1933, as amended, and
any applicable state securities laws or (B) the Company must receive a favorable
opinion of the Company's legal counsel or of other legal counsel acceptable to
the Managers to the effect that the Disposition or admission is exempt from
registration under those laws, and (ii) the Company must receive a favorable
opinion of the Company's legal counsel or of other legal counsel acceptable to
the Managers to the effect that the Disposition or admission, when added to the
total of all other sales, assignments, or other Dispositions within the
preceding twelve (12) months, would not result in the Company's being
10
considered to have terminated within the meaning of the Code. The Managers,
however, may waive the requirements of this Section 3.3(d).
(e) The Transferor shall pay, or reimburse the Company for, all costs incurred
by the Company in connection with the Disposition or admission (including,
without limitation, the legal fees incurred in connection with the legal
opinions referred to in Section 3.3(d)) on or before the tenth day after the
receipt by the Transferor of the Company's invoice for the amount due. If
payment is not made by the date due, the Transferor shall pay interest on the
unpaid amount from the date due until paid at a rate per annum equal to the
Default Interest Rate.
3.4 Additional Members. Additional Legal Entities may be admitted to the Company
from time to time at the direction of a Supermajority Interest and on such terms
and conditions as a Supermajority Interest may determine at the time of such
admission. The terms of admission or issuance must specify the Sharing Ratios
and the Commitments applicable thereto and may provide for the creation of
different classes or groups of members and having different rights, powers, and
duties. The Members shall reflect the creation of any new class or group in an
amendment to these Regulations indicating the different rights, powers, and
duties of the Members. Any admission of a new Member is effective only after the
new Member has executed and delivered to the Managers a document including the
new Member's notice address and its agreement to be bound by these Regulations.
The provisions of this Section 3.4 shall not apply to Dispositions of Membership
Interests.
3.5 Interests in a Member. A Member that is not a natural person may not cause
or permit an interest, direct or indirect, in itself to be Disposed of such
that, after the Disposition, the Company would be considered to have terminated
within the meaning of section 708 of the Code.
3.6 Liability to Third Parties. No Member or Manager shall be liable for the
debts, obligations, or liabilities of the Company, including under a judgment
decree or order of a court.
3.7 Lack of Authority. No Member (other than a Manager or an officer) has the
authority or power to act for or on behalf of the Company, to do any act that
would be binding on the Company, or to incur any expenditure on behalf of the
Company.
ARTICLE 4. CAPITAL CONTRIBUTIONS AND SHARING RATIO
4.1 Contributions and Sharing Ratio. Contemporaneously with the execution by
such Member of these Regulations, each Member shall make the Capital
Contributions described for that Member in Exhibit B, and shall have the sharing
ratio set forth in Exhibit A.
4.2 Subsequent Contributions. Without creating any rights in favor of any third
party, each Member shall contribute to the Company, in cash, on or before the
date specified as hereinafter described, that Member's Sharing Ratio of all
monies that in the judgment of the Managers and a Supermajority Interest are
necessary to enable the Company to cause the assets of the Company to be
properly operated and maintained and to discharge the Company's costs, expenses,
obligations, and liabilities; provided, however, that a Member is not obligated
to contribute a total amount that, when added to all Capital Contributions that
Member previously has made pursuant to Section 4.6 or this Section 4.2, exceeds
that Member's Commitment. The Managers shall notify each Member of the need for
Capital Contributions pursuant to this Section 4.2 when appropriate, which
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notice must include a statement in reasonable detail of the proposed uses of the
Capital Contributions and may state a date (which date may be no earlier than
thirty business days following each member's receipt of its notice) before which
the Capital Contributions must be made.
4.3 Failure to Contribute. (a) If a Member does not contribute by the time
required all the Capital Contribution that Member is required to make as
provided in these Regulations, the Company, on notice to that Member (the
"Delinquent Member"), may:
(i) take such action (including, without limitation, court proceedings) as the
Managers may deem appropriate to obtain payment by the Delinquent Member of the
portion of the Delinquent Member's Capital Contribution that is in default,
together with interest thereon at the Default Interest Rate from the date that
the Capital Contribution was due until the date that it is made, all at the cost
and expense of the Delinquent Member. Capital Contributions subject to Section
4.2 shall not exceed the quarterly projection distributed to Members no later
than 45 business days before which a Capital Contribution must be made. The
quarterly projections shall be updated and distributed to Members monthly.
(ii) permit the other Members, in proportion to their Sharing Ratios or in such
other percentages as they may agree (the "Lending Member," whether one or more),
to advance the portion of the Delinquent Member's Capital Contribution that is
in default, with the following results:
(A) The sum advanced constitutes a loan from the Lending Member to the
Delinquent Member and a Capital Contribution of that sum to the Company by
the Delinquent Member pursuant to the applicable provisions of these
Regulations,
(B) the principal balance of the loan and all accrued unpaid interest
thereon is due and payable in whole on the tenth day after written demand
therefor by the Lending Member to the Delinquent Member,
(C) the amount loaned bears interest at the Default Interest Rate from the
day that the advance is deemed made until the date that the loan, together
with all interest accrued on it, is repaid to the Lending Member,
(D) all distributions from the Company that otherwise would be made to the
Delinquent Member (whether before or after dissolution of the Company)
instead shall be paid to the Lending Member until the loan and all interest
accrued on it have been paid in full to the Lending Member (with payments
being applied first to accrued and unpaid interest and then to principal);
provided, however, that if the loan has been repaid in full according to
the its terms, the Lending Member shall thereupon reimburse the Delinquent
Member for all amounts received by the Lending Member in connection with
the Delinquent Member's interest.
(E) the payment of the loan and interest accrued on it is secured by a
security interest in the Delinquent Member's Membership Interest, as more
fully set forth in Section 4.3(b), and
(F) the Lending Member has the right, in addition to the other rights and
remedies granted to it pursuant to these Regulations or available to it at
law or in equity, to take any action (including, without limitation, court
12
proceedings) that the Lending Member may deem appropriate to obtain payment
by the Delinquent Member of the loan and all accrued and unpaid interest on
it, at the cost and expense of the Delinquent Member;
(iii) exercise the rights of a secured party under the Uniform Commercial Code
of the State of Texas, as more fully set forth in Section 4.4(b); or
(iv) exercise any other rights and remedies available at law or in equity.
In addition, the failure to make required Capital Contributions shall constitute
a Default by the Delinquent Member, and the other Members shall have the rights
set forth in Article 11 with respect to such Default.
(b) Each Member grants to the Company, and to each Lending Member with respect
to any loans made by the Lending Member to that Member as a Delinquent Member
pursuant to Section 4.4(a)(ii), ratably, as security for the payment of all
Capital Contributions for which that Member is obligated to make and interest
accrued thereon, and for the payment of all loans and interest accrued thereon
made by Lending Members to that Member as a Delinquent Member pursuant to
Section 4.4(a)(ii), a security interest in and a general lien on its Membership
Interest and the proceeds thereof, all under the Uniform Commercial Code of the
State of Texas. On any default in the payment of a Capital Contribution or in
the payment of such a loan or interest accrued on it, the Company or the Lending
Member, as applicable, is entitled to all the rights and remedies of a secured
party under the Uniform Commercial Code of the State of Texas with respect to
the security interest granted in this Section 4.4(b). Each Member shall execute
and deliver to the Company and the other Members all financing statements and
other instruments that the Managers or the Lending Member, as applicable, may
reasonably request to effectuate and carry out the preceding provisions of this
Section 4.4(b). At the option of the Managers or a Lending Member, these
Regulations or a photocopy hereof may serve as a financing statement.
4.5 Return of Contributions. A Member is not entitled to the return of any part
of its Capital Contributions or to be paid interest in respect of either its
capital account or its Capital Contributions. An unrepaid Capital Contribution
is not a liability of the Company or of any Member. A Member is not required to
contribute or to lend any cash or property to the Company to enable the Company
to return any Member's Capital Contributions.
4.6 Advances by Members. If the Company does not have sufficient cash to pay its
obligations, any Member(s) that may agree to do so with the Managers' consent
may advance all or part of the needed funds to or on behalf of the Company. An
advance described in this Section 4.6 constitutes a loan from the Member to the
Company, bears interest at the Prime Rate from the date of the advance until the
date of payment, and is not a Capital Contribution.
4.7 Capital Accounts. A capital account shall be established and maintained for
each Member. Each Member's capital account (a) shall be increased by (i) the
amount of money contributed by that Member to the Company, (ii) the fair market
value of property contributed by that Member to the Company (net of liabilities
secured by the contributed property that the Company is considered to assume or
take subject to under section 752 of the Code), and (iii) allocations to that
Member of Company income and gain (or items thereof), including income and gain
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exempt from tax and income and gain described in Treas. Reg. ss.1.704-1
(b)(2)(iv)(g), but excluding income and gain described in Treas. Reg. ss.1.704-1
(b)(4)(i), and (b) shall be decreased by (i) the amount of money distributed to
that Member by the Company, (ii) the fair market value of property distributed
to that Member by that Company (net of liabilities secured by the distributed
property that the Member is considered to assume or take subject to under
section 752 of the Code), (iii) allocations to that Member of expenditures of
the Company described in section 705(a)(2)(B) of the Code, and (iv) allocations
of Company loss and deduction (or items thereof), including loss and deduction
described in Treas. Reg. ss.1.704-1 (b)(2)(iv)(g), but excluding items described
in clause (b)(iii) above and loss or deduction described in Treas. Reg.
ss.1.704-1 (b)(4)(i) or ss.1.704-1 (b)(4)(iii). The Members' capital accounts
also shall be maintained and adjusted as permitted by the provisions of Treas.
Reg. ss.1.704-1 (b)(2)(iv)(f) and as required by the other provisions of Treas.
Reg. ss.~1 .704-I (b)(2)(iv) and 1.704-1 (b)(4), including adjustments to
reflect the allocations to the Members of depreciation, depletion, amortization,
and gain or loss as computed for book purposes rather than the allocation of the
corresponding items as computed for tax purposes, as required by Treas. Reg.
ss.1.704-1 (b)(2)(iv)(g). A Member that has more than one Membership Interest
shall have a single capital account that reflects all its Membership Interests,
regardless of the class of Membership Interests owned by that Member and
regardless of the time or manner in which those Membership Interests were
acquired. On the transfer of all or part of a Membership Interest, the capital
account of the transferor that is attributable to the transferred Membership
Interest or part thereof shall carry over to the transferee Member in accordance
with the provisions of Treas. Reg. ss.1.704-1 (b)(2)(iv)(I).
