ling shareholder, and chairman of the board of directors of Chunchula Energy Corp.

Dr. Wallace had a very high energy level. He required only 3 to 4 hours of sleep per night and would work 14 to 20 hours a day, 7 days a week.

Facts Relating to Prepaid Feed Issue

The term "cattle feeding" applies to the practice of placing cattle in feedlots, feeding the cattle a high protein diet for 3 to 5 months, and then selling the cattle for slaughter. Commercial cattle feeding lots began to develop as an industry in the 1960s. Most of the cattle feeding lots are in Texas, Oklahoma, and New Mexico. Generally the cattle in the lots are not owned by the owners of the feedlots or their employees. Individuals or other entities will purchase cattle, place the cattle at custom feedlots for the required fattening period, and then sell the cattle for slaughter.

The feedlot employees include the feedlot manager, clerical staff, office manager, cowboy-foreman, cowboys, lay doctor, processors, market monitors, and a food mill expert. In addition to employees, a commercial feedlot usually has a nutritionist and a veterinarian as consultants.

The feedlot employees care for the cattle from the moment the cattle are delivered to the feedlot until the moment they are sold for slaughter. Care of the cattle includes daily feeding, maintenance of the cattle's health, treatment of disease, and other activities necessary for the cattle to adequately gain weight during the feeding period. Cattle in the feedlot are segregated into separate pens according to owner, but all cattle in the feedlot at a given time and at a given stage of development are treated exactly the same.

The ultimate authority in a commercial feedlot is the feedlot manager. The feedlot manager and supervisors make all the decisions regarding the hiring and firing of employees on the feedlot. Individual cattle owners have no authority to hire or fire any employees. If an owner is displeased with the treatment his cattle receive at a particular feedlot, he can speak with the feedlot manager or operator in an attempt to work out a solution, take his

complaint to arbitration or to court, or simply move his cattle to another feedlot. Generally, if the owner is dissatisfied with a feedlot, when he purchases his next set of cattle he will place those cattle with another feedlot. It is very unusual to move cattle from one feedlot to another during their feeding cycle, because it throws the cattle off feed and adds freight charges.

Commercial feedlots offer cattle owners marketing services. The feedlot will place fat cattle on a show list for viewing by packers/buyers who usually visit the feedlots daily. In many instances, the feedlot manager will negotiate a sale of cattle to the packer/buyer from the cattle owner.

A cattle owner must purchase feed for his cattle to consume during the feeding period. An owner can buy feed directly from a grain or feed mill, or he can buy feed through the feedlot. If the owner buys from a grain or feed mill, he can take physical possession of his prepurchased feed and store it either at his own expense or at an accommodating feedlot. Also, a cattle owner can simply rely on the feedlot to secure the amount of feed necessary to feed his cattle during the feeding period.

Dr. Wallace became interested in the cattle feeding program in 1979. Prior to his involvement in the cattle feeding program, he had no background in farming. After researching the program, he concluded that the cattle feeding business had a good profit potential. From 1980 until 1985, Dr. Wallace purchased cattle and placed them for feeding in a commercial feedlot.

In December 1980, Dr. Wallace retained the firm of Featheringill & Haynes to advise him in regard to his cattle feeding program. Dr. Wallace's agreement with Featheringill & Haynes provided for the number of cattle to be purchased, the feedlot where the cattle were to be placed, the hedging of the cattle, and the obtaining of disease insurance on the cattle. In August 1981, upon the breakup of the Featheringill & Haynes firm, Dr. Wallace retained the services of Mr. Haynes, working though the firm of Haynes Investment Services.

Both when he engaged the services of Featheringill & Haynes and when he engaged Haynes Investment Services, Dr. Wallace paid a flat fee of $10 per head of cattle for

advice. During the time that Dr. Wallace retained the services of Haynes Investment Services, he also reimbursed Mr. Haynes for out-of-pocket expenses. From December 1981 until February 1986 Mr. Haynes received the following amounts as compensation for his services rendered to Dr. Wallace:

Mr. Haynes received commissions from Saul Stone & Co. for commodity trades undertaken on behalf of Dr. Wallace. Dr. Wallace and Mrs. Wallace had discussed eventually terminating the relationship with Mr. Haynes when they believed they understood the cattle business well enough to make a profit without paying someone an advisory fee, but did not terminate the relationship before they discontinued their cattle activity in 1985. Petitioners planned to have an employee do the bookkeeping and visit the feedlots if they discontinued the services of Mr. Haynes.

