SECURITIES EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
ANNUAL REPORT PURSUANT TO SECTION 13 or 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934
For the Fiscal Year Ended December 31, 1999
Commission file number 0-29670
DRUCKER INDUSTRIES, INC.
------------------------
(Exact name of registrant as specified in its charter)
Delaware N/A
---------- -----
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) Identification No.)
#1-1035 Richards Street, Vancouver, B.C. Canada V6B 3E4
- ------------------------------------------------ -------
(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (604) 681-4421
--------------
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
Securities Registered Pursuant to Section 12(g) of the Act
COMMON STOCK $.0001 PAR VALUE
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to the filing
requirements for at least the past 90 days.
Yes X No
Indicate by check mark if disclosure of delinquent filers in Response to Item
405 of Regulation S-B is not contained in this form, and no disclosure will be
contained to the best of Registrant's knowledge in definitive proxy or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.
Yes No X
<PAGE>
Registrants gross revenues for its most recent fiscal year were $134,930 from
interest income only and operations expenses totaled $708,114 for a net loss of
$(573,184).
State the aggregate market value of the voting stock held by non-affiliates of
the Registrant: $8,868,112 as of December 31, 1999 (a $.39/share closing price
at December 23, 1999).
Indicate the number of shares outstanding of each of the Registrant's classes of
common stock: 32,476,250 common shares as of December 31, 1999.
<PAGE>
TABLE OF CONTENTS
PART I
Page
Item 1. Business............................................................1
Item 2. Properties .........................................................11
Item 3. Legal Proceedings...................................................12
Item 4. Submission of Matters to a Vote of
Security Holders....................................................12
PART II
Item 5. Market for Registrant's Common Stock and
Security Holder Matters ............................................12
Item 6. Management's Discussion and Analysis of
Financial Condition and Results of
Operations .........................................................14
Item 7. Financial Statements and Supplementary Data.........................20
Item 8. Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure..............................20
PART III
Item 9. Directors and Executive Officers of the
Registrant .........................................................21
Item 10. Executive Compensation..............................................23
Item 11. Security Ownership of Certain Beneficial
Owners and Management...............................................25
Item 12. Certain Relationships and Related
Transactions........................................................27
PART IV
Item 13. Exhibits, Financial Statement Schedule
and Reports on Form 8-K.............................................28
<PAGE>
PART I
ITEM 1. BUSINESS
(a) General Description and Development of Business.
HISTORY OF COMPANY
(Through December 31, 1997)
On February 4, 1971, the Registrant was incorporated under the laws of
the State of Idaho, under the name of Monetary Metals Corporation.
On December 16, 1988, Drucker Sound Design Corporation was incorporated
under the laws of the State of California.
On October 18, 1989, Gul Industries Corp. was incorporated under the laws
of the State of Delaware.
On December 14, 1989, the Registrant entered into an Agreement and Plan
of Reorganization, whereby the issuer acquired 100% of the assets subject to
liabilities of Drucker Sound Design Corporation, a California corporation. The
Registrant began engaging in the manufacturing and distribution of audio,
cellular, C.B., radar, and other electronic installation systems for
automobiles. The Company decided to redomicile in Delaware and entered into a
merger agreement with Gul Industries, Inc., a Delaware corporation. On April 16,
1990, the Registrant filed Articles of Amendment in the State of Idaho changing
its name from Monetary Metals Corporation to Drucker Sound Design Corporation.
On June 6, 1990, Gul Industries Corp. filed a Certificate of Amendment to the
State of Delaware changing its name to Drucker Sound Design Corporation. On June
19, 1990, a Certificate of Merger was filed in the State of Delaware. On August
7, 1990, a Certificate of Merger was filed in the State of Idaho. Prior to
September 1991, the Registrant discontinued engaging in the business of
manufacturing and distributing of audio, cellular, C.B., radar, and other
electronic installation systems for automobiles. On September 4, 1991, the
Registrant filed Certificate of Amendment in the State of Delaware changing its
name to Drucker Industries, Inc.
In September 1991, the Company purchased the license to the "N-Viro
Process" in Japan from N-Viro Energy Systems, Ltd. for $466,063. The Company
made a $100,000 down payment and paid the balance by quarterly installments. The
Company was delinquent on minimum royalty payments due June 30, 1994 and
September 30, 1994, totalling $50,000, and consequently all rights and
privileges granted to the Company under the license agreement were cancelled by
the licensor. The license agreement costs, net of accumulated amortization, were
written-off during the year ended December 31, 1994. The Company at December 31,
1995, terminated any attempts in the N-Viro business.
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No activities were conducted in 1995 or 1996. In 1997, new management
was engaged and a business plan to engage in oil and gas exploration was
adopted.
THE COMPANY BUSINESS
1. General Operations
The Company has had very limited operations within the last three
years, and such operations have been restricted to investigation of
opportunities, evaluation and negotiations of the joint venture agreements
described hereafter, and joint venture participations in oil exploration
projects in China in fall 1997 and in Egypt in 1999.
Current Business
The Company was inactive from 1994 until late 1996. The Company's
primary business focus is the acquisition, exploration and development of
mineral properties and oil and natural gas properties. In early 1997, the
Company negotiated joint venture farm-in agreements with two Vancouver based oil
companies with whom the companies' officers and directors are affiliates for a
50% interest in certain oil projects in the People's Republic of China. The
projects were unsuccessful and were abandoned in 1998, although the Company
retains an investment in China in the Shaanxi exploration project which is not
under active exploration. The Registrant has a participation in the Gulf of Suez
joint venture in Egypt, which has in 1999 made one oil discovery, has drilled
one dry hole, and has a third well being drilled.
The Company anticipates that its business will continue to require
capital to make required financial investments under exploration joint venture
agreements. The Company intends to use the capital Markets of the United States,
Canada, and Europe to secure the capital funding required by the Company and its
operations. It has no commitments for funding as of the date of this Report, nor
anticipated sources of debt or equity funding, except its cash on hand.
The Company has not established, and does not intend to formally
establish, criteria for the selection or evaluation of oil and gas properties or
participations. When a property is located which the management, in its opinion,
believes holds the potential for profit for the Company, an attempt will be made
to secure an option, or lease, in the property. Shareholder approval will not be
sought for property acquisitions. Therefore, shareholders will be dependent upon
the judgment of management in selecting properties (see "Management"). If such
an interest is acquired, the Company will then expend funds for preliminary
exploration and testing of the property to determine the feasibility of
production of such property. Based on the results of such preliminary testing,
the Company will decide, without shareholder approval, whether to acquire or
abandon the property. A property may be acquired by outright purchase; by
purchasing or leasing the oil, gas or mineral rights of the property; or by
exchange of the shares for leases or interests in properties.
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The Company may expend funds to rework, explore or test any oil and gas
prospects it acquires to determine the economic production feasibility of such
properties. The Company will rely on outside consultants (none of whom have been
designated) to provide management with competent evaluation and recommendations
concerning property or interests in properties to be considered for acquisition.
The Company has no agreement or understanding, express or implied, with any
outside professional; and there is no assurance that it will be able to retain
the services of competent experts or as to the fees which such experts will
charge the Company. Based upon the results of such exploration and tests, as
interpreted by management, the Company will then determine whether such
properties should be acquired, explored further, sold or leased to a third
party, held for possible later development or abandoned; or whether development
to production should be attempted by the Company either by itself or through
joint venture or other business arrangements with other companies or entities.
The Company currently maintains its offices #1- 1035 Richards
Street, Vancouver, B.C. Canada V6B 3E4. Its telephone number is 604-681-4421.
(b) Parents and Subsidiaries
Parent
DRUCKER INDUSTRIES, INC., a Delaware corporation
Subsidiaries
DRUCKER PETROLEUM, INC., a British Virgin Islands
corporation
DRUCKER PETROLEUM, (Algeria) INC., a British Virgin
Islands corporation
(c) Oil and Gas Activities.
Registrants oil and gas exploration, development and production
activities have been limited due to lack of capital and lack of focus in such
area prior to 1997. The Company, in 1997 received stock sale proceeds to finance
its oil & gas joint ventures. The Company terminated its China exploration
ventures 1998 after drilling a dry hole.
The Company's proposed principal areas of activities are described
below.
Exploration and Production Activity. The Company's strategy with
respect to its oil exploration related activities is to identify geological
areas in which the Company may invest or participate in non-producing or
producing oil and gas prospects or joint ventures for development and where the
company may lease prospects for oil and gas exploration. In 1997, it joined
joint ventures to explore for oil and gas in China. In 1998, it terminated and
abandoned its joint venture in China after drilling one dry hole and finding its
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other China prospects to bear slim chances of success. In 1998, the Company
began a participation in the West Gharib, Egypt concession and two successful
wells were drilled there in 1999. (Hana 1 and Hana 2.) Drucker Petroleum, Inc. a
wholly owned subsidiary holds a 20% working interest in the Hana wells in Egypt.
During the last five (5) fiscal years, the Company conducted
exploration activities on oil and gas properties for joint venture participation
in China and Egypt. If the Company acquires oil and gas prospects in the future,
the Company may agree to assign rights in certain properties to be drilled to
the general or managing partner of a partnership or joint venture which thereby
becomes the owner of a working interest in the property and the Company will
retain an interest in the property. The Company actively reviews prospects for
participatioon in exploration or development drilling joint ventures, but
currently has no proposal being negotiated on any specific property, lease or
asset, not otherwise discussed herein.
The Company does not own any drilling rigs, nor does it employ drilling
or operating crews. The Company will not be the actual contract driller of
wells. If and when the Company decides to drill to explore a prospect, the
Company will contract with third-party non-affiliated drilling companies to
drill oil and gas wells on a fixed-cost (turnkey) basis. Once a well has reached
its desired depth, the Company, in consultations with experts, will then
determine whether to complete such wells and/or to plug and abandon the well.
All well completion activities are conducted under supervision of the Company
and its consultants, by third party service contractors. When the Company is
merely a participant in a venture on a minority basis, all decisions regarding
drillers, operations, and consultants will be made by third party management of
the venture and not by the registrant.
The Company is not carrying any reserve values of any properties due to
the lack of any production or found reserves.
Exploration Results 1999 1998 Prior Years
------------------- ---- ---- -----------
Gas Wells 0 0 0
Dry Holes 1 1 0
Oil Wells 2 0 0
Financing of Oil and Gas Activities. The Company's future oil and gas
financing activities will be conducted primarily pursuant to ventures with other
Independent companies and through Joint Ventures in which the Company may act as
co-venturer ("Company-Joint Ventures") or as a working interest participant. The
Company has contacted some independent companies who have indicated an interest
in participating in financing if the project interests them. The Company is a
participant in the West Gharib, Gulf of Suez, Egypt exploration venture (see
"Registrant's Joint Venture Interests" hereafter). In 1997, the Company
participated in exploration participation in China in which it paid 100% of
costs for a 50% interest in the concession and any production found. The 1997
results were one dry hole in the China venture.
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The following table sets forth, for the years indicated, the funds
invested by the Company pursuant to contracts under Participation Agreements and
Joint Ventures. The Company may record revenues from operations on the
percentage of completion method as the oil and gas projects are drilled or
constructed, rather than when funds are received.
Year Ended December 31,
1995 1996 1997 1998 1999
Participation Payments $0 $50,802 $1,275,217 $1,262,106 $352,000
Under Agreements
Deferred Exploration $629,290
--------
Total $0 $50,802 $1,275,217 $1,262,106 $981,290
In 1997, the Company offered and sold 5,179,500 units at $1.00 per unit
pursuant to an Offering Memorandum. The cash proceeds of this offering have been
used to fund the Company operations. Each unit is to consist of one common share
and one share purchase warrant which will entitle the holder thereof to acquire
an additional unit at $1.50 per unit. This warrant would have expired in
eighteen months from the closing of the Offering Memorandum, but the warrant was
extended to March 31, 2000. The additional unit is to consist of one common
share and one additional share purchase warrant to acquire one common share at
$2.00 per share. This warrant has been extended to March 31, 2001.
(d) Narrative Description of Business.
The primary initial focus of business operations was to make an
investment in oil and gas exploration joint ventures in China. The Chinese joint
venture has been terminated, although the Company retains a project investment
interest which gives the Company the right to participate in exploratory wells
by paying 100% of the drilling cost for a 50% interest. The Company, trhough its
wholly owned subsidiary, Drucker Petroleum, Inc., has participated in two wells
in Egypt in the Gulf of Suez, which has been completed as an oil discovery in
July 1999 (Hana 1) and Hana 2 was completed as a producer in December 1999.