ARTICLE 5. ALLOCATIONS AND DISTRIBUTIONS
5.1 Allocations. (a) Except as may be required by section 704(c) of the Code and
Treas. Reg. ss.1.704-1 (b) (2) (iv) (f) (4), all items of income, gain, loss,
deduction, and credit of the Company shall be allocated among the Members in
accordance with their Sharing Ratios.
(b) All items of income, gain, loss, deduction, and credit allocable to any
Membership Interest that may have been transferred shall be allocated between
the transferor and the transferee based on the portion of the calendar year
during which each was recognized as owning that Membership Interest, without
regarding to the results of Company operations during any particular portion of
that calendar year and without regarding to whether cash distributions were made
to the transferor or the transferee during that calendar year; provided,
however, that this allocation must be made in accordance with a method
permissible under section 706 of the Code and the regulations thereunder.
5.2 Distributions. (a) Distributions shall be made to the Members as described
in Exhibit D hereof.
(b) From time to time the Managers also may cause property of the Company other
than cash to be distributed to the Members, which distribution must be made in
accordance with the Members Sharing Ratios and may be made subject to existing
liabilities and obligations. Immediately prior to such a distribution, the
capital accounts of the Members shall be adjusted as provided in Treas. Reg.
ss.1.704-1 (b) (2) (iv) (t).
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ARTICLE 6. MANAGERS
6.1 Management by Managers. (a) Except for situations in which the approval of
the Members is required by these Regulations or by nonwaivable provisions of
applicable law, and subject to the provisions of Section 6.2, (i) the powers of
the Company shall be exercised by or under the authority of, and the business
and affairs of the Company shall be managed under the direction of, the
Managers, consisting of representatives of the Members; and (ii) the Managers
may make all decisions and take all actions for the Company not otherwise
provided for in these Regulations. No Member (other than a Member who is acting
in such Member's capacity as a Manager or an officer) has the authority or power
to act for or on behalf of the Company, to do any act that would be binding on
the Company, or to incur any expenditures on behalf of the Company.
(b) Notwithstanding the provisions of Section 6.1(a), the Managers may not cause
the Company to do any of the following without complying with the applicable
requirements set forth below:
(i) sell, lease, exchange, or otherwise dispose of (other than by way of a
pledge, mortgage, deed of trust, or trust indenture) all or substantially all of
the Company's property and assets (with or without good will), other than in the
usual and regular course of the Company's business, without complying with the
applicable procedures set forth in the Act and the TBCA, including, without
limitation, the requirement in Article 5.10 of the TBCA regarding approval by
the Members (unless such provision is rendered inapplicable by another provision
of applicable law);
(ii) be a party to (i) a merger, or (ii) an exchange or acquisition of the type
described in Article 5.02 of the TBCA, without complying with the applicable
procedures set forth in the Act and the TBCA, including, without limitation, the
requirement in Article 5.03 of the TBCA regarding approval by the Members
(unless such provision is rendered inapplicable by another provision of
applicable law); and
(iii) amend or restate the Articles, without complying with the applicable
procedures set forth in the Act and the TBCA, including, without limitation, the
requirement in Article 4.02 of the TBCA regarding approval by the Members
(unless such provision is rendered inapplicable by another provision of
applicable law).
6.2 Actions by Managers; Committees; Delegation of Authority and Duties. (a) In
managing the business and affairs of the Company and exercising its powers, the
Managers shall act (i) collectively through meetings and written consents
pursuant to Sections 6.4 and 6.6; (ii) through committees pursuant to Section
6.2(b); and (iii) through Managers to whom authority and duties have been
delegated pursuant to Section 6.2(c).
(b) The Managers may, from time to time, designate one or more committees, each
of which shall be comprised of one or more Managers. Any such committee, to the
extent provided in a resolution designating such committee or in the Articles or
these Regulations, shall have and may exercise all of the authority of the
Managers, subject to the limitations set forth in the Act and the TBCA. At every
meeting of any such committee, the presence of a majority of the members of such
committee shall constitute a quorum, and the affirmative vote of a majority of
the members of such committee present shall be necessary for the adoption of any
resolution. The Managers may dissolve any committee at any time, unless
otherwise provided in the Articles or these Regulations.
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(c) The Managers may, from time to time, delegate to one or more Managers such
authority and duties as the Managers may deem advisable. In addition, the
Managers may assign titles (including, without limitation, president, vice
president, secretary, assistant secretary, treasurer and assistant treasurer) to
any such Manager. Unless the Managers decide otherwise, if the title is one
commonly used for officers of a business corporation formed under the TBCA, the
assignment of such title shall constitute the delegation to such Manager of the
authority and duties that are normally associated with that office, subject to
any specific delegation of authority and duties made pursuant to the first
sentence of this Section 6.2(c). Any number of titles may be held by the same
Manager. Any delegation pursuant to this Section 6.2(c) may be revoked at any
time by the Managers.
(d) Any Person dealing with the Company, other than a Member, may rely on the
authority of any Manager or officer in taking any action in the name of the
Company without inquiry into the provisions of these Regulations or compliance
herewith, regardless of whether that action actually is taken in accordance with
the provisions of these Regulations.
6.3 Designation of Managers. The Company shall have three (3) Managers. The
Majority In Interest shall have the right to designate two Managers. The
remaining Member shall have the right to designate one Manager. Each Manager
shall hold office until such Manager's successor shall have been designated by
the Member with authority to designate such Manager, or until his death,
resignation, or removal. Unless otherwise provided in the Articles, Managers
need not be Members or residents of the State of Texas. At any time and from
time to time, the Member which has authority to designate a Manager may remove
such Manager and name another Person to serve in his stead.
6.4 Meetings. (a) Unless otherwise required by law or provided in the Articles
or these Regulations, a majority of the total number of Managers fixed by, or in
the manner provided in, the Articles or these Regulations shall constitute a
quorum for the transaction of business of the Managers, and the act of a
majority of the Managers present at a meeting at which a quorum is present shall
be the act of the Managers. A Manager who is present at a meeting of the
Managers at which action on any Company matter is taken shall be presumed to
have assented to the action unless his dissent shall be entered in the minutes
of the meeting or unless he shall file his written dissent to such action with
the Person acting as secretary of the meeting before the adjournment thereof or
shall deliver such dissent to the Company immediately after the adjournment of
the meeting. Such right to dissent shall not apply to a Manager who voted in
favor of such action.
(b) Meetings of the Managers may be held at such place or places as shall be
determined from time to time by resolution of the Managers. At all meetings of
the Managers, business shall be transacted in such order as shall from time to
time be determined by resolution of the Managers. Attendance of a Manager at a
meeting shall constitute a waiver of notice of such meeting, except where a
manager attends a meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
(c) In connection with any annual meeting of Members at which Managers were
designated, the Managers may, if a quorum is present, hold its first meeting for
the transaction of business immediately after and at the same place as such
annual meeting of the Members. Notice of such meeting at such time and place
shall be required to all Members.
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(d) Regular meetings of the Managers shall be held at such times and places as
shall be designated from time to time by resolution of the Managers. Notice of
such regular meetings shall be required to each Manager.
(e) Special meetings of the Managers may be called by any Manager on at least 24
hours notice to each other Manager. Such notice need not state the purpose or
purposes of, nor the business to be transacted at, such meeting, except as may
otherwise be required by law or provided for by the Articles or these
Regulations.
6.5 Approval or Ratification of Acts or Contracts by Members. The Managers in
their discretion may submit any act or contract for approval or ratification at
any annual meeting of the Members, or at any special meeting of the Members
called for the purpose of considering any such act or contract, and any act or
contract that shall be approved or be ratified by a Majority in Interest shall
be as valid and as binding upon the Company and upon all the Members as if it
shall have been approved or ratified by every Member of the Company.
6.6 Action by Written Consent or Telephone Conference. Any action permitted or
required by the Act, the TBCA, the Articles, or these Regulations to be taken at
a meeting of the Managers or any committee designated by the Managers may be
taken without a meeting if a consent in writing, setting forth the action to be
taken, is signed by all the Managers or members of such committee, as the case
may be. Such consent shall have the same force and effect as a unanimous vote at
a meeting and may be stated as such in any document or instrument filed with the
Secretary of State of Texas, and the execution of such consent shall constitute
attendance or presence in person at a meeting of the Managers or any such
committee, as the case may be. Subject to the requirements of the Act, the TBCA,
the Articles, or these Regulations for notice of meetings, unless otherwise
restricted by the Articles, Managers, or members of any committee designated by
the Managers, may participate in and hold a meeting of the Managers or any
committee of Managers, as the case may be, by means of a conference telephone or
similar communications equipment by means of which all Persons participating in
the meeting can hear each other, and participation in such meeting shall
constitute attendance and presence in person at such meeting, except where a
Person participates in the meeting for the express purpose of objecting to the
transaction of any business on the ground that the meeting is not lawfully
called or convened.
6.7 Conflicts of Interest. Subject to the other express provisions of these
Regulations, each Manager, Member, and officer of the Company at any time and
from time to time may engage in and possess interests in other business ventures
of any and every type and description, independently, or with others, including
ones in competition with the Company, with no obligation to offer to the Company
or any other Member, Manager, or officer the right to participate therein except
business ventures which conduct or will conduct any business activity in Madison
County or Hardin County, Texas. The Company may transact business with any
Manager, Member, officer, or Affiliate thereof, provided the terms of those
transactions are no less favorable than those the Company could obtain from
unrelated third parties.
6.8 Officers. (a) The Managers may, from time to time, designate one or more
Persons to be officers of the Company. No officer need be a resident of the
State of Texas, a Member or a Manager. Any officers so designated shall have
such authority and perform such duties as the Managers may, from time to time,
delegate to them. The Managers may assign titles to particular officers. Unless
17
the Managers decide otherwise, if the title is one commonly used for officers of
a business corporation formed under the TBCA, the assignment of such title shall
constitute the delegation to such officer of the authority and duties that are
normally associated with that office, subject to (i) any specific delegation of
authority and duties made to such officer by the Managers pursuant to the third
sentence of this Section 6.8(a), or (ii) any delegation of authority and duties
made to one or more Managers pursuant to Section 6.2. Each officer shall hold
office until his successor shall be duly designated and shall qualify or until
his death or until he shall resign or shall have been removed in the manner
hereinafter provided. Any number of offices may be held by the same Person. The
salaries or other compensation, if any, of the officers and agents of the
Company shall be fixed from time to time by the Managers.