Mr. Haynes would advise Dr. Wallace on hedging, feed purchasing, and selling cattle and would provide Dr. Wallace with an analysis of the cattle market as often as Dr. Wallace requested such advice. Mr. Haynes would discuss the advantages of different feedlots with Dr. Wallace and make recommendations. However, Dr. Wallace after receiving Mr. Haynes' advice made his own investment decisions.

The cattle owners that Mr. Haynes represented had varying degrees of risk they were willing to take. Mr. Haynes considered Dr. Wallace extremely motivated to make money and more willing to take risks than many of Mr. Haynes' clients. Even though it was highly unusual, Dr. Wallace on one occasion moved cattle from one feedlot to another during the feeding cycle when he became dissatisfied with the feedlot operator's performance. At one time, Dr. Wallace had expressed an interest in acquiring a feedlot to own and operate himself. He later decided that it was not a good idea and discontinued looking for a feedlot to purchase.

From 1980 until 1985, Mr. Haynes also owned feeder cattle. Most of the time, Mr. Haynes' clients used the same feedlot Mr. Haynes was using for his own cattle. Mr. Haynes would telephone the feedlot manager in regard to his and his clients' cattle as often as 3 or 4 times a week. He would generally telephone Dr. Wallace about once a week. Dr. Wallace would speak to the feedlot manager personally 2 or 3 times during a feeding cycle. Dr. Wallace visited the feedlots from 1980 until 1985 between 2 to 6 times. The visits usually lasted 1/2 to 1 day and were made while he was en route to another destination. Linda McDonald, Dr. Wallace's bookkeeper, visited the feedlots with Mr. Haynes once or twice.

Mr. Haynes would locate cattle for Dr. Wallace to buy. Neither Dr. Wallace nor Mr. Haynes had seen the cattle firsthand at the time they were purchased. Mr. Haynes was never given authority to draw on his clients' bank accounts or to draw on lines of credit they had arranged, but he would arrange with the client to have the seller paid by wire the same day. Mr. Haynes also assisted Dr. Wallace in locating a suitable feedlot to care for his cattle.

Considerable authority with respect to "sell" decisions was delegated by Dr. Wallace to Mr. Haynes because such decisions often had to be made almost immediately and Mr. Haynes was generally more accessible than Dr. Wallace. Mr. Haynes tried to confer with Dr. Wallace before making the decision. Any decision Mr. Haynes made regarding Dr. Wallace's cattle was made pursuant to Dr. Wallace's direction or ratification. There was at least one occasion

when Mr. Haynes specifically recommended that Dr. Wallace accept an opportunity to sell his cattle, but Dr. Wallace decided to wait. Dr. Wallace eventually sold the cattle at a better price.

Mr. Haynes maintained records regarding Dr. Wallace's investment in cattle. Mr. Haynes would prepare a profit and loss statement with respect to Dr. Wallace's cattle management at the end of each feed cycle. In addition, either Dr. Wallace, Mrs. Wallace, or an employee of Dr. Wallace, Linda McDonald, maintained a record of Dr. Wallace's cattle feeding operation in a general ledger.

Mr. Haynes offered advice to his clients with respect to hedging. Hedging is accomplished by selling fat cattle contracts through a commodities exchange, normally the Chicago Mercantile Exchange. Dr. Wallace always wanted to be hedged to the extent that projected losses would not exceed $200,000. Dr. Wallace, at the recommendation of Featheringill & Haynes, opened a commodities account with Saul Stone & Co. of Chicago, Illinois, to conduct hedging transactions on his behalf.

In order to leverage his cattle feeding investments, Dr. Wallace opted to borrow a substantial portion of the required investment from a production credit association. Production credit associations are rural banks established by the Federal Government to finance agricultural projects at competitive interest rates. Production credit associations normally will loan all but $105 to $115 of the cost of each purchased head of cattle in a cattle feeding program plus substantially all of the cost of feed and other costs. In each instance, Dr. Wallace would execute a Uniform Commercial Code security agreement in favor of the lending production credit association. As part of his loan agreement with each production credit association, Dr. Wallace was required to hedge a portion of his cattle if certain events took place. Saul Stone & Co. reported the hedging transactions to Dr. Wallace and to the respective production credit associations at least monthly.

The cost of the cattle purchased, together with the feed and hedging costs, would be paid by the lending production credit association and charged to Dr. Wallace's account. The production credit association would notify Dr. Wallace