Further wells are planned in Egypt. In 1998, the Company did not complete any
successful oil or gas wells.
Algerian Concession
As of October 27, 1999, the Company, through its wholly owned subsidiary
Drucker Petroleum (Algeria), Inc. (DPA), acquired 10% of the issued capital
stock of Santa Catalina (Algeria) Ltd. ("Algeria Concession SLM Algeria"), a
company which, through its wholly-owned subsidiary, Santa Catalina L.H. Ludin
(Algeria) Ltd. ("SLM Ludin"), entered into an agreement to acquire a 25%
participating interest in an oil and gas concession in Algeria. Subject to SLM
Ludin earning its 25% participating interest, DPA may earn up to a 2.5% indirect
interest in the property by paying SLM Algeria $625,000 (paid) to acquire 10% of
its capital stock, and by funding its pro-rata share of SLM Lundin's portion of
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the drilling and general and administrative costs in excess of US $5,000,000 for
testing and drilling of the first well.
In order to participate in the second well, DPA must pay SLM Algeria
$600,000. DPA will then be responsible for their pro-rata share of SLM Lundin's
portion of the drilling costs and general and administrative costs in excess of
$5,000,000 associated with the drilling and testing of the second well. This
agreement is in effect for one year.
All costs associated with this concession are shown as oil and gas
project costs.
See also (c) "Oil and Gas Activities," "Properties," and "Joint
Ventures" hereafter for more complete discussion.
Governmental Regulation for Oil Exploration Operations
General - The Registrant's oil and gas production activities
are subject to extensive regulation by numerous national, state and local
governmental authorities in the countries where project participation is
commenced. Taxation and regulation of the Registrant's production,
transportation and sale of oil or gas, and federal price and allocation controls
in particular, have a significant effect on the Registrant and its operating
results.
State Regulation - The production operations of the Registrant
are subject to regulation by national bureaus or ministries which have authority
to issue permits prior to the commencement of drilling activities, establish
allowable rates of production, control spacing of wells, establish prices or
taxes, prevent waste and protect correlative rights, and aid in the conservation
of oil and gas. Typical state regulations require permits to drill and produce
oil or gas, protection of fresh water horizons, and confirmation that wells have
been properly plugged and abandoned.
Environmental Matters - Various national and state authorities
have authority to regulate the production and development of oil and gas and
mineral properties with respect to environmental matters. Such laws and
regulations, presently in effect or as hereafter promulgated, may significantly
affect the cost of the workover and development activities contemplated by the
Registrant and could result in loss or liability to the Registrant in the event
that its operations are subsequently deemed inadequate for purposes of any such
law or regulation. New regulations, if adopted, could result in significant
capital expenditures by the Registrant, resulting in unprofitable operations.
Uncertainties Related to the Oil and Gas Business in General
The Registrant's operations will be subject to all of the
risks normally incident to the production of oil and gas, including blowouts,
pollution and fires. Each of these incidents could result in damage to or
destruction of oil and gas wells or formations or
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production facilities or damage to persons or property. As is common in the oil
and gas industry, the Registrant is not fully insured against these risks either
because insurance is not available or because the Registrant has elected not to
insure due to prohibitive premium costs.
The Registrant's future oil and gas activities may involve a
significant risk that commercial oil or gas production will not be maintained.
The costs of drilling, completing reworking or operating wells is often
uncertain. Further, operations, may be curtailed or delayed as a result of many
factors, weather conditions, delivery delays, shortages of pipe and equipment,
and the availability of workover equipment.
The oil and gas business is further subject to many other
contingencies which are beyond the control of the Registrant. Wells may have to
be shut-in because they have become uneconomical to operate due to changes in
the price of oil, depletion of reserves, or deterioration of equipment. Changes
in the price of imported oil, the discovery of new oil and gas fields and the
development of alternative energy sources have had and will continue to have an
important effect on the Registrant's business.
Registrant's Joint Venture Interests
West Gharib Concession
On April 27, 1998, the Company, through its wholly owned subsidiary,
Drucker Petroleum, Inc. (DPI), entered into a farm-in agreement to acquire an
undivided 20% participating interest in the right to explore for and exploit
petroleum in a concession located in West Gharib, Gulf of Suez, Egypt. The
Agreement was amended on March 24, 1999. The Agreement provided that DPI shall
pay:
1. $352,000 within seven days of the execution of the agreement (paid)
2. pay 20% of all costs and expenses incurred subsequent to the
execution of the agreement related to this concession
3. 40% of the costs and expenses associated with the drilling of
first two exploratory wells exploratory well to a maximum cost to the Company of
$500,000; thereafter, DPI shall pay 20% of all costs and expenses associated
with any further activity associated with the concession.
4. In addition, DPI provided a bank guarantee of $2,000,000 within
seven days of the execution of the agreement, being 40% of a letter of
guarantee.
DPI has the right but not the obligation to participate in additional
wells in the West Gharib, Egypt concession. The Company has paid and performed
upon all its obligations under the Farm In Agreement.
DPI's interest in this oil and gas concession is subject to 7% net
profit interest payable to a related company, after DPI has recovered all its
exploration and development expenditures. This company is related by virtue of
common directors.
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Drucker Petroleum, Inc., a wholly owned subsidiary of Drucker
Industries, Inc., holds the 20% interest. Tanganyika Oil Company, Ltd., through
its wholly owned subsidiary, Dublin International Petroleum (Egypt) Limited, is
the operator of the West Gharib block holding a 50% interest and GHP Exploration
(West Gharib) Ltd., a wholly owned subsidiary of TransAtlantic Petroleum (USA)
Corp. holds the remaining 30% interest.
The Hana-1 well was drilled to a total depth of 7,415 feet and
production casing was landed at 5,475 feet in order to evaluate the prospective
Middle Miocene Kareem formation. Logs run through casing indicate a gross sand
section of 116 feet with 60 feet of net sand pay which is believed to be
hydrocarbon bearing. The uppermost 20 feet of sand interval was perforated from
4,868 to 4,888 feet and the well flowed oil to surface. Typical wells in this
region require pumping equipment to maximize production When assisted with a
nitrogen string set at 2,500 feet, the Hana-1 well flowed at rates averaging 500
barrels of oil per day at 25.8 degrees API gravity oil with zero water content.
The Hana 2 stepout well was drilled in late 1999 and began production at 750 b/d
in late December 1999.
Algeria Minority Participation
Products, Services, Markets, Methods of Distribution, and Revenues. Oil and
natural gas are presently the principal products sought to be produced by the
Company.
Oil productioon commenced in first quarter 2000.
Working Capital Needs. The working capital needs of the company consist
primarily of: investigation activities, acquisition of prospect acreage and
costs of participation in joint ventures. These requirements may be met by
private placement of stock or loans or sale of working interests. The Company
may need to develop additional working capital for future operations.
Industry Segments
The company's industry segment is the oil and gas industry. The company's
geographic segments are Canada, China, Algeria, and Egypt.
Algerian Concession
By a letter of intent dated October 27, 1999, the Company acquired 10% of
the issued capital stock of Santa Catalina (Algeria) Ltd. ("Algeria Concessions
SLM Algeria"), a company which, through its wholly-owned subsidiary, Santa
Catalina L.H. Ludin (Algeria) Ltd. ("SLM Lundin"), entered into an agreement to
acquire a 25% participating interest in an oil and gas concession in Algeria.
Subject to SLM Ludin earning its 25% participating interest, the Company may
earn up to a 2.5% indirect interest in the property by paying SLM Algeria
$625,000 (paid) to acquire 10% of its capital stock and by funding its pro-rata
share of SLM Ludin's portion of the drilling and general and administrative
costs in excess of US$5,000,000 for testing and drilling of the first well.
In order to particpiate in the second well, the Company must pay SLM
Algeria $600,000. The Company will then be responsible for their pro-rata share
of SLM Lundin's portion of the drilling costs and general and administrative
costs in excess of $5,000,000 associated with the drilling and testing of the
second well. This agreement is in effect for one year.
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<TABLE>
<CAPTION>
December 31, 1999
Canada China Egypt Total
<S> <C> <C> <C> <C>
Identifiable Assets
Current $ 1,887,666 $ - $ - $ 1,887,666
-------------- -------- -------- ------------
Oil and gas projects - - 981,290 1,606,290
-------------- -------- -------- ------------
$ 1,877,666 $ - $981,290 $ 3,493,956
============== ======== ======== ============
December 31, 1998
Canada China Egypt Total
Identifiable Assets
Current $ 2,771,380 $ - $ - $ 2,771,380
-------------- -------- -------- ------------
Oil and gas projects - 895,306 366,800 1,262,106
-------------- -------- -------- ------------
$ 2,771,380 895,306 $366,800 $ 4,033,486
============== ======== ======== ============
Year ended December 31,
1999 1998 1997
==== ==== ====
Operations
Canada $(83,511) $(24,867) (116,019)
--------- --------- ---------
China ( 70,135) (368,290) (433,795)
Egypt ( 419,538) (247,973) -
========== ========= =========
$ ( 573,184) $(641,130) (549,814)
============ ========== =========
</TABLE>
(3) Dependence on a Single Customer or a Few Customers.
a) Revenues - None in 1999. The Company has no customers
at this time.
b) Client Services revenues - none
During the five (5) years ending December 31, 1999, no
revenues were generated from client services.
(4) Backlog of Orders. None at this time.
(5) Government Contracts. None.
(6) Competitive Conditions. The oil and gas industry is highly
competitive. The Company faces competition from large numbers of oil and gas
companies, public and private drilling programs and major oil companies engaged
in the acquisition, exploration, development and production of hydrocarbons in
all areas in which it may attempt to operate in the future. Many of the programs
and companies so engaged possess greater financial and personnel resources than
the Company and therefore have greater leverage to use in acquiring prospects,
hiring personnel and marketing oil and gas. Accordingly, a high degree of
competition in these areas is expected to continue. The markets for crude oil
and natural gas production have increased substantially in recent years. Oil
prices have stabilized generally,
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but the world market for crude oil should be considered unstable due to
uncertainty in the Mideast. There is considerable uncertainty as to future
production levels of major oil producing countries. Significant increases in
production could create additional downward pressure on the price of oil. A
precipitous drop in oil & natural gas prices in the futures market occurred in
January 1986, and the Company could be adversely affected if further drops occur
in the future.
In the past surpluses in natural gas supplies and other factors have
combined to have a negative impact on the natural gas business. Purchasers have
canceled contracts or might propose to cancel contracts. Other purchasers have
lowered the price they will pay for unregulated natural gas, which previously
commanded premium prices. There is no assurance that the Company's revenues, if
any ever develop, will not be adversely affected by these factors.
Oil concessions in foreign countries are usually controlled by the
Government, which subsequently could impose taxes or restrictions at any time
which would make operations, if any, unprofitable and infeasible and cause a
write off of capital investment in oil and gas opportunities.
The oil exploration situation is highly competitive. The Company faces
competition from large numbers of companies in any areas in which it may attempt
to operate in the future. Many of the companies so engaged possess much greater
financial and personnel resources than the Company and therefore have greater
leverage to use in acquiring participation interests, hiring personnel and
marketing. Accordingly, a high degree of competition in these areas is expected
to continue.
A number of factors, beyond the Registrant's control and the effect of
which cannot be accurately predicted, affect the production and marketing of oil
and gas. These factors include crude oil imports, actions of foreign oil
producing nations, the availability of adequate pipeline and other
transportation facilities, the marketing of competitive fuels and other matters
affecting the availability of a ready market, such as fluctuating supply and
demand.
(7) Registrant Sponsored Research and Development. None.
(8) Compliance with Environmental Laws and Regulations. The exploration
operations of the Company are subject to local, provincial and national laws and
regulations in the country of Egypt where the Company is a participant in
drilling and production and in Algeria if any exploration is commenced there. To
date, compliance with these regulations by the Company has had no material
effect on the Company's operations, capital, earnings, or competitive position,
and the cost of such compliance has not been material. The Company is unable to
assess or predict at this time what effect such regulations or legislation could
have on its activities in the future.
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(a) Local Regulation -
The Company cannot determine to what extent future operations
and earnings of the Company may be affected by new legislation, new regulations
or changes in existing regulations.
(b) National Regulation -None.
The Company cannot determine to what extent future operations
and earnings of the Company may be affected by new legislation, new regulations
or changes in existing regulations.