(b) Any officer may resign as such at any time. Such resignation shall be made
in writing and shall take effect at the time specified therein, or if no time be
specified, at the time of its receipt by the Managers. The acceptance of a
resignation shall not be necessary to make it effective, unless expressly so
provided in the resignation. Any officer may be removed as such, either with or
without cause, by the Managers; provided, however, that such removal shall be
without prejudice to the contract rights, if any, of the Person so removed.
Designation of an officer shall not of itself create contract rights. Any
vacancy occurring in any office of the Company may be filled by the Managers.
ARTICLE 7. MEETINGS OF MEMBERS
7.1 Meetings. (a) A quorum shall be present at a meeting of Members when all of
the Members are represented at the meeting either in person or by proxy. With
respect to any matter, other than a matter for which the affirmative vote of the
holders of a specified portion of the Sharing Ratios of all Members entitled to
vote is required by the Act, the affirmative vote of a Majority in Interest at a
meeting of Members at which a quorum is present shall be the act of the Members.
(b) All meetings of the Members shall be held at the principal place of business
of the Company or at such other place within or without the State of Texas as
shall be specified or fixed in the notices or waivers of notice thereof;
provided that any or all Members may participate in any such meeting by means of
conference telephone or similar communications equipment pursuant to Section
7.5.
(c) Notwithstanding the other provisions of the Articles or these Regulations,
the chairman of the meeting or the holders of a Majority in Interest shall have
the power to adjourn such meeting from time to time, without any notice other
than announcement at the meeting of the time and place of the holding of the
adjourned meeting. If such meeting is adjourned by the Members, such time and
place shall be determined by a vote of the holders of a Majority in Interest.
Upon the resumption of such adjourned meeting, any business may be transacted
that might have been transacted at the meeting as originally called.
(d) An annual meeting of the Members for the transaction of such other business
as may properly come before the meeting, shall be held at such place, within or
without the State of Texas, on such date and at such time as the Managers shall
fix and set forth in the notice of the meeting, which date shall be within 13
months subsequent to the date of organization of the Company or the last annual
meeting of Members, whichever most recently occurred.
18
(e) Special meetings of the Members for any proper purpose or purposes may be
called at any time by the Managers or the holders of at least ten percent of the
Sharing Ratios of all Members. If not otherwise stated in or fixed in accordance
with the remaining provisions hereof, the record date for determining Members
entitled to call a special meeting is the date any Member first signs the notice
of that meeting. Only business within the purpose or purposes described in the
notice (or waiver thereof) required by these Regulations may be conducted at a
special meeting of the Members.
(f) Written or printed notice stating the place, day, and hour of the meeting
and, in the case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten (10) nor more than sixty
(60) days before the date of the meeting, by or at the direction of the Managers
or Person calling the meeting, to each Member entitled to vote at such meeting.
Notice of meetings shall be made according to the provisions of Article 12.2
hereof.
(g) The date on which notice of a meeting of Members is mailed or the date on
which the resolution of the Managers declaring a distribution is adopted, as the
case may be, shall be the record date for the determination of the Members
entitled to notice of or to vote at such meeting, including any adjournment
thereof, or the Members entitled to receive such distribution.
(h) The right of Members to cumulative voting on any matter to come before the
Members is expressly prohibited.
7.2 Voting List. The Managers shall make, at least ten (10) days before each
meeting of Members, a complete list of the Members entitled to vote at such
meeting or any adjournment thereof, arranged in alphabetical order, with the
address of and the Sharing Ratios held by each, which list, for a period of ten
(10) days prior to such meeting, shall be kept on file at the registered office
or principal place of business of the Company and shall be subject to inspection
by any Member at any time during usual business hours. Such list shall also be
produced and kept open at the time and place of the meeting and shall be subject
to the inspection of any Member during the whole time of the meeting. The
original membership records shall be prima-facie evidence as to who are the
Members entitled to examine such list or transfer records or to vote at any
meeting of Members. Failure to comply with the requirements of this Section
shall not affect the validity of any action taken at the meeting.
7.3 Proxies. A Member may vote either in person or by proxy executed in writing
by the Member. A telegram, telex, cablegram, or similar transmission by the
Member, or a photographic, facsimile, or similar reproduction of a writing
executed by the Member shall be treated as an execution in writing for purposes
of this Section. Proxies may be used at any meeting of Members or in connection
with the taking of any action by written consent, as the case may be. All
proxies shall be received and taken charge of and all ballots shall be received
and canvassed by the Managers, who shall decide all questions touching upon the
qualification of voters, the validity of the proxies, and the acceptance or
rejection of votes, unless an inspector or inspectors shall have been appointed
by the chairman of the meeting, in which event such inspector or inspectors
shall decide all such questions. No proxy shall be valid after eleven (11)
months from the date of its execution unless otherwise provided in the proxy. A
proxy shall be revocable unless the proxy form conspicuously states that the
proxy is irrevocable and the proxy is coupled with an interest. Should a proxy
designate two or more Persons to act as proxies, unless that instrument shall
provide to the contrary, a majority of such Persons present at any meeting at
19
which their powers thereunder are to be exercised shall have and may exercise
all the powers of voting or giving consents thereby conferred, or if only one be
present, then such powers may be exercised by that one; or, if an even number
attend and a majority do not agree on any particular issue, the Company shall
not be required to recognize such proxy with respect to such issue if such proxy
does not specify how the Sharing Ratios that are the subject of such proxy are
to be voted with respect to such issue.
7.4 Conduct of Meetings. All Meetings of the Members shall be presided over by
the chairman of the meeting, who shall be a Manager (or representative thereof)
designated by a majority of the Managers. The chairman of any meeting of Members
shall determine the order of business and the procedure at the meeting,
including such regulation of the manner of voting and the conduct of discussion
as seem to him in order.
7.5 Action by Written Consent or Telephone Conference. (a) Any action required
or permitted to be taken at any annual or special meeting of Members may be
taken without a meeting, without prior notice, and without a vote, if a consent
or consents in writing, setting forth the action so taken shall be signed by the
holder or holders of not less than the minimum Sharing Ratios that would be
necessary to take such action at a meeting at which the holders of all Sharing
Ratios entitled to vote on the action were present and voted. A telegram, telex,
cablegram or similar transmission by a Member, or a photographic, photostatic,
facsimile or similar reproduction of a writing signed by a Member, shall be
regarded as signed by the Member for purposes of this Section. Prompt notice of
the taking of any action by Members without a meeting by less than unanimous
written consent shall be given to those Members who did not consent in writing
to the action.
(b) The record date for determining Members entitled to consent to action in
writing without a meeting shall be the first date on which a signed written
consent setting forth the action taken or proposed to be taken is delivered to
the Company by delivery to its registered office, its principal place of
business, or the Managers. Delivery shall be by hand or by certified or
registered mail, return receipt requested. Delivery to the Company's principal
place of business shall be addressed to the Managers or, if one is designated,
the president of the Company.
(c) If any action by Members is taken by written consent, any articles or
documents filed with the Secretary of State of Texas as a result of the taking
of the action shall state, in lieu of any statement required by the Act or the
TBCA concerning any vote of Members, that written consent has been given in
accordance with the provisions of the Act and the TBCA and that any written
notice required by the Act and the TBCA has been given.
(d) Members may participate in and hold a meeting by means of conference
telephone or similar communications equipment by means of which all Persons
participating in the meeting can hear each other, and participation in such
meeting shall constitute attendance and presence in person at such meeting,
except where a Person participates in the meeting for the express purpose of
objecting to the transaction of any business on the ground that the meeting is
not lawfully called or convened.
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ARTICLE 8. INDEMNIFICATION
8.1 Right to Indemnification. Subject to the limitations and conditions provided
in this Article 8, each Person who was or is made a party or is threatened to be
made a party to or is involved in any threatened, pending or completed action,
suit or proceeding, whether civil, criminal, administrative, arbitrative, or
investigative (hereinafter a "Proceeding"), or any appeal in such a Proceeding
or any inquiry or investigation that could lead to such a Proceeding, by reason
of the fact that he or she, or a Person of whom he or she is the legal
representative, is or was a Manager of the Company or while a Manager of the
Company is or was serving at the request of the Company as a Manager, director,
officer, partner, venturer, proprietor, trustee, employee, agent, or similar
functionary of another foreign or domestic limited liability company,
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise shall be indemnified by the Company to the
fullest extent permitted by the Act and the TBCA, as the same exist or may
hereafter be amended (but, in the case of any such amendment, only to the extent
that such amendment permits the Company to provide broader indemnification
rights than said law permitted the Company to provide prior to such amendment)
against judgments, penalties (including excise and similar taxes and punitive
damages), fines, settlements and reasonable expenses (including, without
limitation, attorneys' fees) actually incurred by such Person in connection with
such Proceeding, and indemnification under this Article 8 shall continue as to a
Person who has ceased to serve in the capacity which initially entitled such
Person to indemnity hereunder. The rights granted pursuant to this Article 8
shall be deemed contract rights, and no amendment, modification, or repeal of
this Article 8 shall have the effect of limiting or denying any such rights with
respect to actions taken or Proceedings arising prior to any such amendment,
modification or repeal. It is expressly acknowledged that the indemnification
provided in this Article 8 could involve indemnification for negligence or under
theories of strict liability.
8.2 Advance Payment. The right to indemnification conferred in this Article 8
shall include the right to be paid or reimbursed by the Company the reasonable
expenses incurred by a Person of the type entitled to be indemnified under
Section 8.1 who was, is or is threatened to be made a named defendant or
respondent in a Proceeding in advance of the final disposition of the Proceeding
and without any determination as to the Person's ultimate entitlement to
indemnification; provided, however, that the payment of such expenses incurred
by any such Person in advance of the final disposition of a Proceeding, shall be
made only upon delivery to the Company of a written affirmation by such Manager
of his or her good faith belief that he has met the standard of conduct
necessary for indemnification under this Article 8 and a written undertaking, by
or on behalf of such Person, to repay all amounts so advanced if it shall
ultimately be determined that such indemnified Person is not entitled to be
indemnified under this Article 8 or otherwise.