The value of the Company's investments in the joint ventures
may be adversely affected by significant political, economic and social
uncertainties in the area of interest. Any changes in the policies by the
Government of the area of interest could adversely affect the company area of
interest by, among other factors, changes in laws, regulations or the
interpretation thereof, confiscatory taxation, restrictions on currency
conversion, imports and sources of supplies, the expropriation or
nationalization of private enterprises, wars, or political relationships with
other countries.
(c) Environmental Matters - None at the date of this
registration statement.
(d) Other Industry Factors - Oil and gas drilling operations
are subject to hazards such as fire, explosion, blowouts, cratering and oil
spills, each of which could result in substantial damage to oil and gas wells,
producing facilities, other property and the environment or in personal injury.
(9) Number of Persons Employed. As of December 31, 1999, the Company
had one full-time consultant, A. Ken Kow, Manager of Petroleum Operations at a
salary of 45,000 Candian per month and a part-time employee the President,
Gerald William Funolfson, at no salary based in Vancouver, B.C.
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ITEM 2. PROPERTIES
(a) Real Estate. None
(b) Title to properties. See item (1) below.
(c) Oil and Gas Drilling Activities. The Company participated in two
successful oil wells in West Gharib, Egypt in 1999. (See "Business")
(d) Oil and Gas Production. None at year end.
(e) Oil and Gas Reserves. None computed at year end.
(f) Present value of Estimated future Net Reserves From Proved
Developed Oil and Gas Reserves. None.
(g) Reserves Reported to Other Agencies. None.
(h) Natural Gas Gathering/Processing Facilities. None.
(i) Present Activities and Subsequent Events:
Material Agreements
(1) West Gharib Concession
On April 27, 1998, DPI entered into a farm-out agreement to
acquire an undivided 20% participating interest in the right to explore for and
exploit petroleum in a concession located in West Gharib, Gulf of Suez, Egypt.
The Agreement was amended on March 24, 1999. The terms of the Agreement are that
DPI agreed to pay for a 20% interest:
a. $352,000 within seven days of the execution of the agreement (paid)
b. pay 20% of all costs and expenses incurred subsequent to the
execution of the agreement related to this concession
c. 40% of the costs and expenses associated with the drilling of first two
exploratory wells to a maximum cost to the Company of $500,000; thereafter, DPI
shall pay 20% of all costs and expenses associated with any further activity
associated with the concession.
d. In addition, DPI provided a bank guarantee of $2,000,000 within
seven days of the execution of the agreement.
DPI's interest in this oil and gas concession is subject to 7%
net profit interest payable to a related company, Richco Investors, Inc., after
DPI has recovered all its exploration and development expenditures. This company
is related by virtue of common directors.
12
<PAGE>
The Company has fully completed all its obligations under this Agreement.
(2) Algerian Concession
By a letter of intent dated October 27, 1999, DPA acquired 10% of the
issued capital stock of Santa Catalina (Algeria) Ltd. ("Algeria Concession SLM
Algeria"), a company which, through its wholly-owned subsidiary, Santa Catalina
L.H. Ludin (Algeria) Ltd. ("SLM Ludin"), entered into an agreement to acquire a
25% participating interest in an oil and gas concession in Algeria. Subject to
SLM Ludin earning its 25% participating interest, DPA may earn up to a 2.5%
indirect interest in the property by paying SLM Algeria $625,000 (paid) to
acquire 10% of its capital stock, and by funding its pro-rata share of SLM
Ludin's portion of the drilling and general and administrative costs in excess
of US $5,000,000 for testing and drilling of the first well.
In order to participate in the second well, DPA must pay SLM Algeria
$600,000. DPA will then be responsible for their pro-rata share of SLM Lundin's
portion of the drilling costs and general and administrative costs in excess of
$5,000,000 associated with the drilling and testing of the second well. This
agreement is in effect for one year.
(j) Criteria:
The Company will consider the following criteria when evaluating
whether to participate in an oil and gas prospect in any area of interest:
1) Geological and Seismic (when available) Data
2) Market demand for products;
3) Efficient transportation availability;
4) Location;
5) Weather;
6) Management;
7) Cost of participation;
8) Terms;
9) Risk vs. rewards;
10) Feasibility study;
11) Whether capital is available to fund participation.
ITEM 3. LEGAL PROCEEDINGS
None at date of Registration Statement.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None in Fiscal Year ended December 31, 1999.
13
<PAGE>
PART II
ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SECURITY HOLDER
MATTERS
The Company's common stock is now traded on the "Over-the-Counter"
market on the National Quotation Bureau or the NASD Electronic Bulletin Board.
The following table sets forth high and low bid prices of the Company's common
stock for the three (3) years ended December 31, 1999, 1998, and 1997 as
follows:
Bid
High Low
1999
First Quarter .27 .17
Second Quarter .35 .175
Third Quarter .65 .135
Fourth Quarter 5/8 .365
Bid
High Low
1998
First Quarter .53 .24
Second Quarter .62 .18
Third Quarter .50 .14
Fourth Quarter .29 .17
Bid
High Low
1997
First Quarter 2 1/8 1 1/8
Second Quarter 1 13/16 1
Third Quarter 1.09 .65
Fourth Quarter .84 .31
Such over the counter market quotations reflect interdealer prices,
without retail mark up, mark down or commission and may not necessarily
represent actual transactions.
(b) As of December 31, 1999 the Company had 69 shareholders of record
of the common stock.
(c) No dividends on outstanding common stock have been paid within the
last two fiscal years, and interim periods. The Company does not anticipate or
intend upon paying dividends for the foreseeable future.
14
<PAGE>
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
The information presented herein, should be read in conjunction with
the Company's consolidated financial statements and related notes appearing
elsewhere herein.
Selected Financial Information
<TABLE>
<CAPTION>
(A DEVELOPMENT STAGE COMPANY)
Fiscal Year Ended December 31,
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Income Statement Data:
Revenues 0 0 0 0 0
Cost of
Revenues 0 0 0 0 0
Gross Profit 0 0 0 0 0
Exploration Expenses 489,673 616,263 433,795 0 0
General and
Administrative
Expenses 218,441 182,405 247,566 3,118 46,004
Income (loss)
from
operations (708,114) (798,668) (681,361) 0 0
Other income
(expense) 134,930 157,538 135,266 0 (33,451)
Amortization of
License Agreement 0 0 0 0 0
(write off -1994)
Income (loss)
before income
taxes (573,184) (641,130) (549,814) (3,118) (79,455)
Provisions for
income taxes 0 0 0 0 0
Net income
(loss) per Greater
common share than (.02) (.02) (.02) (.00) (.004)
Average shares
outstanding 32,476,250 32,476,250 30,167,056 26,554,183 21,575,697
</TABLE>
15
<PAGE>
<TABLE>
<CAPTION>
FY FY FY
1999 1998 1997 1996 1995
---- ---- ---- ---- ----
<S> <C> <C> <C> <C> <C>
Balance Sheet Data:
Current Assets 1,887,666 2,771,380 3,489,288 0 0
Total 3,493,956 0 4,033,486 50,802 0
Assets
Current 81,109 47,455 137,341 53,327 37,407
Liabilities
Long-term debt,
net of current
Portion 0 0 0 0 0
Deficit Accum-
ulated during
Exploration
Stage (2,926,071) (2,352,887) (1,711,757) (1,161,943) (1,158,825)
Stockholders'
equity (deficiency) 3,412,847 3,986,031 4,627,161 (2,525) (37,407)
</TABLE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND CHANGES IN
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The Company has no primary income source from oil producted (commencing in
2000), as well as interest on deposits, other than interest on deposits, at this
time. Capital from private placements or borrowing against assets may be
required to fund future operations. The company completed a private offering of
Units at $1.00 per share for $5,179,500, in May 1997.
The Company had no operating revenues for the twelve month period ending
December 31, 1999, but had interest income of $157,538. The Company recommenced
limited business operations in late 1996, and has incurred a significant net
loss from operations in 1997 through 1999, resulting from costs of participation
in its joint oil exploration venture in Peoples Republic of China which it has
now terminated and its West Gharib, Egypt joint venture participation. The
Company may continue to show losses resulting from joint venture participation
for an indeterminate time. In 1997, the Company commenced regular operations and
has incurred significantly greater expenses which continued through 1999.
The Company incurred the following expenses in the past fiscal
year compared to the 1998 fiscal year.
16
<PAGE>
<TABLE>
<CAPTION>
December 31, December 31,
1998 1999
<S> <C> <C>
OPERATING EXPENSES
Accounting $44,651 $40,011
Consulting 38,288 54,436
Foreign exchange (gain) loss 1,111 1,866
Interest and bank charges 619 2,421
Investor relations 9,834 28,118
Legal 12,104 27,852
Office and general 29,957 31,153
Printing 0 0
Promotion 0 0
Rent 8,020 9,217
Telephone 2,718 0
Transfer Agent 11,042 1,632
Travel 0 21,732
Write-off of advances 24,061 0
TOTAL OPERATING COSTS $182,405 $218,441
============= ===========
</TABLE>
It is expected that expenses may continue at a significantly increased rate
due to costs of development of its oil opportunities and implementing
exploration pursuant to joint ventures. In the event oil exploration joint
ventures continue to be unsuccessful, continued significant losses should be
anticipated.
Cash Flows:
The Company has achieved no revenues from any operations
during the year, ending December 31, 1999.
At this time, the Company is dependent upon its cash reserves,
interest income, private placements, or loans for future operations and funding.
When its cash reserves are depleted, it may have to either borrow money, if
possible, or raise funds through subsequent
17
<PAGE>
public or private offerings to continue operations until when, or if, it ever
develops sufficient revenue from its assets to maintain operations. If operating
losses continue at the same rates in the future as in 1998 and 1999, the Company
will deplete its cash within the 2001 fiscal year absent income from oil
production or new investment capital. If revenues are not generated, the Company
will be forced to develop another line of business, or to finance its operations
through borrowed funds, the sale of assets it has, or enter into the sale of
stock for additional capital none of which may be feasible when needed. The
Company has no specific management ability, and no financial resources or plans
to enter any other business as of this date although the Company will be open to
suggestion and opportunity. Revenues from oil production have commenced in early
2000.
CHANGES IN FINANCIAL CONDITION
At year end 1999 the Company's assets were $3,493,956 compared to
$4,033,486 at end of 1998. The decrease was a result of continuing expenditures
for the exploration for drilling participations in Egypt.
The liabilities, all of which are current liabilities, increased
significantly as a result of accounts payable related to expenses for the oil
exploration participation in Egypt. At year end 1999, current liabilities were
$81,109 an increase of 85% over the 1998 year end liabilities of $47,455.
Stockholders' equity at year end 1999 was $3,412,847, a decrease over the
1998 stockholder's equity of $3,986,031, resulting from losses on operations.
From the aspect of whether the Company can continue toward its business
goal of exploring for oil, the Company may use all of its available capital
without generating revenues. Without revenues from oil production and without
continued capital infusions or loans or a combination thereof, it is doubtful
that the Company can carry out its business goals regarding any oil exploration
operations or participations for any extended period beyond 2000. The Company
expects significant revenues in 2000 from the participation in the two
successful oil wells in West Gharib, Egypt. First revenues were received in
first quarter 2000.
Results of Operations for Year Ended December 31, 1999 Compared to Same Period
in 1998
The Company had no revenues from Operations in 1999 or 1998. However,
it had interest income of $134,930 in 1999 and $157,538 in 1998.
The Company participated in two oil wells in the West Gharib, Egypt
area in 1999, both of which were completed as producers. Revenue from production
did not begin until year 2000 due to restricted transportation from the locale.
The Company has a 20% working interest in the two wells in West Gharib, Egypt.
The exploration expenses in 1999 on the wells were $489,673 as compared to
expenditures of $616,263 in 1998.
The Company had general and administrative expenses of $218,441 in 1999
and $182,405 in such expenses in 1998. The largest items of expenses for 1999
and 1998 are shown below.
18
<PAGE>
1999 1998
---- ----
Accounting & Audit $40,011 $44,651
Consulting 54,436 38,288
Investor Communications 28,118 9,834
Legal 27,852 12,104
Office & General 31,153 29,957
Travel 21,735 11,042
The increased expenses for consulting, legal, office/general, and
travel are due to the increased activity level of the Company in dealing with
its investment in the West Gharib, Egypt venture. The increased cost of investor
communications results from the efforts of the Company to more effectively
inform its shareholders of its business activities.
The Company had a net loss on operations of ($708,114) in 1999 compared
to the net loss on operations in 1998 of ($798,668). The net loss after interest
income was ($573,184) in 1999 and ($641,130) in 1998. The net loss per share in
1999 was ($.02) compared to ($.02) 1998.