8.3 Indemnification of Officers, Employees, and Agents. The Company, by adoption
of resolution of the Managers, may indemnify and advance expenses to an officer,
employee, or agent of the Company to the same extent and subject to the same
conditions under which it may indemnify and advance expenses to Managers under
this Article 8; and, the Company may indemnify and advance expenses to persons
who are not or were not Managers, officers, employees, or agents of the Company
but who are or were serving at the request of the Company as a Manager,
director, officer, partner, venturer, proprietor, trustee, employee, agent, or
similar functionary of another foreign or domestic limited liability company,
corporation, partnership, joint venture, sole proprietorship, trust, employee
benefit plan, or other enterprise against any liability asserted against him and
incurred by him in such a capacity or arising out of his status as such a Person
to the same extent that it may indemnify and advance expenses to Managers under
this Article 8.
21
8.4 Appearance as a Witness. Notwithstanding any other provision of this Article
8, the Company may pay or reimburse expenses incurred by a Manager in connection
with his appearance as a witness or other participation in a Proceeding at a
time when he is not a named defendant or respondent in the Proceeding.
8.5 Nonexclusivity of Rights. The right to indemnification and the advancement
and payment of expenses conferred in this Article 8 shall not be exclusive of
any other right which a Manager or other Person indemnified pursuant to Section
8.3 may have or hereafter acquire under any law (common or statutory), provision
of the Articles or these Regulations, agreement, vote of members or
disinterested Managers, or otherwise.
8.6 Insurance. The Company may purchase and maintain insurance, at its expense,
to protect itself and any Person who is or was serving as a Manager, officer,
employee, or agent of the Company or is or was serving at the request of the
Company as a Manager, director, officer, partner, venturer, proprietor, trustee,
employee, agent, or similar functionary of another foreign or domestic limited
liability company, corporation, partnership, joint venture, sole proprietorship,
trust, employee benefit plan, or other enterprise against any expense, liability
or loss, whether or not the Company would have the power to indemnify such
Person against such expense, liability or loss under this Article 8.
8.7 Member Notification. To the extent required by law, any indemnification of
or advance of expenses to a Manager in accordance with this Article 8 shall be
reported in writing to the Members with or before the notice or waiver of notice
of the next Members' meeting or with or before the next submission to Members of
a consent to action without a meeting and, in any case, within the twelve (12)
month period immediately following the date of the indemnification or advance.
8.8 Savings Clause. If this Article 8 or any portion hereof shall be invalidated
on any ground by any court of competent jurisdiction, then the Company shall
nevertheless indemnify and hold harmless each Manager or any other Person
indemnified pursuant to this Article 8 as to costs, charges, and expenses
(including attorneys' fees), judgments, fines, and amounts paid in settlement
with respect to any action, suit, or proceeding, whether civil, criminal,
administrative, or investigative to the full extent permitted by any applicable
portion of this Article 8 that shall not have been invalidated and to the
fullest extent permitted by applicable law.
ARTICLE 9. TAXES
9.1 Tax Returns. The Managers shall cause to be prepared and filed all necessary
federal and state income tax returns for the Company, including making the
elections described in Section 9.2. Each Member shall furnish to the Managers
all pertinent information in its possession relating to Company operations that
is necessary to enable the Company's income tax returns to be prepared and
filed.
9.2 Tax Elections. The Company shall make the following elections on the
appropriate tax returns:
22
(a) to adopt the calendar year as the Company's fiscal year;
(b) to adopt the method of accounting as the Managers may determine from time to
time;
(c) if a distribution of Company property as described in section 734 of the
Code occurs or if a transfer of a Membership Interest as described in section
743 of the Code occurs, on written request of any Member, to elect, pursuant to
section 754 of the Code, to adjust the basis of Company properties;
(d) to elect to amortize the organizational expenses of the company and the
startup expenditures of the Company under Section 195 of the Code ratably over a
period of 60 months as permitted by section 709(b) of the Code; and
(e) any other election the Managers may deem appropriate and in the best
interests of the Members.
Neither the Company nor any Manager or Member may make an election for the
Company to be excluded from the application of the provisions of subchapter K of
chapter 1 of subtitle A of the Code or any similar provisions of applicable
state law, and no provision of these Regulations (including, without limitation,
Section 2.7) shall be construed to sanction or approve such an election.
9.3 "Tax Matters Partner." A majority of the Managers who are Members shall
designate one Manager that is a Member to be the "tax matters partner" of the
Company pursuant to section 6231 (a) (7) of the Code; or, if there is no Manager
that is a Member, the "tax matters partner" shall be a Member that is designated
as such by a Majority in Interest. Any Member who is designated "tax matters
partner" shall take such action as may be necessary to cause each other Member
to become a "notice partner" within the meaning of section 6223 of the Code. Any
Member who is designated "tax matters partner" shall inform each other Member of
all significant matters that may come to its attention in its capacity as "tax
matters partner" by giving notice thereof on or before the fifth Business Day
after becoming aware thereof and, within that time, shall forward to each other
Member copies of all significant written communications it may receive in that
capacity. Any Member who is designated "tax matters partner" may not take any
action contemplated by sections 6222 through 6232 of the Code without the
consent of a Majority in Interest, but this sentence does not authorize such
Manager (or any other Manager) to take any action left to the determination of
an individual Member under sections 6222 and 6232 of the Code.
ARTICLE 10. BOOKS, RECORDS, REPORTS, AND BANK ACCOUNTS
10.1 Maintenance of Books. The Company shall keep books and records of accounts
and shall keep minutes of the proceedings of its Members, its Managers and each
committee of the Managers. The books of account for the Company shall be
maintained in accordance with Section 9.2 of these Regulations, except that the
capital accounts of the Members shall be maintained in accordance with Section
4.7.
23
10.2 Reports. On or before the 120th day following the end of each fiscal year
during the term of the Company, the Managers shall cause each Member to be
furnished with a balance sheet, an income statement, and a statement of changes
in Members' capital of the Company for, or as of the end of, that year, which
need not be audited. These financial statements must be prepared in accordance
with United States generally accepted accounting principles (except as therein
noted). The Managers also may cause to be prepared or delivered such other
reports as they may deem appropriate. The Company shall bear the costs of all
reports.
10.3 Accounts. The Managers will maintain a bank account for the Company
designated as the Distribution Account. The Distribution Account will consist of
deposits made for cash capital contributions to the Company and receipts of all
revenue of the Company. Distributions shall be made from the Distribution
Account only in accordance with the provisions of Exhibit D hereof, except upon
the written approval of a Majority in Interest. In addition to the Distribution
Account, the Managers may establish and maintain one or more separate bank and
investment accounts and arrangements for Company funds in the Company name with
financial institution and firms that the Managers determine. The Managers may
not commingle the company's funds with the funds of any Member.
ARTICLE 11. DISSOLUTION, LIQUIDATION, AND TERMINATION
11.1 Dissolution. The Company shall dissolve and its affairs shall be wound up
on the first to occur of the following (each a "Dissolution Event'):
(a) the written consent of a Supermajority Interest.
(b) the Bankruptcy or death of any Manager who is a Member (or, if there is no
Manager who is a Member, any Member), or in the case of a Member which is not an
individual, the dissolution or other termination of existence thereof; provided,
however, that if the event described in this Section 11.1(b) shall occur and
there shall be at least one other Member remaining, the Company shall not be
dissolved, and the business of the Company shall be continued, if a Majority in
Interest of the remaining Members so agree ("Continuation Election").
(c) entry of a decree of judicial dissolution of the Company under article 6.02
of the Act.
11.2 Liquidation and Termination. On dissolution of the Company, the Managers
shall act as liquidators or may appoint one or more Members as liquidator. The
liquidator shall proceed diligently to wind up the affairs of the Company and
make final distributions as provided herein and in the Act. The costs of
liquidation shall be borne as a Company expense. Until final distribution, the
liquidator shall continue to operate the Company properties with all of the
power and authority of the Managers. The steps to be accomplished by the
liquidator are as follows:
(a) as promptly as possible after dissolution and again after final liquidation,
the liquidator shall cause a proper accounting to be made of the Company's
assets, liabilities, and operations through the last day of the calendar month
in which the dissolution occurs or the final liquidation is complete, as
applicable;
24
(b) the liquidator shall cause the notice described in article 6.05(A)(2) of
the Act to be mailed to each known creditor of and claimant against the Company
in the manner described in such article 6.05(A)(2);
(c) the liquidator shall pay, satisfy, or discharge from Company funds all of
the debts, liabilities, and obligations of the Company (including, without
limitation, all expenses incurred in liquidation and any advances described in
Section 4.6) or otherwise make adequate provision for payment and discharge
thereof (including, without limitation, the establishment of a cash escrow fund
for contingent liabilities in such amount and for such term as the liquidator
may reasonably determine); and
(d) all remaining assets of the Company shall be distributed to the Members as
follows:
(i) the liquidator may sell any or all Company property, including to
Members, and any resulting gain or loss from each sale shall be computed and
allocated to the capital accounts of the Members;
(ii) with respect to all Company property that has not been sold, the fair
market value of that property shall be determined and the capital accounts of
the Members shall be adjusted to reflect the manner in which the unrealized
income, gain, loss, and deduction inherent in property that has not been
reflected in the capital accounts previously would be allocated among the
Members if there were a taxable disposition of that property for the fair market
value of that property on the date of distribution; and
(iii) Company property shall be distributed among the Members in accordance
with the positive capital account balances of the Members, as determined after
taking into account all capital account adjustments for the taxable year of the
Company during which the liquidation of the Company occurs (other than those
made by reason of this clause 11.2(d)(iii)) and those distributions shall be
made by the end of the taxable year of the Company during which the liquidation
of the Company occurs (or, if later, ninety (90) days after the date of the
liquidation).
All distributions in kind to the Members shall be made subject to the liability
of each distributee for costs, expenses, and liabilities theretofore incurred or
for which the Company has committed prior to the date of termination and those
costs, expenses, and liabilities shall be allocated to the distributee pursuant
to this Section 11.2. The distribution of cash and/or property to a Member in
accordance with the provisions of this Section 11.2 constitutes a complete
return to the Member of its Capital Contributions and a complete distribution to
the Member of its Membership Interest and all the Company's property and
constitutes a compromise to which all Members have consented. To the extent that
a Member returns funds to the Company, it has no claim against any other Member
for those funds.
11.3 Deficit Capital Accounts. Notwithstanding anything to the contrary
contained in these Regulations, and notwithstanding any custom or rule of law to
the contrary, to the extent that the deficit, if any, in the capital account of
any Member results from or is attributable to deductions and losses of the
Company (including non-cash items such as depreciation), or distributions of
money pursuant to these Regulations to all Members in proportion to their
respective Sharing Ratios, upon dissolution of the Company such deficit shall
not be an asset of the Company and such Members shall not be obligated to
contribute such amount to the Company and such members shall not be obligated to
contribute such amount to the Company to bring the balance of such member's
capital account to zero.
25
11.4 Articles of Dissolution. On completion of the distribution of Company
assets as provided herein, the Company is terminated, and the Managers (or such
other Person or Persons as the Act may require or permit) shall file Articles of
Dissolution with the Secretary of State of Texas, cancel any other filings made
pursuant to Section 2.5, and take such other actions as may be necessary to
terminate the Company.
ARTICLE 12. GENERAL PROVISIONS
12.1 Offset. Whenever the Company is to pay any sum to any Member, any amounts
that Member owes the Company shall be deducted from that sum before payment. If
a Member has breached any of the representations, warranties or covenants made
herein by such Member (the "Breaching Member"), including without limitation
those representations, warranties and covenants made in Exhibit B-1 as to the
status of title to the assets conveyed to the Company by GulfWest, then the
amount by which payments to the Breaching Member shall be offset shall include
all losses, including lost profits, costs, damages, expenses, claims, and
liabilities, including reasonable attorneys' fees, which are attributable to
such breach. If the breach relates to a deficiency in the title to an asset or
an encumbrance on an asset contributed to the Company by the Breaching Member,
then the damage to the Company shall include the greater of (a) the value of the
affected asset as of the time it is contributed to the Company, which value
shall be determined by the Company in its reasonable discretion, or (b) the
value of the affected asset to the Company at the time the breach is discovered,
which value shall be determined by an independent appraiser retained by the
Company. With respect to the asset subject to an encumbrance, the Company,
acting through its Managers, shall have the option to pay the encumbrance and
release the asset from the encumbrance or return the affected asset to the
Breaching Member. The Breaching Member hereby gives the Company full authority
to negotiate with the person or entity claiming the encumbrance against the
affected asset and to resolve the matter of the claimed encumbrance. The
Breaching Member hereby releases and discharges the Company from any liability
whatsoever with respect to discussions, negotiations, and settlements with
respect to the resolution of the claimed encumbrance.
12.2 Notices. Except as expressly set forth to the contrary in these
Regulations, all notices, requests, or consents provided for or permitted to be
given under these Regulations must be in writing and delivered either by hand
delivery or by certified mail, return receipt requested, to each party at the
following address:
If to GulfWest: GulfWest Energy, Inc.
Attention: John E. Loehr
480 N Sam Houston Parkway East
Suite 300
Houston, Texas 77060
With a copy to: GulfWest Energy, Inc.
Attention: Stephen Schoppe
480 N Sam Houston Parkway East
Suite 300
Houston, Texas 77060
26
If to ADAC: Allen Drilling Acquisition Company
Attention: Charles Holtgraves
5799 Broadmoor, Suite 750
Mission, Kansas 66203
With a copy to: Mary Frances vonBerg
Farnsworth & vonBerg, LLP
333 North Sam Houston Parkway E., Suite 300
Houston, Texas 77060
or to such other address as any party may designate by written notice to all
other parties. Each such notice, request and demand shall be deemed given or
made as follows: (a) if sent by hand delivery, upon delivery; (b) if sent by
certified mail, upon receipt. Whenever any notice is required to be given by
law, the Articles, or these Regulations, a written waiver thereof, signed by the
Person entitled to notice, whether before or after the time stated therein,
shall be deemed equivalent to the giving of such notice.
12.3 Entire Agreement. These Regulations constitute the entire agreement of the
Members relating to the Company and supersedes all prior contracts or agreements
with respect to the Company, whether oral or written.
12.4 Effect of Waiver or Consent. A waiver or consent, express or implied, to or
of any breach or default by any person in the performance by that Person of its
obligations with respect to the Company is not a consent or waiver to or of any
other obligations of that Person with respect to the Company. Failure on the
part of a Person to complain of any act of any Person or to declare any person
in default with respect to the Company, irrespective of how long that failure
continues, does not constitute a waiver by that Person of its rights with
respect to that default until the applicable statute-of-limitations period has
run.
12.5 Amendment or Modification. These Regulations may be amended or modified
from time to time (i) by the Managers, if amendments by the Managers is
permitted in the Articles of Organization, or (ii) by a written instrument
adopted by a Majority in Interest; provided, however, that (a) an amendment or
modification reducing a member's Sharing Ratio or increasing its Commitment
(other than to reflect changes otherwise permitted by these Regulations) is
effective only with that Member's consent, (b) an amendment or modification
reducing the required Sharing Ratio or other measure for any consent or vote in
these Regulations is effective only with the consent or vote of Members having
the Sharing Ratio or other measure theretofore required, and (c) amendments of
the type described in Section 3.4 may be adopted as therein provided. If
Managers are given the power to amend the Regulations in the Articles of
Organization, the Members may revoke any power delegated to the managers by this
Article by amending the Regulations to so provide.
12.6 Binding Effect. Subject to the restrictions on Dispositions set forth in
these Regulations, these Regulations are binding on and inure to the benefit of
the Members and their respective heirs, legal representatives, successors, and
assigns.
12.7 Governing Law; Severability. THESE REGULATIONS ARE GOVERNED BY AND SHALL BE
CONSTRUED IN ACCORDANCE WITH THE LAW OF THE STATE OF TEXAS, EXCLUDING ANY
CONFLICT-OF-LAWS RULE OR PRINCIPLE THAT MIGHT REFER THE GOVERNANCE OR THE
27
CONSTRUCTION OF THESE REGULATIONS TO THE LAW OF ANOTHER JURISDICTION. In the
event of a direct conflict between the provisions of these Regulations and (a)
any provision of the Articles, or (b) any mandatory provision of the Act or (to
the extent such statutes are incorporated into the Act) the TBCA or the Texas
Miscellaneous Corporation Laws Act, the application provision of the Articles,
the Act, the TBCA or the Texas Miscellaneous Corporation Laws Act shall control.
If any provision of these Regulations or the application thereof to any Person
or circumstance is held invalid or unenforceable to any extent, the remainder of
these Regulations and the application of that provision to other Persons or
circumstances is not affected thereby and that provision shall be enforced to
the greatest extent permitted by law.
12.8 Further Assurances. In connection with these Regulations and the
transactions contemplated hereby, each Member shall execute and deliver any
additional documents and instruments and perform any additional acts that may be
necessary or appropriate to effectuate and perform the provisions of these
Regulations and those transactions.
12.9 Waiver of Certain Rights. Each Member irrevocably waives any right it may
have to maintain any action for dissolution of the Company or for partition of
the property of the Company.
12.10 Indemnification. To the fullest extent permitted bylaw, each Member shall
indemnify the Company, each Manager and each other Member and hold them harmless
from and against all losses, costs, liabilities, damages, and expenses
(including, without limitation, costs of suit and attorneys' fees) they may
incur on account of any breach by that Member of these Regulations.
12.11 Counterparts. These Regulations may be executed in any number of
counterparts with the same effect as if all signing parties had signed the same
document. All counterparts shall be construed together and constitute the same
instrument.
IN WITNESS WHEREOF, following adoption of these Regulations by the
Managers, the Members have executed these Regulations as of the date first set
forth above.
MEMBERS:
GulfWest Energy Inc.
- ---------------------------
By: John E. Loehr
Title: Chief Executive Officer
Allen Drilling Acquisition Company
- ---------------------------
By: Charles A. Holtgraves
Title: President
28
EXHIBIT A
MEMBERS' SHARING RATIOS
Member Sharing Ratio
------ -------------
GulfWest Energy Inc. 47.5%
- --------------------
480 N Sam Houston Parkway East
Suite 300
Houston, Texas 77060
(281) 820-1919
Allen Drilling Acquisition Company 52.5%
- ----------------------------------
5799 Broadmoor, Suite 750
Mission, Kansas 66203
(913) 535-1072
29
EXHIBIT B
INITIAL CONTRIBUTION OF MEMBERS
ADAC: ADAC agrees to make an initial capital contribution of up to
$595,000.00 pursuant to the schedule described below.
GulfWest: GulfWest agrees to make an initial contribution of the assets
described in Exhibit B-1, attached hereto.
30
EXHIBIT B-1
Initial Contribution by GulfWest Energy Inc.
--------------------------------------------
1. Madisonville (Rodessa) acreage
GulfWest will contribute to the Company the leasehold ownership interest it
holds in the oil, gas and mineral leases covering the following acreage:
1. Mathis Gas Unit #1 well tract: All depths currently owned by GulfWest
will be assigned to the LLC. Oil and gas production from a well
produced by a third party operator holds or maintains GulfWest's
leasehold ownership interest in oil and gas located below the
Subclarksville formation which includes the Lewisville, Georgetown,
Glen Rose, Rodessa and deeper zones. The total acreage contributed
from this tract is approximately 660 acres.
2. Harris Johnson tract: GulfWest will contribute all interest it
currently holds or subsequently acquires below the Georgetown
Formation in this approximate 212 acre tract. GulfWest currently owns
an 11/16ths ownership leasehold interest in the Georgetown and deeper
formations under this tract. The shallow rights held by GulfWest in
this tract from surface through the Georgetown are subject to an
outstanding secured indebtedness and will not be contributed to the
Company.
As consideration for this contribution, GulfWest shall be credited with a
contribution of $316,350.00 to the Member's Capital Account.
2. Saratoga Pipeline System (Hardin Co., Texas)
That certain natural gas pipeline system ("Saratoga Pipeline System") owned
by LTW Pipeline Company, a wholly owned subsidiary of GulfWest, and situated in
the Saratoga Field, Hardin County, Texas between the Batson and Saratoga oil
fields.. The Saratoga Pipeline System consists of various two inch (2") and
three inch (3") pipeline sections and associated right-of-ways. Total length of
the system is approximately 22.5 miles. The majority of the system is currently
deactivated; however, approximately three (3) miles of the system will be
reactivated and tied into interstate pipeline owned and operated by MidCon Gas
Transmission Company located in the Saratoga Field. Setex Oil and Gas Company, a
wholly owned subsidiary of GulfWest will continue as operator of the Saratoga
Pipeline System. As consideration for contributing these assets to the Company,
GulfWest shall be credited with a contribution of $125,000 to the Member's
Capital Account.