<TABLE>
<CAPTION>
EXPLORATION EXPENSES
January 1,
1997 (date of
Inception of
Exploration
Stage) to
Nixgxia December
Concession West Gharib 1999 Total 1998 Total 1997 Total 31, 1999
- ------------- ------------- ------------ ----------- ------------- ---------------
<S> <C> <C> <C> <C> <C>
$70,135 $419,538 $489,673 $616,263 $433,793 $1,539,731
</TABLE>
Results of Operations for Year Ended December 31, 1998 as Compared to Year Ended
December 31, 1997
The Company had no revenues from operations in 1998; however, it had
interest income of $157,538. The Company had no revenues in 1997 but had
interest income of $135,266.
In 1998, the Company incurred $182,405 in general and administrative
expenses, a decrease from $247,566 in 1997. The Company had dry hole expenses of
$40,403 in 1998 compared to $147,281 in 1997. The Company incurred $575,860 in
exploration expenses in
19
<PAGE>
1998 as compared to $286,514 in exploration expenses in 1997. The Company
incurred a loss on operations of ($798,668) in 1998 as compared to the loss on
operations of $ ($685,080) in 1997.
The Company incurred a net loss in 1998 of ($641,130) and in 1997 had a
net loss of ($549,814). The net loss per share was ($.02) in 1998 and ($.02) in
1997.
LIQUIDITY
The Company expects that its need for liquidity will increase for the
coming year due to its drilling expense obligations on its Egyptian oil venture
participation
Short Term.
On a short term basis, the Company does not generate any revenue to
cover operations. Based on prior experience, the Company believes it will
continue to have insufficient revenue to satisfy current and recurring
liabilities. For short term needs the Company will be dependent on cash reserves
and revenues from oil production which commenced in 2000.
The Company had current assets of $1,887,666 at December 31, 1999 and
had current liabilities of $81,109.
Long Term.
On a long-term basis, the Company has no fixed assets and no long term
debt. It did have at year end 1999 $1,867,417 in cash.
The Company has no business at this time from which it generates
income. Its operations have no net cash flow at this time. However, oil revenues
have begun from the two successful well participations in West Gharib, Egypt. It
is reliant upon success in its oil exploration ventures, at this time, for
possibility of future income, none of which are assured.
CAPITAL RESOURCES
The primary capital resources of the Company are its stock and cash on
deposit only. Stock may be illiquid because it is restricted in an unproved
company with no income.
As of the date of this report, the Company has material commitments for
capital expenditures within the next year, pursuant to the Egyptian joint
ventures, which amounts may exceed its available capital of $1,887,666.
ITEM 7. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
The response to this Item is included as a separate Exhibit to
this report. Please see pages F-1 through F-11.
20
<PAGE>
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
a) None
b) In connection with audits of two most recent fiscal years
and any interim period preceding resignation, no disagreements exist with any
former accountant on any matter of accounting principles or procedure, which
disagreements if not resolved to the satisfaction of the former accountant would
have caused him to make reference in connection with his report to the subject
matter of the disagreement(s).
c) The principal accountant's report on the financial
statements for any of the past two years contained no adverse opinion or a
disclaimer of opinion nor was qualified as to uncertainty, audit scope, or
accounting principles except for the "going concern" qualification.
d) The decision to change accountants was approved by the
Board of Directors as the registrant has no audit committee.
21
<PAGE>
PART III
ITEM 9. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
(a) The following table furnishes the information concerning the
directors of the Company as of December 31, 1999. The directors of the Company
are elected every year and serve until their successors are elected and qualify.
Name Age Title Term
- ---- --- ----- ----
Gerald William Runolfson 59 President and Director Annual
Ernest Cheung 49 Secretary and Director Annual
Patrick Pak Ling Chan 45 Director and Chairman Annual
Joseph S. Tong 49 Director Annual
The term of office for each director is one (1) year, or until his/her
successor is elected at the Company's annual meeting and qualified. The term of
office for each officer of the Company is at the pleasure of the board of
directors.
The board of directors has no nominating, auditing committee but has
set up a compensation committee. Therefore, the selection of person or election
to the board of directors was neither independently made nor negotiated at arm's
length.
The term of office for each director is one (1) year, or until his/her
successor is elected at the Company's annual meeting and qualified. The term of
office for each officer of the Company is at the pleasure of the board of
directors.
(c) Identification of Certain Significant Employees.
There are no employees other than the executive officers disclosed
above who make, or are expected to make, significant contributions to the
business of the Company, the disclosure of which would be material.
(d) Family Relationships. None.
(e) Business Experience.
The following is a brief account of the business experience during the
past five years of each director and executive officer of the Company, including
principal occupations and employment during that period and the name and
principal business of any corporation or other organization in which such
occupation and employment were carried on.
22
<PAGE>
MANAGEMENT EXPERIENCE
Gerald William Runolfson, President and Director, age 59, has been
President and Director of the Company since 1991. He received a Bachelor of
Science in Civil Engineering in 1963 from University of Saskatchewan Canada. He
studied Business Administration 1970 - 1971 at University of Alberta, Canada.
From 1988 to date, he has been President of International Butec Industries
Corp., Vancouver, B.C. From 1991 to 1994 he was President of N-Viro Recovery,
Inc. From 1994 to present he has been President of Elkon Products, Inc. of
Vancouver, B.C. He has been a Director of Horseshoe Gold Mines since 1991.
Ernest Cheung, Secretary and Director, age 49, received an MBA in Finance
and Marketing from Queen's University, in Kingston, Ontario in 1975, and
obtained a Bachelors Degree in Math in 1973 from University of Waterloo,
Ontario. From 1984 to 1991 he was vice President and Director, Capital Group
Securities, Ltd. in Toronto, Canada. From 1991 to 1993 he was Vice President of
Midland Walwyn Capital, Inc. of Toronto, Canada. From 1993 to 1994 he was Vice
Chairman, Tele Pacific International Communications Corp. of Vancouver, B.C.
From 1994 - 1996 he was Vice President of Finance of BIT Integration Technology,
Inc. of Toronto, Canada. From May 1995 to present he has served as President of
Richco Investors, Inc. of Vancouver, BC.
From 1992-1995, he served as a Director of Tele Pacific International
Communications Corp. (VSE). He has also served as a Director of Richco
Investors, Inc. (CDN) since 1995. From 1995-1996, he was a Director of BIT
Integration Technology, Inc. (ASE). Since 1997, he has served and is still
serving as Director of the following companies: Agro International Holdings,
Inc. (VSE); Spur Ventures, Inc. (VSE); Drucker Industries, Inc. (NASD Bulletin
Board); Xin Net Corp. (NASD Bulletin Board); Speechlink Communications Corp.
(NASD); Global-Pacific Minerals, Inc. (TSE); and Pacific E-Link Corp. (VSE);
NetNation Communications, Inc. (Nasdaq small cap.).
He has held a Canadian Securities license but is currently inactive. He
has been a Director of Registrant since January 1997.
Patrick Pak Ling Chan, age 45, has been a Director of Registrant since
January 1997 and is now Chairman. He graduated from McGill University in
Montreal, Quebec with a Bachelor of Commerce in Accounting in 1977. He is a
Chartered Accountant in British Columbia (since 1980). From 1992 to 1993 he was
executive assistance to the Chairman, Solid Pacific Enterprises, a company
engaged in manufacturing and distribution of confectionery products in Hong Kong
and China. From 1985 to 1992 he was employed at Coopers & Lybrand, Toronto,
Canada, and focused on mergers and acquisitions. From 1993 to 1995 he was a
registered Securities Representative with Bache Securities.
Joseph S. Tong, age 49, has been a director of Registrant since January
1997. Mr. Tong matriculated from La Salle College, Kowloon, Hong Kong in 1968.
From 1986 to 1990 he was a Branch Manager for Canadian Imperial Bank of
Commerce. From 1990 to 1994 he
23
<PAGE>
was Regional Manager, Asian Banking, Canadian Imperial Bank of Commerce. From
1994 to 1995 he was President of China Growth Enterprises Corporation. From 1995
to present he has been a Director, Corporate Finance, of Corporate Capital Group
in Ontario, Canada. He is currently a director of Agro International Holdings,
Inc. of Vancouver, B.C. since January 1997 and Global Pacific Minerals, Inc. of
Vancouver, B.C. since January 1997.
Directors Compensation
Each member of the Board of Directors of the Company receives $1,000.00
plus reasonable outside travel expenses for each Board meeting he attends and
for each Committee meeting he attends during the fiscal year. Directors who are
also officers of the Company receive no compensation for services as a director.
ITEM 10. EXECUTIVE COMPENSATION
(a) Cash Compensation.
Compensation paid by the Company for all services provided during the
fiscal year ended December 31, 1999, (1) to each of the Company's five most
highly compensated executive officers whose cash compensation exceeded $60,000
and (2) to all officers as a group is set forth below under directors.
24
<PAGE>
<TABLE>
<CAPTION>
SUMMARY COMPENSATION TABLE OF EXECUTIVES
Annual Compensation Awards
<S> <C> <C> <C> <C> <C> <C>
Name and Year Salary ($) Bonus Other Annual Restricted Securities
Principal ($) Compensation ($) Stock Underlying
Position Award(s)($) Options/SARs(#)
Gerald 1999 0 0 0 0 0
Runolfson,
President and
Director
1998 0 0 0 0 0
1997 0 0 0 0 0
Ernest Cheung, 1999 0 0 0 0 0
Secretary and
Director
1998 0 0 0 0 0
1997 0 0 0 0 0
Patrick Chan, 1999 0 0 0 0 0
Director
1998 0 0 0 0 0
1997 0 0 0 0 0
Joseph Tong, 1999 0 0 0 0 0
Director
1998 0 0 0 0 0
1997 0 0 0 0 0
</TABLE>
(b) Compensation Pursuant to Plans. None.
(c) Other Compensation. None. No stock appreciation rights or warrants
exist to management
(d) Compensation of Directors.
Compensation paid by the Company for all services provided during the
fiscal year ended December 31, 1999 (1) to each of the Company's directors whose
cash compensation exceeded $60,000 and (2) to all directors as a group is set
forth below:
DIRECTOR COMPENSATION FOR LAST FISCAL YEAR
(Except for compensation of Officers who are also Directors which Compensation
is listed in Summary Compensation Table of Executives)
25
<PAGE>
<TABLE>
<CAPTION>
Cash Compensation Security Grants
Name Annual Meeting Consulting Number Number of Securities
Retainer Fees ($) Fees/Other of Underlying
Fees ($) Fees ($) Shares(#) Options/SARs(#)
<S> <C> <C> <C> <C> <C>
A. Director 0 0 0 0 0
Gerald Runolfson
B. Director 0 0 0 0 0
Ernest Cheung
C. Director 0 0 0 0 0
Patrick Chan
D. Director 0 0 0 0 0
Joseph Tong
</TABLE>
(e) Termination of Employment and Change of Control Arrangements.
None
(f) EMPLOYEES' STOCK OPTIONS
Share Purchase Options
Patrick Chan 550,000 shares (1)
FKT Exploration Consultants, Ltd. 325,000 shares
Ken K Consulting, Ltd. 325,000 shares (2)
Cobilco Inc. 550,000 shares (3)
Lancaster Pacific Investment Ltd. 550,000 shares
Gerry Runolfson 300,000 shares (4)
Yonderiche Int'l Consultants 150,000 shares
808719 Ont. Ltd. 100,000 shares (5)
Gemscor Management Ltd. 100,000 shares (6)
The above options shall be 5 years in length to expire on May 31, 2004 and
exercisable in whole or in part at US$0.40 per share.
(1) Mr. Chan is Chariman of the Board of the Company.
(2) Ken Kow is a paid consultant of the company.
(3) Cobilco is owned by Raoul Tsakok, a director, of Richco Investors, Inc., a
major shareholder in the company.
(4) Mr. Runolfson is President and director of the company.
(5) 808719 Ont., Ltd. is owned and controlled by Joe Tong, a director.
(6) Gemscor Management, Ltd. is owned and controlled by Maurice Tsakok, a
director of Richco Investors, Inc. a major shareholder of the Company.