3.
4. Land and Geological Maps
For contributing land and geological maps to the LLC, GulfWest shall
receive and fair market credit of $96,985 in the Member's Capital Account.
In addition to the foregoing interests, GulfWest covenants and agrees that
it will convey to the LLC all other leases and leasehold interests it has
acquired in Madison County, Texas, in exchange for which the LLC will pay
GulfWest its cost to acquire such leases and leasehold interests.
31
WARRANTIES AND REPRESENTATIONS
GulfWest represents and warrants to the Company that all assets contributed
by it to the Company and which may be subsequently contributed to the Company
shall be free of any liens or other encumbrances. GulfWest further indemnifies
the Company and ADAC and agrees to hold the Company and ADAC harmless from and
against any and all cost, loss, damage, liability or expense, such parties may
incur, including attorneys' fees, as a result of any breach of this warranty and
representation.
32
EXHIBIT C
USE OF ADAC'S INITIAL CASH CONTRIBUTION 1,2
ADAC's Initial Cash Contribution to the Company will be $595,000.00, and shall
be allocated to the projects in the manner set forth below.
I.
ADAC will contribute up to $315,000 for the Madisonville Field - Rodessa
Formation Project to be used as follows:
Madisonville - Rodessa Project:
Lease Costs
Acreage $100,000
Leasing Costs 65,000
--------
Subtotal 165,000
Unitization and Technical Work:
Legal/Consulting $100,000
Geologic/Mapping 50,000
--------
150,000
--------
Subtotal: $315,000
II.
ADAC will contribute up to $165,000 to be used to reactivate the Saratoga
Pipeline Project to be used as follows:
Pipeline Modification
and Reactivation Expenses $125,000
Prepayment to DutchWest for
the purchase of natural gas to be
used to reactivate the pipeline system 40,000
--------
Subtotal: $165,000
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III.
ADAC will contribute up to $70,000 to be used to establish the Company's
pipeline operations to be used as follows:
Marketing Consultant Costs $ 45,000
(4 to 6 month assignment)
Engineering Consultant Costs $ 25,000
--------
(4 to 6 month assignment)
$ 70,000
Finders Fee $ 45,000
--------
Subtotal: $115,000
- -------------------------------------------
1 Notwithstanding anything herein to contrary, the Majority in Interest shall be
under no obligation to make any part of the Initial Contribution described
herein, nor to make any additional or further contributions which may be called
for under the Regulations if the Majority in Interest, in its sole discretion
deems the project under consideration, or any part of thereof to not be
feasible.
2 Notwithstanding anything herein to the contrary, the Majority in Interest
shall be under no obligation to make any part of the Initial Contribution
described herein, nor to make any additional or further contribution which may
be called for under the Regulations, unless and until all ancillary agreements,
deemed by the Majority in Interest, in its sole discretion, to be necessary to
the success of the project or transaction, have been executed, including without
limitation the Revenue Sharing Agreement and the Operating Agreement.
34
EXHIBIT D
DISTRIBUTIONS TO MEMBERS
Cash Flow will be distributed to the Members on a monthly basis, in
arrears, beginning with the first month following collection of operating
revenue. Cash Flow shall be distributed to the Members based on their sharing
ratios. However, notwithstanding anything to the contrary contained in these
Regulations, until such time as ADAC has recovered from the Cash Flow of the
Company one hundred fifty percent (150%) of the actual cash amount contributed
by ADAC to the Company ("Initial Threshold Recovery"), ADAC shall be and is
guaranteed a minimum distribution on its initial cash contribution to the
Company of $13,125 per calendar month ("ADAC's Minimum Distribution"). Until
such time as ADAC has recovered its Initial Threshold Recovery, for each month
in which the Cash Flow of the Company is $25,000 or less, ADAC's Minimum
Distribution shall be payable to ADAC, and the balance shall be payable to
GulfWest in full satisfaction of any distribution payable to GulfWest for the
given month. If there is insufficient Cash Flow to pay ADAC the sum of $13,125
in any given month, the amount of the deficiency shall be carried forward to the
following month(s) until such deficiency, on a cumulative basis, is paid to
ADAC. In months in which Cash Flow is in excess of $25,000, Cash Flow will be
distributed to the Members based on their sharing ratios, subject to payment
owing to ADAC for ADAC's Minimum Distribution in previous months. At no time
shall the payment to GulfWest of an amount less than its sharing ratio of Cash
Flow entitle GulfWest to recover such deficiency in succeeding months.
"Cash Flow" shall mean collected revenue less operating expenses less
overhead.
35
EXHIBIT E
RESPONSIBILITIES OF OPERATOR
Setex Oil & Gas Company ("Setex"), a wholly-owned subsidiary of GulfWest,
shall be as the designated Operator of the Company's oil and gas assets and
shall serve as such at the will of the Company. Notwithstanding anything in
these Regulations to the contrary, the following terms and conditions will
govern the relationship between the Company and Setex as Operator.
On or before the tenth day of each month, Setex will provide the Company
with a proposed monthly budget for the operation of the Assets for the following
calendar month. The submission of the proposed monthly budget shall be deemed a
request for authorization for expenditure, which shall be subject to the
approval of the Company. If the Company approves expenditures listed in the
proposed monthly budget, the Company shall document its approval of the proposed
expenditures by the signature of two of the three Managers on behalf of the
Company. The Company then shall cause to be transferred to Setex funds
sufficient to pay the expenses so approved. Setex shall be responsible to pay
all expenses approved by the Company.
Setex also shall be responsible for the billing of all revenue and the
collection of all receivables regarding the Company's Assets. Notwithstanding
the foregoing, all revenue of the Company shall be made payable directly and
solely to the Company, shall be delivered by the payee to the Company's
Operating Account located at Harrington Bank, Mission, Kansas, and shall be
deposited to a bank account maintained for the Company by the Managers.
Within forty five (45) days after the end of the each calendar month, Setex
will provide the Company with a monthly accounting of revenue, expenses, and
capital expenditures of the Company for the preceding calendar month.
Setex and the Company shall enter into a separate Operating Agreement
setting forth the duties and responsibilities of Setex regarding its operational
duties and responsibilities regarding the Company's oil and gas assets and its
accounting administrative duties.
36
EXHIBIT B
THE CERTIFICATE OF DESIGNATION, PREFERENCES
AND RIGHTS OF THE SENIOR SERIES B PREFERRED
STOCK, STATED VALUE OF $1,000
OF
ALLEN DRILLING ACQUISITION COMPANY
CERTIFICATE OF DESIGNATION
PREFERENCES AND RIGHTS
of
Senior Series B Preferred Stock, Stated Value of $1,000
of
ALLEN DRILLING ACQUISITION COMPANY
Allen Drilling Acquisition Company., a corporation organized and existing
under the laws of the State of Nebraska (herein referred to as the "Corporation"
or "ADAC"), does hereby CERTIFY:
THAT the Amended Articles of Incorporation fixes the total number of shares
of all classes of capital stock which the Corporation shall have the authority
to issue at twenty thousand (20,000) shares, of which ten thousand (10,000)
shares shall be shares of preferred stock, with a par value of $10.00 per share
("Preferred Stock") and ten thousand (10,000) shares shall be common stock, with
a par value of $10.00 per share ("Common Stock"); and
THAT on April 4, 2003, the Board of Directors adopted resolutions which
provided for and authorized the issuance of 900 shares of Series A Preferred
Stock with a stated value of $1,000 per share, which shares are issued and
outstanding; and
THAT the Amended Articles of Incorporation of the Corporation expressly
grant to the Board of Directors of the Corporation authority to provide for the
issuance of the Preferred Stock in one or more series, with such voting powers,
full or limited, and with such designations, preferences, and relative,
participating, optional or other special rights, and qualifications, limitations
or restrictions thereof, as shall be stated and expressed in the Restated
Certificate of Incorporation or any amendment thereto, or in the resolution or
resolutions providing for the issue of such stock adopted by the Board of
Directors; and
THAT pursuant to the authority conferred upon the Board of Directors by the
Amended Articles of Incorporation of the Corporation, the Board of Directors, by
action duly taken on October 12, 2004, adopted resolutions that provided for a
series of the Preferred Stock as follows:
RESOLVED, that the Corporation is hereby authorized to issue a series of
Preferred Stock of the Corporation (such Preferred Stock being herein
referred to as "Series B Preferred Stock", consisting of Five Hundred
Ninety Five (595) shares with a stated value of $1,000 per share. Such
shares, with a total stated value of $595,000, are authorized to be issued
to shareholders as fully paid consideration for delivery of $595,000 to
ELGIN HOLDINGS, LLC, ("ELGIN") the initial capital contribution as set
forth in EXHIBIT B, "INITIAL CONTRIBUTION OF MEMBERS" of the "REGULATIONS
of ELGIN HOLDINGS, LLC," (the "REGULATIONS"). The voting power,
designation, preference and relative, participating, optional or other
special rights, and qualifications, limitations or restrictions of the
shares are hereby fixed as follows:
1. Designation. The designation of the series of Series B Preferred Stock
shall be Senior Preferred Stock, $1,000, Series B, par value $10.00
per share (hereinafter referred to as the "Series B Preferred Stock")
and the number of shares constituting such series shall be five
hundred ninety five (595). The number of authorized shares of Series B
Preferred Stock may be reduced by further resolution duly adopted by
the Board of Directors of the Corporation and by the filing of a
certificate pursuant to the provisions of the Nebraska Corporation Act
stating that such reduction has been so authorized, but the number of
authorized shares of Series B Preferred Stock shall not be increased.
2. Dividends. So long as any shares of the Series B Preferred Stock will
be outstanding, the holders thereof will be entitled to receive
cumulative preferential dividends as set forth in this Section 2.
a. Dividends on each share of Series B Preferred Stock will accrue
and accumulate at a 10% annual rate from and after the date of
issuance of such Series B Preferred Shares
b. The Series B Preferred Stock shall pay quarterly dividends in
cash commencing fifteen (15) days following the end of the first
calendar quarter that the Corporation shall have received the
first cash distribution from ELGIN as provided for in EXHIBIT D
to the REGULATIONS (the "Dividend Commencement Date"). The
quarterly dividend payments will apply against the accrued and
accumulated unpaid dividends until such time as the dividends
paid from cash distributed to the Corporation from ELGIN equals
the accumulated dividends. Upon payment of all accumulated and
unpaid dividends, the dividend will be accrued and paid quarterly
at the greater of ; (i) the 10% annual rate, or (ii) 80% of the
cash distributions from ELGIN. At such time as accumulated
dividend payments to the holders of the Series B Preferred Stock
equals 150% of the stated value of the Series B Preferred Stock,
the dividend rate will be fixed and dividends accrued and paid
quarterly at the rate of 66.67% of the cash distributions
received from ELGIN.
c. For purposes of this Section 2, the last date of each calendar
month following the Dividend Commencement Date on which any
Series B Preferred Stock will be outstanding will be deemed to be
a "Dividend Due Date." The record date for the payment of
dividends will, unless otherwise altered by the Corporation's
Board of Directors, be the 15th day following the Dividend Due
Date (the "Dividend Payment Date"). The record date for the
payment of dividends on the Series B Preferred Stock shall be 15
days prior to a Dividend Due Date. Each such dividend shall be
paid to the holders of record of shares of Series B Preferred
Stock as they appear on the stock register of the Corporation.
d. Any dividend which is not paid on the Dividend Payment Date shall
be deemed to be "past due" until the dividend is paid or until
the Share of Series B Preferred Stock with respect to which the
dividend became due will no longer be outstanding, whichever is
the earlier to occur. All dividends will be declared only upon
outstanding shares of Series B Preferred Stock and will be
declared pro rata so that in all cases the amount of dividends
declared per share on the outstanding Series B Preferred Stock
shall be the same.
e. So long as any shares of Series B Preferred Stock shall remain
outstanding, the Corporation shall not declare or pay any
dividend, make a distribution, or purchase, acquire, redeem, or
set aside or make monies available for a sinking fund for the
purchase or redemption of, any shares of stock of the Corporation
ranking junior to the Series B Preferred Stock with respect to
the payment of dividends or the distribution of assets on
redemption, liquidation, dissolution or winding up of the
Corporation including Common Stock of the Corporation (the Common
Stock and any other stock being herein referred to as "Junior
Stock"), unless:
i. all dividends in respect of the Series B Preferred Stock for
all past dividend periods have been paid and such dividends
for the current dividend period have been paid or declared
and duly provided for,
ii. the Corporation shall not be in default with respect to any
matters included herein with respect to the Series B
Preferred Stock.
Subject to the foregoing, and not otherwise, dividends
(payable in cash, stock or otherwise) as may be determined
by the Board may be declared and paid on any Junior Stock
from time to time out of any funds legally available, and
the Series B Preferred Stock will not be entitled to
participate in any such dividends, whether payable in cash,
stock or otherwise.
3. Liquidation Preference. In the event of any liquidation, dissolution
or winding up of the Corporation, whether voluntary or involuntary,
the holders of the Series B Preferred Stock then outstanding shall be
entitled to receive a proportionate interest in the Corporation's
Capital Account of ELGIN, subject, however, to the terms and
conditions of the "Regulations of Elgin Holdings, LLC.", before any
payment or declaration and setting apart for payment of any amount
will be made in respect of any shares of any Junior Stock or stock
ranking on parity with the Series B Preferred Stock, with respect to
the payment of dividends or distribution of assets on liquidation,
dissolution or winding up of the Corporation, an amount equal to
$1,000 per share plus all accumulated, past-due and unpaid dividends
(including a prorated monthly dividend from the last Dividend Due Date
to the date of such payment) in respect of any liquidation,
dissolution or winding up of the Corporation.
If upon any liquidation, dissolution or winding up of the Corporation,
whether voluntary or involuntary, the Corporation's Capital Account in
ELGIN to be distributed among the holders of Series B Preferred Stock
shall be insufficient to permit the payment to the holders of the full
preferential amounts aforesaid, then the remaining assets of the
Corporation , shall be distributed ratably among the holders of the
Series B Preferred Stock and any preferred stock ranking on parity
with the Series B Preferred Stock (such parity preferred stock having
a preferential right as to certain assets of the Corporation) based
upon the number of shares of each series of preferred stock held by
each holder.
4. Voting. Except as otherwise expressly provided herein or as required
by law, the holder of each share of Series B Preferred Stock shall not
be entitled to vote.
a. In any case in which the holders of the Series B Preferred Stock
are entitled to vote pursuant to this Section or pursuant to law,
each holder of the Series B Preferred Stock is entitled to one
vote for each share of Series B Preferred Stock held.
b. As long as any shares of the Series B Preferred Stock remain
outstanding, the Corporation will not, without the affirmative
vote at a meeting or the written consent with or without a
meeting of the holders of at least two-thirds of the outstanding
shares of the Series B Preferred Stock, (1) create any class or
classes of stock ranking prior to or on a parity with the Series
B Preferred Stock either as to dividends or upon liquidation, (2)
amend, alter or repeal any of the provisions of the Corporation's
Articles of Organization or Bylaws so as to affect adversely the
preferences, special rights or powers of the Series B Preferred
Stock; provided, however, that the amendment of the provisions of
the Articles of Incorporation so as to authorize or create, or to
increase the authorized amount of, any Junior Stock will not be
deemed to affect adversely the voting powers, rights or
preferences of the holders of the Series B Preferred Stock, (3)
issue any additional shares of the Series B Preferred Stock, (4)
consolidate or merge with or into any other corporation, (5)
liquidate, wind up or dissolve itself, or (6) convey, sell,
assign, transfer or otherwise dispose of, all or substantially
all of its assets.
5. No Reissuance of Series B Preferred Stock. No Series B Preferred Stock
acquired by the Corporation by reason of redemption, purchase, or
otherwise will be reissued, and all shares acquired by the Corporation
will be cancelled, retired and eliminated from the shares which the
Corporation will be authorized to issue.
6. Right to Audit Books and Records of Corporation. As long as any shares
of the Series B Preferred Stock remain outstanding, each holder of 20%
or more of the Series B Preferred Stock shall have the right, during
normal business hours, and upon reasonable prior notice, to review and
audit the books and records of the Corporation to ensure that the
Corporation has properly accrued and paid all dividends to which the
holders of the Series B Preferred Stock may be entitled.
7. Right of First Refusal. As long as any shares of the Series B
Preferred Stock remain outstanding, in the event that a holder of the
Series B Preferred Stock ("Selling Stockholder") desires to sell, or
receives a bona fide offer which it desires to accept from a
prospective purchaser to buy its Series B Preferred Stock, it shall
first offer such shares of Series B Preferred Stock to the other
holders of the Series B Preferred Stock as provided in this Section.
a. The other holders of the Series B Preferred Stock shall have the
right either to purchase the Selling Stockholder's stock in
accordance with the terms of the written offer by written notice
to the Selling Stockholder of their intent to purchase such
interest, such notice to be delivered to the Selling Stockholder
within 30 days following the date on which the Selling
Stockholder's written offer is delivered to the other holders of
the Series B Preferred Stock.
b. Payment of the purchase price shall be made upon the payment
terms of the written offer.
c. Right to Sell to Third Party. In the event the other holders of
Series B Preferred Stock elect not to purchase the Selling
Stockholder's shares, the Selling Stockholder shall be free to
sell its shares to the prospective purchaser upon the purchase
price, terms and conditions contained in the original offer for a
period of 60 days from the expiration of the other Series B
Preferred Stockholders right to purchase the Selling Stockholders
shares. If the Selling Stockholder's stock is not sold to the
prospective purchaser within the 60 day period, then the Selling
Stockholder may not transfer the Selling Stockholder's stock to
the prospective purchaser without once again offering the stock
as provided in this paragraph.
8. Notices. All notices to the Corporation permitted here will be
personally delivered or sent by first class mail, postage prepaid,
addressed to its principal office located at 5799 Broadmoor Suite 750
Mission, Ks. 66203, Attention: Treasurer, or to other address at which
its principal office is located and as to which notice is similarly
given to the holders of the Series B Preferred Stock at their
addresses appearing on the books of the Corporation.
IN WITNESS WHEREOF, the Corporation has caused its corporate seal to be
hereunto affixed and this certificate to be signed by its Secretary, and
witnessed this 12th day of October, 2004.
ALLEN DRILLING ACQUISITION COMPANY
By: /s/
--------------------------------
President
Witness:
/s/
- -----------------------------
EXHIBIT C
THE LICENSE AGREEMENT BETWEEN ADVANCED ENERGY RECOVERY, INC.
ELGIN HOLDINGS, L.L.C.
GATEWAY ENERGY CORPORATION
LICENSE AGREEMENT
THIS LICENSE AGREEMENT ("Agreement") dated as of the 15th day of
November, 2004, is made by the between Advanced Energy Recovery, Inc., a
Delaware corporation, ("AER"), Allen Drilling Acquisition Company, a
wholly-owned subsidiary of AER and a Nebraska corporation ("ADAC"), Elgin
Holdings, LLC, a Texas limited liability company ("Elgin"), Gateway Energy
Corporation, a Delaware corporation ("Gateway"), and Gateway Processing Company,
a Texas corporation ("GPC") (AER, ADAC and Elgin are collectively referred to as
the "AER Parties").
RECITALS
WHEREAS, GPC holds the exclusive U. S. license to technology developed
by Advanced Extraction Technologies, Inc., a Texas corporation ("AET"), which
employs the state-of-the-art, patented, absorption based technology to remove
nitrogen and other gasses from natural gas pursuant to a First Amended and
Restated Agreement to Develop Natural Gas Treatment Projects Using Mehra Gas
Treating Units, dated as of January 1, 2004 (the "AET Agreement"); and
WHEREAS, the AET Agreement authorizes GPC to license the Know-How and
Patent Rights (as those terms are defined in the AET Agreement) in the United
States to design, construct, build, license, operate, sell, install, assign,
lease, rent, repair, maintain, revise and revamp Mehra Gas Treating Units (as
defined in the AET Agreement); and
WHEREAS, ADAC and Gateway have entered into that certain agreement
dated March 6, 2003 with respect to a project known as the "Madisonville
Project", which project utilizes the Know-How and Patent Rights licensed to GPC
pursuant to the AET Agreement; and
WHEREAS, Elgin is a company holding significant rights to high
Nitrogen gas within the Madisonville Field which would benefit from the
processing available pursuant to Mehra Gas Treating Units; and
WHEREAS, the parties hereto desire to enter into an agreement with
respect to a joint participation in future projects which will treat natural gas
to remove impurities from the gas to enable the gas to meet pipeline quality
specifications ("High Nitrogen Projects"); and
WHEREAS, Gateway desires due diligence assistance in connection with
certain future Gateway projects, and assistance in the preparation and filing of
Gateway's Securities and Exchange Commission ("SEC") reports, and AER has agreed
to provide such assistance.