Section 16(a) of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), requires the Company's officers and directors, and persons who
own more than 10% of a registered class of the Company's equity securities, to
file reports of ownership and changes in ownership of equity securities of the
Company with the Securities and Exchange Commission and NASDAQ. Officers,
directors and greater-than 10% shareholders are required by the Securities and
Exchange Commission regulation to furnish the Company with copies of all Section
16(a) that they file. No officers, directors or 10% shareholders have filed any
Reports pursuant to Section 16(a) at year end.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
(a) Beneficial owners of five percent (5) or greater, of the
Registrant's Common Stock and Warrants: No Preferred Stock is outstanding at the
date of this offering. The following sets forth information with respect to
ownership by holders of more than five percent (5%) of the Company's Common
Stock known by the Company based upon 32,476,250 shares outstanding at December
31, 1999.
26
<PAGE>
<TABLE>
<CAPTION>
Title Name and Amount and Percent
of Address of Nature of of
Class Beneficial Owner Beneficial Interest Class
- ----- ---------------- ------------------- -------
<S> <C> <C> <C>
Common Stock Richco Investors, Inc. 9,225,000(1)(2) 28.4%
789 West Pender St. #830
Vancouver, B.C. Canada V6C 1H2
b) The following sets forth information with respect to the Company's
Common Stock beneficially owned by each Officer and Director, and by all
Directors and Officers as a group. (Table does not include options granted to
officers and directors. See Item 10(f) Employee Stock Options.)
Title Name of Amount and Percent
of Beneficial Nature of of
Class Owner Beneficial Ownership Class
----- ----- -------------------- -----
Common Gerald Runolfson 512,501 (a)(b) 1.5%
President and Director
4151 Rose Crescent
West Vancouver, B.C. Canada
(a) Porta-Pave Industries, Inc. (company owned
by Runolfson family) 380,002
(b) Gerald Runolfson, individually 132,499
512,501
Title Name of Amount and Percent
of Beneficial Nature of of
Class Owner Beneficial Class
----- ----- Ownership -----
---------
Common Ernest Cheung 9,225,000(1)(2) 28.4%
Secretary and Director
6091 Richards Drive
Richmond, B.C. Canada
V7C 5R2
Common Patrick Chan 0 0%
Director and Chairman
#7 Conduit Road, Flat 6E
Hong Kong
Common Joseph Tong, Director 0 0%
33 Allview Crescent
North York, Ont., Canada
M2J 2R4
27
<PAGE>
Officers and Directors as a Group 9,737,501 29.98%
</TABLE>
(1) 9,225,000 shares are owned by Richco Investors, Inc. of which Ernest
Cheung is a director, officer and shareholder.
(2) Richco Investors, Inc. is beneficially owned by Raoul Tsakok
through ownership of 50%+ shares of common stock of Richco Investors, Inc.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Certain Transactions
The Company's interest in the West Gharib Egyptian oil and gas
concession is subject to a 7% net profit interest payable to a related company,
Richco Investors, Inc., beneficially owned by Ernest Cheung, director and
secretary, after DPI has recovered all of its exploration and development
expenditures. This company is related by virtue of common directors.
Oil and gas project costs - advances to (due from) project are advanced
to companies with a common director. These advances are unsecured, non-interest
bearing and have no specific terms for repayment.
The Company was charged the following expenses by a related company:
1999 1998 1997
---- ---- ----
Consulting $ $ - $ -
Office & general 13,785 -
Rent 8,020 -
-------------------------------------------------------
$21,805 -
=======================================================
This company was related by virtue of common directors.
Certain employees, officers, directors, and affiliates were granted options
in November 1999. The options are exercisable at $.40 per share and extend until
May 31, 2004.
1. Mr. Chan, who is Chairman of the Board of the Company, was granted an
option for 550,000 shares.
2. Ken Kow is a paid consultant of the Company and received a 325,000 share
option.
3. Cobilco is owned by Raoul Tsakok, a director, of Richco Investors, Inc.,
a majority shareholder in the company. Cabilco was granted a 550,00 share
option.
4. Mr. Runolfson is President and director of the Company. He received a
300,000 share option.
5. 808719 Omt., Ltd. is owned and controlled by Joe Tong, a director. It
received a 100,000 share option.
6. Gemscor Managment, Ltd. is onwed and controlled by Maurice Tsakok, a
director of Richco Investors, Inc. a major shareholder of the Company. It was
awarded a 100,000 share option.
28
<PAGE>
ITEM 13. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS
ON FORM 8-K
(a) Financial Statements and Schedules. The following
financial statements and schedules for Drucker Industries, Inc., as of December
31, 1999 and 1998 are filed as part of this report.
<TABLE>
<CAPTION>
Page
<S> <C> <C>
(1) Financial statements of Drucker Industries, Inc:
Reports of Independent Accountants, Amisano & Hanson
for years ended December 31, 1999 and December 31, 1998 F-1
Balance Sheets F-2
Statements of Operations F-3
Statements of Shareholders' Equity F-4 - F-6
Statements of Cash Flow F-7
Schedule of General and Administrative expenses Schedule #1
Schedule of Dry Hole expenses Schedule #2
Schedule of Exploration expenses Schedule #3
Notes to Financial Statements F-8 - F-11
(2) Financial Statement Schedules:
(a) None
(b) Reports on Form 8-K: None
(c) Exhibits
</TABLE>
Item No.
(under 601)
4.1 Articles of Incorporation and By-Laws: Incorporated by
Reference as filed with Form 10 with the Securities and
Exchange Commission
10.1 West Gharib Egypt Joint Operating Agreement: Incorporated by
Reference to 10KSB for period ended 12/31/98
West Gharib Block Operating/Technical Committee meeting March
1999 Resolution: Incorporated by Reference to 10KSB for period
ended 12/31/98
10.2 West Gharib Block Operating/Technical Committee meting March
1999 Resolution: Incorporated by Reference to 10KSB for period
ended 12/31/98
10.3 Farmout Agreement: Incorporated by Reference to 10KSB for
period ended 12/31/98
29
<PAGE>
10.4 Concession Agreement - West Gharib: Incorporated by Reference
to 10KSB for period ended 12/31/98
10.5 Algeria Farm In Agreement
30
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
DATE April 18, 2000 DRUCKER INDUSTRIES, INC.
/s/ Gerald Runolfson
By: --------------------------------
Gerald Runolfson, President
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the Registrant and in the capacities and on the dates indicated.
/s/ Gerald Runolfson
- ---------------------- President April 18, 2000
Gerald Runolfson and Director
/s/ Ernest Cheung
- ---------------------- Secretary April 18, 2000
Ernest Cheung and Director
/s/ Patrick Pak Ling Chan
- ---------------------- Director April 18, 2000
Patrick Pak Ling Chan
/s/ Joseph S. Tong
- ---------------------- Director April 18, 2000
Joseph S. Tong
31
<PAGE>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
REPORT AND CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Stated in U.S. dollars)
<PAGE>
TERRY AMISANO LTD. AMISANO HANSON
KEVIN HANSON, C.A. CHARTERED ACCOUNTANTS
AUDITORS' REPORT
To the Stockholders,
Drucker Industries, Inc.
We have audited the consolidated balance sheets of Drucker Industries, Inc. as
at December 31, 1999 and 1998 and the statements of operations, stockholders'
equity and cash flows for each of the years in the three year period ended
December 31, 1999 and for the period from inception of the exploration stage,
January 1, 1997 to December 31, 1999. These financial statements are the
responsibility of the company's management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform an audit to obtain
reasonable assurance whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the company as at December 31, 1999
and 1998 and the results of its operations and cash flows for each of the years
in the three year period ended December 31, 1999 and for the period from
inception of the exploration stage, January 1, 1997 to December 31, 1999, in
accordance with generally accepted accounting principles in the United States.
Vancouver, Canada "AMISANO HANSON"
March 10, 2000 Chartered Accountants
Suite 604 - 750 West Pender Street, Vancouver, BC, Canada, V6C 2T7
Telephone: (604) 689-0188
Facsimile: (604) 689-9773
E-MAIL: [email protected]
<PAGE>
<TABLE>
<CAPTION>
SEE ACCOMPANYING NOTES
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
CONSOLIDATED BALANCE SHEETS
December 31, 1999 and 1998
(Stated in U.S. dollars)
ASSETS 1999 1998
------ ---- ----
<S> <C> <C>
Current
Cash and cash equivalents - Note 3 $ 1,867,417 $ 2,763,628
Accrued interest receivable 10,958 5,483
Prepaid expenses 1,089 2,269
Advances receivable 8,202 -
1,887,666 2,771,380
Oil and gas projects - Notes 4 and 6 1,606,290 1,262,106
$ 3,493,956 $ 4,033,486
LIABILITIES AND STOCKHOLDERS' EQUITY
Current
Accounts payable and accrued expenses $ 81,109 $ 47,455
Stockholders' Equity - Notes 5 and 10
Common stock $.001 par value, authorized 50,000,000 shares:
32,476,250 shares issued and outstanding 32,115 32,115
Additional paid-in capital 6,306,803 6,306,803
Deficit accumulated during the exploration stages ( 2,926,071) ( 2,352,887)
Total stockholders' equity 3,412,847 3,986,031
$ 3,493,956 $ 4,033,486
Nature of Operations - Note 1
Commitment - Note 5
Subsequent Event - Note 10
</TABLE>
APPROVED BY THE BOARD:
"Gerry Runolfson" "Ernest Cheung"
- -------------------------, Director --------------------------, Director
SEE ACCOMPANYING NOTES
<PAGE>
<TABLE>
<CAPTION>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF OPERATIONS
for the years ended December 31, 1999, 1998 and 1997
and January 1, 1997 (Date of Inception of Exploration Stage)
to December 31, 1999
(Stated in U.S. dollars)
January 1, 1997
(Date of
Inception of
Exploration
Stage) to
Year ended December 31, December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Interest income $ ( 134,930) $ ( 157,538) $ ( 135,266) $ ( 427,734)
General and administrative expenses
- Schedule 1 218,441 182,405 247,566 648,412
Fiscal agent fees - - 3,719 3,719
Exploration expenses - Schedule 2 489,673 616,263 433,795 1,539,731
Net loss $ ( 573,184) $ ( 641,130) $ ( 549,814) $ ( 1,764,128)
Net loss per share $ ( 0.02) $ ( 0.02) $ ( 0.02)
Weighted average shares outstanding 32,476,250 32,476,250 30,167,056
</TABLE>
SEE ACOMPANYING NOTES
<PAGE>
<TABLE>
<CAPTION>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
for the years ended December 31, 1989 to December 31,
1999 and February 4, 1971 (Date of Inception) to December 31, 1999
(Stated in U.S. dollars)
Deficit
Additional Accumulated
Common Stock Paid-in During
Shares Amount Capital Exploration Stages Total
<S> <C> <C> <C> <C> <C>
Shares issued to acquire Monetary Metals, Inc. 675,000 $ 675 $ ( 675) $ - $ -
Shares issued to acquire net assets of Drucker Sound
Design Corporation 2,700,000 2,700 65,046 - 67,746
Net loss from inception to December 31, 1989 - - - $ ( 8,115) ( 8,115)
Net loss for year ended December 31, 1990 - - - (144,333) (144,333)
Five for one forward split of outstanding shares 13,500,000 13,500 (13,500) - -
Funds contributed by stockholder - - 124,196 - 124,196
Sale of units for cash, September 1991 1,050,000 1,050 103,950 - 105,000
Sale of units for cash, December 1991 750,000 750 74,250 - 75,000
Shares issued to settle debts 52,500 53 5,197 ( 5,250) -
Shares issued to directors as compensation 450,000 450 44,550 (45,000) -
Correct funds contributed to stockholders - - (24,990) - ( 24,990)
Interest on note payable - - - ( 7,370) ( 7,370)
Net loss for year ended December 31, 1991 - - - (38,417) ( 38,417)
Balance, December 31, 1991, as previously reported 19,177,500 19,178 378,024 (248,485) 148,717
Adjustments to previously reported amounts:
Fiscal agent fees - - (18,000) ( 7,300) ( 25,300)
Balance, December 31, 1991, as restated 19,177,500 19,178 360,024 (255,785) 123,417
Sale of common stock, March 1992 700,000 700 69,300 - 70,000
Sale of common stock, September 1992 500,000 500 54,500 - 55,000
Net loss for year ended December 31, 1992 - - - (78,078) (78,078)
Balance, December 31, 1992, as previously reported 20,377,500 20,378 483,824 (333,863) 170,339
Adjustments to previously reported amounts:
Fiscal agent fees - - (12,500) (20,600) ( 33,100)
Balance, December 31, 1992, as restated 20,377,500 20,378 471,324 (354,463) 137,239
.../cont'd.
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
<TABLE>
<CAPTION>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
for the years ended December 31, 1989 to December 31,
1999 and February 4, 1971 (Date of Inception) to December 31, 1999
(Stated in U.S. dollars)
Deficit
Additional Accumulated
Common Stock Paid-in During
Shares Amount Capital Exploration Stages Total
<S> <C> <C> <C> <C> <C>
Balance forward, December 31, 1992, as restated 20,377,500 20,378 471,324 ( 354,463) 137,239
Net loss for the year ended December 31, 1993 - - - ( 134,081) (134,081)
Balance, December 31, 1993 20,377,500 20,378 471,324 ( 488,544) 3,158
Adjustment to previously reported amounts:
Fiscal agent fees - - - ( 27,280) ( 27,280)
Balance, December 31, 1993, as restated 20,377,500 20,378 471,324 ( 515,824) ( 24,122)
Sale of common stock, July, 1994 200,000 200 29,800 - 30,000
Fiscal agent fees - - ( 3,000) - ( 3,000)
Net loss for the year ended December 31, 1994 - - - ( 563,546) (563,546)
Balance, December 31, 1994 20,577,500 20,578 498,124 ( 1,079,370) (560,668)
Shares issued to settle debts 5,976,683 5,977 596,739 - 602,716
Net loss for the year ended December 31, 1995 - - - ( 79,455) ( 79,455)
Balance, December 31, 1995 26,554,183 26,555 1,094,863 (1,158,825) ( 37,407)
Shares issued to settle debts 380,002 380 37,620 - 38,000
Net loss for the year ended December 31, 1996 - - - ( 3,118) ( 3,118)
Balance, December 31, 1996 26,934,185 26,935 1,132,483 ( 1,161,943) ( 2,525)
</TABLE>
.../cont'd.
<PAGE>
<TABLE>
<CAPTION>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIENCY)
for the years ended December 31, 1989 to December 31,
1999 and February 4, 1971 (Date of Inception) to December 31, 1999
(Stated in U.S. dollars)
Deficit
Additional Accumulated
Common Stock Paid-in During
Shares Amount Capital Exploration Stages Total
<S> <C> <C> <C> <C> <C>
Balance forward, December 31, 1996 26,934,185 26,935 1,132,483 (1,161,943) ( 2,525)
Sale of common stock, May, 1997 5,179,500 5,180 5,174,320 - 5,179,500
Shares issued for finder's fee 362,565 - - - -
Net loss for the year ended December 31, 1997 - - - ( 549,814) ( 549,814)
Balance, December 31, 1997 32,476,250 32,115 6,306,803 (1,711,757) 4,627,161
Net loss for the year ended December 31, 1998 - - - ( 641,130) ( 641,130)
Balance, December 31, 1998 32,476,250 32,115 6,306,803 (2,352,887) 3,986,031
Net loss for the year ended December 31, 1999 - - - ( 573,184) ( 573,184)
Balance, December 31, 1999 32,476,250 $32,115 $6,306,803 $( 2,926,071) $ 3,412,847
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
<TABLE>
<CAPTION>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
CONSOLIDATED STATEMENTS OF CASH FLOW
for the years ended December 31, 1999, 1998 and 1997
and January 1, 1997 (Date of Inception of Exploration Stage)
to December 31, 1999
(Stated in U.S. dollars)
January 1, 1997
(Date of Inception
of Exploration
Stage) to
Year ended December 31 December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Cash flow from operating activities:
Net loss $ ( 573,184) $ ( 641,130) $ ( 549,814) $ ( 1,764,128)
Add items not affecting cash:
Capital assets written-off - 40,288 - 40,288
Write-off of advances - 31,285 - 31,285
Project advances written-off 35,427 - - 35,427
( 537,757) ( 569,557) ( 549,814) ( 1,657,128)
Net changes in non-cash working
capital items related to operations:
Accrued interest receivable ( 5,475) ( 5,483) - ( 10,958)
Prepaid expenses 1,180 ( 2,269) - ( 1,089)
Advances receivable ( 8,202) 250,709 ( 250,709) ( 8,202)
Accounts payable and accrued expenses 33,654 ( 39,084) 84,014 78,584
Net cash used in operating activities ( 516,600) ( 365,684) ( 716,509) ( 1,598,793)
Cash flow used in investing activity
Oil and gas project costs ( 379,611) ( 58,462) ( 1,224,415) ( 1,662,488)
Net cash provided by (used in) investing
activity ( 379,611) ( 58,462) ( 1,224,415) ( 1,662,488)
Cash flow from financing activities:
Proceeds from sale of common stock - - 5,179,500 5,179,500
Advance payable - ( 50,802) - ( 50,802)
Net cash provided by (used in )
financing activities - ( 50,802) 5,179,500 5,128,698
Net increase (decrease) in cash ( 896,211) ( 474,948) 3,238,576 1,867,417
Cash and cash equivalents, beginning of period 2,763,628 3,238,576 - -
Cash and cash equivalents, end of period $ 1,867,417 $ 2,763,628 $ 3,238,576 $ 1,867,417
Cash and cash equivalents consist of:
Cash $ 186,417 $ 63,628 $ 39,948 $ 186,417
Term deposit 1,681,000 2,700,000 3,198,628 1,681,000
$ 1,867,417 $ 2,763,628 $ 3,238,576 $ 1,867,417
</TABLE>
Supplemental disclosures of cash flows:
Stock issued for payment of accounts payable in 1996 - $38,000 (1995: $243,716)
Stock issued for payment of promissory note in 1995 - $359,000
SEE ACCOMPANYING NOTES
<PAGE>
<TABLE>
<CAPTION>
Schedule 1
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
CONSOLIDATED SCHEDULE OF GENERAL AND ADMINISTRATIVE EXPENSES
for the years ended December 31, 1999, 1998 and 1997 and
January 1, 1997 (Date of Inception of Exploration Stage)
to December 31, 1999
(Stated in US Dollars)
January 1, 1997
(Date of
Inception of
Exploration
Stage) to
December 31,
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Accounting and audit fees $ 40,011 $ 44,651 $ 9,539 $ 94,201
Advances written-off - Note 6 - 24,061 - 24,061
Consulting - Note 6 54,436 38,288 32,185 124,909
Foreign exchange 1,866 1,111 ( 778) 2,199
Investor communication costs 28,118 9,834 46,689 84,641
Interest and bank charges 2,421 619 406 3,446
Legal 27,852 12,104 59,795 99,751
Office and general 31,153 29,957 46,576 107,686
Rent 9,217 8,020 7,376 24,613
Transfer agent fees 1,632 2,718 - 4,350
Travel 21,735 11,042 45,778 78,555
$ 218,441 $ 182,405 $ 247,566 $ 648,412
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
<TABLE>
<CAPTION>
Schedule 2
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
CONSOLIDATED SCHEDULE OF EXPLORATION EXPENSES
for the years ended December 31, 1999, 1998 and 1997 and January 1, 1997 (Date of Inception of Exploration Stage)
to December 31, 1999
(Stated in US Dollars)
January 1, 1997
(Date of
Inception of
Exploration
Stage) to
Ningxia West 1999 1998 1997 December 31,
Concession Gharib Total Total Total 1999
---------- ------ ----- ----- ----- ----
<S> <C> <C> <C> <C> <C> <C>
Administration $ - $ 76,266 $ 76,266 $ 40,529 $ 9,657 $ 126,452
Amortization - - - 7,901 12,968 20,869
Audit - - - 4,246 5,000 9,246
Consulting - - - - 10,875 10,875
Consumables - 77,924 77,924 30,072 - 107,996
Development costs - 4,139 4,139 - - 4,139
Drilling - 167,965 167,965 420 - 168,385
Entertainment - - - 4,752 9,816 14,568
Geological/geophysical - 70,157 70,157 164,940 - 235,097
Insurance (rebate) - - - ( 2,611) 5,256 2,645
Office Supplies - - - 64 6,272 6,336
Other - - - 3,237 7,526 10,763
Project advances written-off 65,406 - 65,406 31,285 - 96,691
Rent - - - 7,908 918 8,826
Repairs and maintenance - - - 629 1,983 2,612
Surveying and testing - - - 242,600 262,982 505,582
Telephone - - - 2,567 3,375 5,942
Travel 4,729 - 4,729 4,668 62,718 72,115
Wages and benefits - 23,087 23,087 43,948 34,449 101,484
Capital assets written-off - - - 40,288 - 40,288
Interest income - - - ( 7,614) - ( 7,614)
Other income - - - ( 3,566) - ( 3,566)
$ 70,135 $ 419,538 $ 489,673 $ 616,263 $ 433,795 $ 1,539,731
</TABLE>
SEE ACCOMPANYING NOTES
<PAGE>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Stated in U.S. dollars)
Note 1 Nature of Operations
The company currently is in the business of exploration and
development of oil and gas properties in Egypt and Algeria.
The company was incorporated in Idaho on February 4, 1971, as
Monetary Metals, Inc. On December 14, 1989, the company acquired
all the net assets of Drucker Sound Design, Inc. in exchange for
2,700,000 shares (13,500,000 shares after split) of common stock.
On December 30, 1989, the company changed its name to Drucker
Sound Design, Inc., and on June 19, 1990, the company changed its
domicile to Delaware. On September 5, 1991, the company changed
its name to Drucker Industries, Inc., and forward split the
outstanding shares of common stock on the basis of five for one.
The company is in the exploration stage and is in the process of
exploring its resource properties and has not yet determined
whether these properties contain reserves that are economically
recoverable. The recoverability of amounts shown for resource
properties is dependent upon the discovery of economically
recoverable reserves and confirmation of the company's interest in
the underlying properties, the ability of the company to obtain
necessary financing to satisfy the expenditure requirements under
resource property agreements and to complete the development of
the properties, and upon future profitable production or from the
sale thereof.
Note 2 Summary of Significant Accounting Policies
The consolidated financial statements of the company have been
prepared in accordance with generally accepted accounting
principles in the United States. Because a precise determination
of many assets and liabilities is dependent upon future events,
the preparation of financial statements for a period necessarily
involves the use of estimates which have been made using careful
judgement. Actual results may vary from these estimates.
The consolidated financial statements have, in management's
opinion been properly prepared within reasonable limits of
materiality and within the framework of the significant accounting
policies summarized below:
Principles of Consolidation
These consolidated financial statements include the accounts of
Drucker Industries, Inc. and its wholly-owned subsidiaries,
Drucker Petroleum Inc. ("DPI") and Drucker Petroleum (Algeria)
Inc. ("DPA"). DPI and DPA were incorporated by the company in the
British Virgin Islands on April 16, 1998 and September 22, 1999,
respectively. All inter-company transactions have been eliminated.
Exploration Stage Company
The company is an exploration stage company as defined in
Statement of Financial Accounting Standards No. 7 and the
Securities and Exchange Commission's Exchange Act Guide 7. The
company is devoting substantially all of its present efforts to
the business of exploration and development of oil and gas
properties in Egypt and Algeria. For the purposes of providing
cumulative amounts for the statements of operations and cash flow,
these amounts consider only those losses for the period from
January 1, 1997 to December 31, 1999, the period in which the
company has undertaken a new exploration stage activity.
<PAGE>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Stated in U.S. dollars)
Note 2 Summary of Significant Accounting Policies - (cont'd)
Oil and Gas Project Costs
The company follows the successful efforts method of accounting
for its oil and gas properties. Under this method, the initial
acquisition costs and the costs of drilling and equipping
development wells, are capitalized. The costs of drilling
exploratory wells are initially capitalized and, if subsequently
determined to be unsuccessful, are charged to operations as dry
hole expenses. Costs and reserves of properties are aggregated by
country. All other exploration expenditures, including geological
and geophysical costs and annual rentals on exploration acreage,
are charged to operations as incurred. Lease acquisition costs,
subsequently determined to be impaired in value, are charged to
operations.
No gains or losses are recognized on the sale or disposition of
oil and gas properties except when there is a material disposition
of reserves of a country. All other proceeds are credited against
the cost of the related properties.
Depletion of the net capitalized costs of producing wells and
leases is charged to operations on the unit-of-production method,
by country, based upon estimated proved reserves.
Investments in a company that is organized for the sole purpose of
holding an indirect interest in oil and gas concessions and such
investment is less than a 20% investment is accounted for under
the above noted oil and gas project costs policy.
Environmental Costs
Environmental expenditures that relate to current operations are
expensed or capitalized as appropriate. Expenditures that relate
to an existing condition caused by past operations, and which do
not contribute to current or future revenue generation, are
expensed. Liabilities are recorded when environmental assessments
and/or remedial efforts re probable, and the cost can be
reasonably estimated. Generally, the timing of these accruals
coincides with the earlier of:
i) completion of a feasibility study; or
ii) the company's commitment to a plan of action based on the then
known facts.