NOW, THEREFORE, in consideration of the premises, and other good and
valuable consideration, the receipt and sufficiency of which are hereby
acknowledged, the parties agree as follows:
1. GPC hereby grants to the AER Parties a non-exclusive license to the
Know-How and Patent Rights (as those terms are defined in the AET
Agreement) in the United States to design, construct, build, license,
operate, sell, install, assign, lease, rent, repair, maintain, revise
and revamp one or more Mehra Gas Treating Units (as defined in the AET
Agreement) operated in the AMI (as defined below) at or near the
current Madisonville facility. The party or parties hereto that own
and operate the Mehra Gas Treating Unit(s) shall be responsible for
the payment or pre-payment of all of the license fees payable to AET
pursuant to the license agreement arising from such dedicated gas.
However, AER shall advance to Gateway, as a prepayment of earnings
from its Madisonville operations $91,250, which equals the sum Gateway
requires to advance pay any or all fees due AET under Gateway the AET
Agreement. Said funds shall be made available to Gateway on or before
December 15, 2004. With respect to the license granted hereby, the AER
Parties agree to be bound to the terms and conditions of the AET
Agreement.
2. The AER Parties agree that all natural gas produced and owned by the
AER Parties and their controlled affiliates, which shall exceed 5,000
Mcf per day, whether by their own producing wells or by unitized well
within the AMI, shall be dedicated to and processed by Mehra Gas
Treating Units pursuant to Gateway's exclusive license under the AET
Agreement. "AMI" shall have the meaning set forth in the First Amended
and Restated Master Agreement (the "Master Agreement"), dated
September 12, 2003, by and among GPC, Redwood Energy Production, L.P.,
and Hanover Compression Limited Partnership or any amendments,
modifications or replacements that may be in place from time to time.
3. The AER Parties agree that with respect to the gathering, treatment
and transportation of gas within the AMI which may be performed by the
parties hereto, the economic terms of such additional services shall
be substantially similar to those terms provided for in the agreements
currently in place for the Madisonville Field in the agreements
contemplated by the Master Agreement or any amendments, modifications
or replacements that may be in place from time to time. All such
services shall be governed by definitive agreements to be executed by
the parties.
4. Gateway hereby grants to AER, or its designee, the option to
participate (a) on a pari passu basis with Gateway or its controlled
affiliates in any High Nitrogen Projects in which Gateway is a
participant and in which the project utilizes Gateway's exclusive
license under the AET Agreement, provided that AER shall have a right,
upon exercise of such option, to an interest in such project equal to
one-third (1/3) of the total interest that would otherwise Gateway
have therein, and (b) on a pari passu basis with any third party
financing source in one-third (1/3) of the financing of any High
Nitrogen Projects in which Gateway is a participant and in which the
project utilizes Gateway's exclusive license under the AET Agreement.
To exercise this option, AER must provide its pro rata amount of cash
and other consideration in the same form and subject to the same terms
and conditions as Gateway provides in such project. This option shall
expire on November 15, 2007, unless Gateway has not presented eight
(8) or more applicable projects prior to such date, in which case this
option shall continue until immediately after the eight (8th) such
option is thereafter presented. Gateway shall have the right to
designate up to two (2) projects each year which will not be subject
to the option granted to AER pursuant to this Section 4, and such
designated projects shall not count as one of the eight projects
described in the preceding sentence. Notwithstanding the foregoing,
with respect to any project developed by Gateway and in which AET by
virtue of the AET Agreement elects to participate up to 25%, then AER
and Gateway shall each proportionately reduce their rights under this
Section 4. For purposes of this Section 4, a single High Nitrogen
Project shall mean a project with capacity of at least 4,000 Mcf/d,
and shall include any additions to the capacity of the plants or
additional plants included in the High Nitrogen Project.
5. AER will make available, on an "as needed basis", one or more of its
employees, (Larry J. Horbach and/or Chuck A. Holtgraves) to consult
with and assist Gateway employees in the preparation and filing of
it's SEC reports for a period of up to one (1) year from the date of
this Agreement. Gateway shall reimburse AER for all out-of-pocket
expenses incurred by such employees of AER;
6. AER will provide due diligence service assistance to Gateway on High
Nitrogen Projects which may be potentially developed by Gateway, on a
project by project basis, for a period of three years, from the date
of this agreement. Gateway shall reimburse AER for all out-of-pocket
expenses incurred by AER in connection with this due diligence effort;
7. The parties agree, that except for the RECITALS above, no further
representations, warranties, or closing obligations are required.
8. This Agreement shall be governed by and construed in accordance with
the laws of the State of Texas.
9. Any notice, request, consent or communications (a "Notice") shall be
effective only if it is in writing and delivered, with receipt
confirmed, address as follows:
If to AER to:
Advanced Energy, Recovery, Inc.
Charles A. Holtgraves, President
5799 Broadmoor, Ste, 750
Mission, KS 66218
If to ADAC and Elgin, to:
Allen Drilling Acquisition Company
5799 Broadmoor, Ste, 750
Mission, KS 66218
Attn: Charles A. Holtgraves
If to Gateway and GPC, to:
Gateway Energy Corporation
500 Dallas Street, Suite 2615
Houston, TX 77002
Attn: President
With a copy to:
Shook, Hardy & Bacon L.L.P.
2555 Grand Boulevard
Kansas City, MO 64108
Attn: Craig L. Evans
IN WITNESS WHEREOF, the parties hereto have entered in this Agreement as of
the date first herein above set forth.
ADVANCED ENERGY RECOVERY, INC.
By: /s/
------------------------------
Charles A. Holtgraves
President
ALLEN DRILLING ACQUISITION COMPANY
By: /s/
-------------------------------
Charles A. Holtgraves,
President
ELGIN HOLDINGS, LLC
By: /s/
-------------------------------
Charles A. Holtgraves,
Manager
GATEWAY ENERGY CORPORATION
By: /s/
-------------------------------
John Raasch
President
GATEWAY PROCESSING COMPANY
By: /s/
-------------------------------
John Raasch
President
EXHIBIT D
PRESS RELEASE
FOR IMMEDIATE RELEASE: CONTACT CHUCK HOLTGRAVES
(913) 535-1072
ADVANCED ENERGY RECOVERY, INC. ANNOUNCES CLOSING OF TWO SIGNIFICANT TRANSACTIONS
MISSION, KANSAS, November 18, 2004- Advanced Energy Recovery, Inc. ("AER"),
(OTC-PINK SHEETS: AVRC.PK) a mid-stream natural gas and production company,
reported the closing of two transactions.
In the first transaction, AER, through its wholly owned subsidiary, Allen
Drilling Acquisition Company, ("ADAC") entered into a joint venture (Elgin
Holdings, L.L.C.) ("Elgin") with GulfWest Energy Inc, ("GWEI") a publicly traded
oil and gas company located in Houston, Texas. The joint venture was formed for
the purpose of initially developing certain portions of the GWEI oil and gas
asset bases in Madison and Hardin Counties, Texas. Certain of the Madison County
gas reserves, if developed and produced, are expected to require treatment
similar to that described later in the second transaction. GWEI contributed
certain assets valued at approximately $540,000, and ADAC committed to provide
up to $595,000 in initial cash capital funding to Elgin. ADAC holds a 52.5%
interest in Elgin. The initial capital commitment funds are being raised by ADAC
through the private placement of a new series of ADAC participating preferred
stock.
In the second transaction, AER entered into a license agreement (the
"Agreement") with Gateway Energy Corporation ("Gateway"), another publicly
traded energy company located in Houston Texas. The Agreement, provides, among
other things, for the granting of a sublicense to AER and Elgin to enable Elgin
to treat the gas produced from the leasehold interests owned by Elgin in Madison
County, Texas. The gas treatment process employs the state-of-the-art, patented,
absorption based technology developed by Advanced Extraction Technologies, Inc.,
("AET") for which Gateway has the exclusive U. S. license, to remove nitrogen
from the gas. In addition, the Agreement provides that AER and Elgin will
dedicate all gas requiring treatment produced from its Madison County reserves
to Mehra Gas Treating Units pursuant to Gateway's exclusive license under the
AET licensing agreement. The Agreement further grants to AER or its designees,
an option to participate pari passu with Gateway, subject to certain
limitations, in future projects which require the treatment of natural gas
containing high nitrogen, which projects utilize the AET license held by Gateway
President Charles Holtgraves commented, "The completion of these two
transactions should provide an excellent platform on which to build future
stockholder value for the Company. In addition, these transactions complete the
transformation of the Company from the financial industry to the energy
industry. In late March, 2004, the Company's shareholders approved our name
change from Advanced Financial, Inc. to Advanced Energy Recovery, Inc. and a
reverse 1 for 3 stock split. They also approved the disposition of all of our
financial operations, which transaction was completed at the end of August, but
effective as of April 1, 2004, which is the date our fiscal year begins. As of
April 1, 2004, all of the Company's operations and assets are now based in the
energy industry. Although we are a very small sized energy company at this time,
we believe our new business strategy, which is to focus on the development and
production of known natural gas reserves which can be treated and brought to
market, will provide investment opportunities to significantly grow the Company
and enhance stockholder value. We are entering the industry at a time when the
current and future projected sustained price of natural gas, as well as the
demand for natural gas are at all time highs, while at the same time the amount
of natural gas reserves in the continental United States that cannot be
developed and produced because of nitrogen and other impurities is substantial.
Some estimates put these "non-spec" gas reserves to be in the range of 30% to
40% of all natural gas reserves in the continental United States. Our joint
ventures with GulfWest and Gateway are an economically viable integral part of
implementing our new business strategy."