Income Taxes
The company uses the liability method of accounting for income
taxes pursuant to Statement of Financial Accounting Standards, No.
109 "Accounting for Income Taxes".
Net Loss Per Share
Net loss per share is based on the weighted average number of
common shares outstanding during each year.
Values
The amounts shown for oil and gas project costs represent costs to
date and do not necessarily reflect present or future values.
<PAGE>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Stated in U.S. dollars)
Note 3 Cash Equivalents
At December 31, 1999, included in cash and cash equivalents is a
financing deposit of $1,681,000 as required by a farm-out
agreement (Note 4). This deposit is held as collateral for a
letter of guarantee. The deposit will be used as payment for the
costs incurred in exploring the concession located in West Gharib,
Gulf of Suez, Egypt (Note 4).
Note 4 Oil and Gas Projects - Note 6
<TABLE>
<CAPTION>
1999 1998
Ningxia Shaanxi Total Total
<S> <C> <C> <C> <C>
China Concessions
Project advance $ - $ - $ - $ 893,670
Capital assets - - - 1,636
------------ ------------ ------------ ------------
$ - $ - - 895,306
------------ ------------ ------------ ------------
West Gharib, Egypt Concession
Acquisition costs
Cash 352,000 352,000
Project advance - 14,800
------------ ------------
352,000 366,800
Deferred exploration costs 629,290 -
------------ ------------
981,290 366,800
------------ ------------
Algerian Concession
Acquisition costs 625,000 -
------------ ------------
$ 1,606,290 $ 1,262,106
============ ============
</TABLE>
Project advances are advances to companies with a common director.
These advances are unsecured, non-interest bearing and have no
specific terms for repayment.
China Concessions
By a participation agreement dated January 21, 1997, the company
agreed to pay 100% of all the costs of exploring and developing
the Ningxia oil and gas concessions in Yanchi County, Ningxia
Province and WuQi county, Shaanxi Province, Peoples Republic of
China as consideration for an undivided 50% interest in all of the
profits generated from the concession.
By a participation agreement dated January 21, 1997, the company
agreed to pay 100% of all the costs of exploring and developing
the Shaanxi oil and gas concessions in North Shaanxi Province,
Peoples Republic of China as consideration for an undivided 50%
interest in all of the profits generated from the concessions.
<PAGE>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Stated in U.S. dollars)
Note 4 Oil and Gas Project Costs - Note 6 - (cont'd)
-------------------------
China Concessions - (cont'd)
By a participation agreement dated September 9, 1997, the company
agreed to pay 100% of all the costs of exploring and developing
the Fuxian oil and gas property in Fuxian County, Shaanxi
Province, Peoples Republic of China as consideration for an
undivided 50% interest in all of the profits generated from the
properties.
During the year ended December 31, 1998, the Fuxian concession was
abandoned. During the year ended December 31, 1999, the Ningxia
and Shaanxi oil and gas concessions were abandoned and all related
costs were included with exploration expenses.
The parties to the above agreements are related to the company by
virtue of common directors.
West Gharib Concession
On April 27, 1998, DPI entered into a farm-out agreement to
acquire an undivided 20% participating interest in the right to
explore for and exploit petroleum in a concession located in West
Gharib, Gulf of Suez, Egypt.
DPI shall pay:
- $352,000 within seven days of the execution of the agreement
(paid)
- pay 20% of all costs and expenses incurred subsequent to the
execution of the agreement related to this concession.
- 40% of the costs and expenses associated with the drilling of
an exploratory well to a maximum cost to the company of
$500,000; thereafter, DPI shall pay 20% of all costs and
expenses associated with any further activity associated with
the concession.
In addition, DPI provided a bank guarantee of $2,000,000 within
seven days of the execution of the agreement, being 40% of a
letter of guarantee (Note 3). As at December 31, 1999, this bank
guarantee has been reduced to $1,681,000
DPI's interest in this oil and gas concession is subject to a 7%
net profit interest payable to a related company, after DPI has
recovered all of its exploration and development expenditures.
This company is related by virtue of common directors.
During the year ended December 31, 1999, the company included
drilling costs of $167,965 related to an abandoned well with
exploration expenses.
At December 31, 1999, $629,290 incurred in respect to drilling an
exploration well and drilling and equipping a development well
have been capitalized.
<PAGE>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Stated in U.S. dollars)
Note 4 Oil and Gas Project Costs - Note 6 - (cont'd)
-------------------------
Algerian Concession
By a letter of intent dated October 27, 1999, the company acquired
10% of the issued capital stock of Santa Catalina (Algeria) Ltd.
(Algeria Concession SLM Algeria"), a company which, through its
wholly-owned subsidiary, Santa Catalina L.H. Lundin (Algeria) Ltd.
("SLM Lundin"), entered into an agreement to acquire a 25%
participating interest in an oil and gas concession in Algeria.
Subject to SLM Lundin earning its 25% participating interest, the
company may earn up to a 2.5% indirect interest in the property by
paying SLM Algeria $625,000 (paid) to acquire 10% of its capital
stock, and by funding its pro-rata share of SLM Lundin's portion
of the drilling and general and administrative costs in excess of
US$5,000,000 for testing and drilling of the first well.
In order to participate in the second well, the company must pay
SLM Algeria $600,000. The company will then be responsible for
their pro-rata share of SLM Lundin's portion of the drilling costs
and general and administrative costs in excess of $5,000,000
associated with the drilling and testing of the second well. This
agreement is in effect for one year.
All costs associated with this concession are shown as oil and gas
project costs.
Note 5 Common Stock - Note 10
During the year ended December 31, 1997, the company issued
5,179,500 shares of common stock at $1.00 per share for proceeds
of $5,179,500.
The company also issued 362,565 shares of common stock as a
finder's fee.
Commitment
Share Purchase Warrants
At December 31, 1999, 5,179,500 share purchase warrants are
outstanding. Each warrant entitles the holder to purchase one
additional unit of the company at $0.40 per unit until the earlier
of March 31, 2000 and the 90th day after the day on which the
weighted average trading price of the company's shares exceed
$0.90 per share for 10 consecutive trading days. Each unit
consists of one common share of the company and one additional
warrant. Each additional warrant entitles the holder to purchase
one additional common share of the company at $0.60 per share. The
additional warrants will expire one year after the occurrence of
the exercise of the original warrant.
Share Purchase Options
During the year ended December 31, 1999, the company granted
2,950,000 share purchase options entitling the holders thereof the
right to acquire 2,950,000 common shares at $0.40 per share to
June 30, 2004.
<PAGE>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Stated in U.S. dollars)
Note 6 Related Party Transactions - Note 4
During the year ended December 31, 1998, the company wrote-off
advances to a related company in the amount of $24,061 advanced
with respect to administration relating to the China oil and gas
exploration projects. This company is related by virtue of a
common director.
The company was charged the following by a director of the
company:
<TABLE>
<CAPTION>
January 1, 1997
(Date of Incep-
tion of Explora-
tion Stage) to
December 31
1999 1998 1997 1999
---- ---- ---- ----
<S> <C> <C> <C> <C>
Consulting $ - $ - $ - $ 36,000
============== ============== ============== ==============
</TABLE>
Note 7 Deferred Tax Assets
The Financial Accounting Standards board issued Statement Number
109 in Accounting for Income Taxes ("FAS 109") which is effective
for fiscal years beginning after December 15, 1992. FAS 109
requires the use of the asset and liability method of accounting
of income taxes. Under the assets and liability method of FAS 109,
deferred tax assets and liabilities are recognized for the future
tax consequences attributable to temporary differences between the
financial statements carrying amounts of existing assets and
liabilities and loss carryforwards and their respective tax bases.
Deferred tax assets and liabilities are measured using enacted tax
rates expected to apply to taxable income in the year in which
those temporary differences are expected to be recovered or
settled.
The following table summarized the significant components of the
company's deferred tax assets:
Total
Deferred Tax Assets
Net operating loss carryforward $ 3,500,000
===============
Deferred tax assets $ 1,750,000
Valuation allowance for deferred tax assets (1,750,000)
---------------
$ -
===============
The amount taken into income as deferred tax assets must reflect
that portion of the income tax loss carryforwards which is likely
to be realized from future operations. The company has chosen to
provide an allowance of 100% against all available income tax loss
carryforwards, regardless of their time of expiry.
<PAGE>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Stated in U.S. dollars)
Note 8 Income Taxes
No provision for income taxes has been provided in 1999, 1998 and
1997 due to the net loss. The company has net operating loss carry
forwards, which expire commencing in the year 2004 totalling
approximately $3,500,000, the benefits of which have not been
recorded.
Under the provisions of the Tax Reform Act of 1986, when there has
been a change in an entity's ownership of fifty percent or
greater, utilization of net operating loss carry forwards may be
limited. As a result of equity transactions occurring through
December 31, 1999, the company will be subject to such limitation.
The annual limitations have not been determined.
Note 9 Prior Period Change
The company determined that accounts payable at December 31, 1993
was understated by $85,680 due to accrued fiscal agent fees not
recorded. Of these fees, $27,280 related to the year ended
December 31, 1993 and $58,400 related to years prior to the year
ended December 31, 1993. Consequently the deficit accumulated
during the exploration stage at December 31, 1993 and at December
31, 1992 and additional paid-in capital at December 31, 1992 were
restated to reflect this adjustment.
Note 10 Subsequent Event
Subsequent to December 31, 1999, the company extended the terms of
the share purchase warrants to read as follows:
Each warrant entitles the holder to purchase one additional unit
of the company at $0.40 per unit until the earlier of March 31,
2001 and the 90th day after the day on which the weighted average
trading price of the company's shares exceed $2.50 per share for
10 consecutive trading days. Each unit consists of one common
share of the company and one additional warrant. Each additional
warrant entitles the holder to purchase one additional common
share of the company at $0.60 per share. The additional warrants
will expire one year after the occurrence of the exercise of the
original warrant.
<PAGE>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Stated in U.S. dollars)
Note 11 Segmented Information
The company's industry's segment is the oil and gas industry. The
company's geographic segments are Canada, China, Egypt and
Algeria.
<TABLE>
<CAPTION>
December 31, 1999
Canada China Egypt Algeria Total
<S> <C> <C> <C> <C> <C>
Identifiable Assets
Current $ 1,887,666 $ - $ - $ - $ 1,887,666
Oil and gas projects - - 981,290 625,000 1,606,290
------------- ------------- ------------- ------------- -------------
$ 1,877,666 $ - $ 981,290 $ 625,000 $ 3,493,956
============= ============= ============= ============= =============
December 31, 1998
Canada China Egypt Algeria Total
Identifiable Assets
Current $ 2,771,380 $ - $ - $ - $ 2,771,380
Oil and gas projects - 895,306 366,800 - 1,262,106
------------- ------------- ------------- ------------- -------------
$ 2,771,380 $ 895,306 $ 366,800 $ - $ 4,033,486
============= ============= ============= ============= =============
Year ended December 31,
1999 1998 1997
Operations
Canada $ ( 83,511) $ ( 24,867) $ ( 116,019)
China ( 70,135) ( 368,290) ( 433,795)
Egypt ( 419,538) ( 247,973) -
------------- ------------- ---------------
$( 573,184) $ ( 641,130) $ ( 549,814)
============= ============= ===============
</TABLE>
Note 12 New Accounting Standards
In December 1997, the Accounting Standards Board Issued statement
3465, "Income Taxes", which establishes standards for the
recognition, measurement, presentation and disclosure of income
and refundable taxes. This statement is effective for fiscal years
beginning on or after January 1, 2000. Adopting this standard will
not have a significant impact on the company's consolidated
financial position, results of operations or cash flows.
In April 1998, the Accounting Standards Executive Committee issued
SOP 98-5, "Reporting on the costs of start-up activities". This
statement is effective for fiscal years beginning after December
15, 1998. Adopting this standard does not have a significant
impact on the company's consolidated financial position, results
of operations or cash flows.
<PAGE>
DRUCKER INDUSTRIES, INC.
(An Exploration Stage Company)
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1999 and 1998
(Stated in U.S. dollars)
Note 12 New Accounting Standards - (cont'd)
In June 1998, the Financial Accounting Standards board issued SFAS
No. 133, "Accounting for Derivative Instruments and Hedging
Activities," which standardized the accounting for derivative
instruments. SFAS is effective for all fiscal quarters of all
fiscal years beginning after June 15, 1999. Adopting this standard
will not have a significant impact on the company's consolidated
financial positions, results of operations or cash flows.
Note 13 Uncertainty Due to the Year 2000 Issue
The Year 2000 Issue arises because many computerized systems use
two digits rather than four to identify a year. Date-sensitive
systems may recognize the year 2000 as 1900 or some other date,
resulting in errors when information using the year 2000 date is
processed. In addition, similar problems may arise in some systems
which use certain dates in 1999 to represent something other than
a date. Although the change in date has occurred, it is not
possible to conclude that all aspects of the Year 2000 Issue that
may affect the entity, including those related to customers,
suppliers or other third parties, have been fully resolved.
Note 14 Comparative Figures
Certain prior year's comparative figures have been reclassified to
conform with the presentation used in the current year.
EXHIBIT 10.5
ALGERIA FARM IN AGREEMENT
<PAGE>
SANTA CATALINA (BERMUDA) I LTD.
Suite 1320
885 West Georgia Street
Vancouver, British Columbia
Canada
October 27, 1999
Essex Resource (Barbados) Corporation
Suite 1220, 800 West Pender Street
Vancouver, B.C.
V6C 2V6
Attention: Mr. Ian Rozier
CVL Resources (Barbados) Ltd.
Suite 1220, 800 West Pender Street
Vancouver, B.C.
V6C 2V6
Attention: Mr. Ian Rozier
Drucker Petroleum (Algeria) Inc.
Suite 830, 789 West Pender Street
Vancouver, B.C.
V6C 1H2
Attention: Mr. Ernest Cheung
Dear Sirs:
The Hassi Bir Rekaiz Block in Algeria
-------------------------------------
We provide this letter to confirm that it is our intention to enter into a
formal agreement (the "Formal Agreement") with you whereby we will grant to you
the right to earn an interest in the Hassi Bir Rekaiz block in Algeria (the
"Transaction"). We acknowledge that this letter (the "Letter Agreement") will
constitute a binding agreement among, the parties. Any party may request that
the Formal Agreement including the terms of this Letter Agreement and such other
representations, warranties, terms and conditions as are generally accepted in
the industry be entered into, in which event our solicitors will draft the same
for review, consideration and comments by all parties, but until such Formal
Agreement is executed and delivered by all parties, this Letter Agreement will
prevail.
1. For the purposes of this Letter Agreement, the following terms shall be
defined as follows:
(a) "Arco" means Arco Ghadames Inc.;
(b) "Essex" means Essex Resource (Barbados) Corporation, having, an
office at the address appearing in the upper left hand corner of
the first page of this Letter Agreement;
(c) "Contract" means the "Contrat pour la Recherche et I'Exploitation
d'Hydrocarbures (Perimetre: Hassi Bir Rekaiz)" dated May 10, 1992,
as amended, between Sonatrach and Arco Alceria Inc., which
subsequently assigned 100% of its interest to Arco;
<PAGE>
(d) "CVL" means CVL Resources (Barbados) Ltd., having an office at the
address appearing in the upper left hand corner of the first page
of this Letter Agreement;
(e) "Drucker" means Drucker Petroleum (Algeria) Industries Inc., having
an office at the address appearing in the upper left hand corner of
the first page of this Letter Agreement;
(f) "Farminees" means Essex, CVL and Drucker collectively;
(g) "Santa Catalina" means Santa Catalina (Bermuda) I Ltd., having an
office at the address appearing at the top of the first page of
this Letter Agreement;
(h) "SLM Algeria" means Santa Catalina (Algeria) Ltd., a company
incorporated under the laws of Bermuda;
(i) "SLM Lundin" means Santa Catalina L.H. Lundin (Algeria) Ltd., a
company incorporated under the laws of Bermuda; and
(j) "Sonatrach" means National Enterprise Sonatrach.
2. Essex represents and warrants to Santa Catalina that it has good and
sufficient right and authority to enter into this Letter Agreement and, if the
Formal Agreement is entered into, the Formal Agreement, and carry out its
intentions under this Letter Agreement and, if the Formal Agreement is entered
into, its obligations under the Formal Agreement.
3. CVL represents and warrants to Santa Catalina that it has good and sufficient
right and authority to enter into this Letter Agreement and, if the Formal
Agreement is entered into, the Formal Agreement, and carry out its intentions
under this Letter Agreement and, if the Formal Agreement is entered into, its
obligations under the Formal Agreement.
4. Drucker represents and warrants to Santa Catalina that it has good and
sufficient right and authority to enter into this Letter Agreement and, if the
Formal Agreement is entered into, the Formal Agreement, and carry out its
intentions under this Letter Agreement and, if the Formal Agreement is entered
into, its obligations under the Formal Agreement.
5. Santa Catalina represents and warrants to each of Essex, CVL and Drucker that
Santa Catalina has good and sufficient right and authority to enter into this
Letter Agreement and, if the Formal Agreement is entered into, the Formal
Agreement, and carry out its intentions under this Letter Agreement and, if the
Formal Agreement is entered into, its obligations under the Formal Agreement.
6. The parties acknowledge the following facts:
(a) The subject of the Transaction is the Contract.
(b) Arco presently holds a 75% interest in the Contract.
(c) SLM Algeria is currently a wholly owned subsidiary of Santa
Catalina, with 12,000 common shares issued and outstanding.
(d) SLM Lundin is a wholly owned subsidiary of SLM Algeria, with
12,000 common shares issued and outstanding.
(e) Arco has agreed (the "Farm-Out Agreement"), a copy of which is
attached as Schedule "A", subject to, among other things, the
consent of Sonatrach and the Government of Algeria, to grant to
SLM Lundin the right to acquire a 25% participating interest in
the Contract on substantially the following terms:
<PAGE>
(i) SLM Lundin will pay to Arco 50% of the first US$8,000,000 of
drilling costs associated with the drilling and testing of the
first well (the "First Well") under the. Contract;
(ii) SLM Lundin will pay to Arco 25% of the drilling costs in excess
of US$8,000,000 associated with the drilling and testing of the
First Well and after SLM Lundin has made the payments described
in items 6(d)(i) and 6(d)(ii) above, SLM Lundin will have earned
its 25% participating interest in the Contract;
(iii) SLM Lundin will also pay to Arco 50% of the first US$8,000,000
of drilling costs associated with the drilling and testing of
the second well (the "Second Well") under the Contract;
(iv) SLM Lundin will also pay to Arco 25% of the drilling costs in
excess of US$8,000,000 associated with the drilling and testing
of the Second Well;
(v) SLM Lundin will provide to Arco a US$5,000,000 bank guarantee
from a bank acceptable to Arco to ensure that it is able to meet
its obligations;
(vi) Within 10 days after the receipt by SLM Lundin of the final well
logs relating to the First Well or prior to the spudding of the
Second Well, whichever is later, SLM Lundin will have the right
to withdraw from the Farmout Agreement by written notice to
Arco.
7. Subject to SLM Lundin earning its 25% participating interest in the Contract,
SLM Algeria hereby grants to Essex, CVL and Drucker the right to earn up to a
12.5% collective indirect interest in the Contract to be effected by SLM Algeria
issuing shares of SLM Algeria at the rate of 960 shares of SLM Algeria for each
US$250,000 (equivalent to one share of SLM Algeria for each US$260.42) paid to
SLM Algeria such that upon the receipt by SLM Algeria of the following amounts
from each of the Farminees, the respective interests held in SLM Algeria and the
Contract will be as follows:
<TABLE>
<CAPTION>
Name Amount Paid to No. of Shares of % interest in SLM % interest in
SLM Algeria SLM Algeria Algeria Contract
<S> <C> <C> <C> <C>
Santa Catalina N/A 12,000 50% 10%
Essex US $1,250,000 4,800 20% 5%
CVL US $1,250,000 4,800 20% 5%
Drucker US $625,000 2,400 10% 2.5%
</TABLE>
Each of the Farminees will pay to SLM Algeria the amounts set opposite their
names in the table above on the execution of this Letter Agreement.
8. The Farminees would be carried by SLM Algeria for the first US$5,000,000 of
SLM Lundin's portion of the drilling costs associated with the drilling and
testing of the First Well. Thereafter, the Farminees would pay to SLM Algeria
their pro-rata share (determined in accordance with their percentage interest in
SLM Algeria) of SLM Lundin's portion of the drilling costs and general and
administrative costs in excess of US$5,000,000 associated with the drilling and
testing of the First Well. The Farminees will have the right to withdraw from
the Formal Agreement within 10 days after the receipt by SLM Lundin of final
well logs relating to the First Well or prior to the spudding of the Second
Well, whichever is later.
9. In order to participate in the Second Well, the Farminees must first make
the following payments to SLM Algeria:
<PAGE>
Name Amount Paid to SLM Algeria
<PAGE>
Santa Catalina N/A
Essex US $1,200,000
CVL US $1,200,000
Drucker US$600,000
Subject to the receipt by SLM Algeria from each of the Farminees of the amounts
set opposite their names in the table above, the Farminees would be carried by
SLM Algeria for the first US$5,000,000 of SLM Lundin's portion of the drilling
costs associated with the drilling and testing of the Second Well. Thereafter,
the Farminees would pay to SLM Algeria their pro-rata share (determined in
accordance with their percentage interest in SLM Algeria) of SLM Lundin's
portion of the drilling costs and general and administrative costs in excess of
US$5,000,000 associated with the drilling and testing of the Second Well.
10. None of the Farminees will be the operator under the Contract.
11. Concurrently with the execution of this Letter Agreement, Santa Catalina,
Essex, CVL and Drucker will enter into a shareholders' agreement in respect of
their shares of SLM Algeria, which agreement will include restrictions on
transfer, rights of first refusal and anti-dilution provisions, in substantially
the form attached as Schedule "B".
12. Except as may be required by a stock exchange or other trading facility or
by any rule, regulation or law of any kind whatsoever which is applicable to a
party, while this Letter Agreement is in effect and for a period of one year
thereafter, each party shall keep confidential all discussions and
communications between them including, without limitation, all information
communicated therein and all written and printed materials of any kind
whatsoever exchanged between them and, if requested by a party to do so, the
other party shall arrange for its directors, officers, employees, authorized
agents and representatives that are or that may become aware of the relationship
between the parties created by this Letter Agreement to provide to the first
party a letter confirming their agreement to be personally bound by these
non-disclosure provisions.
13. Immediately upon signing this Letter Agreement, the parties shall be in
negotiations with a view to settling the form of Formal Agreement to suit their
ongoing relationship. All parties will proceed with these negotiations
expeditiously and in good faith. While the actual terms and conditions of the
Formal Agreement will be determined at that time, the parties acknowledge and
agree that they will follow the principles set forth herein.
14. Any notice or other communication of any kind whatsoever to be given under
this Letter Agreement shall be in writing and shall be delivered by hand, email
or by fax to the parties at:
SANTA CATALINA (BERMUDA) I LTD. CVL RESOURCES (BARBADOS) LTD.
Suite 1320 Suite 1220
885 West Georgia Street 800 West Pender Street
Vancouver, British Columbia Vancouver, British Columbia
Canada V6C 3E6 Canada V6C 2V6
Attention: Mr. Lukas H. Lundin Attention: Mr. Ian Rozier
Fax: (604) 689-4250 Fax: (604) 685-6493
Email: [email protected] Email: [email protected]
<PAGE>
SANTA CATALINA (ALGERIA) LTD. DRUCKER PETROLEUM (ALGERIA) LTD
Suite 1320 Suite 830
885 West Georgia Street 789 West Pender Street
Vancouver, British Columbia Vancouver, British Columbia
Canada V6C 3E8 Canada V6C 1H2
Attention: Mr. Lukas H. Lundin Attention: Mr. Ernest Cheung
Fax: (604) 689-4250 Fax: (604) 698-7654
Email: [email protected] Email: [email protected]
ESSEX RESOURCE (BARBADOS) CORPORATION
Suite 1220
800 West Pender Street
Vancouver, British Columbia
Canada V6C 2V6
Attention: Mr. Ian Rozier
Fax: (604) 685-6493
Email: [email protected]
or to such other addresses as may be given in writing by the parties hereto in
the manner provided for in this paragraph.
15. This Letter Agreement may not be assigned by any party hereto without the
prior written consent of all of the parties hereto.
16. This Letter Agreement shall be governed by the laws of British Columbia and
the federal laws of Canada applicable therein, and the parties hereby attom to
the jurisdiction of the Courts of British Columbia.
17. This Letter Agreement may be signed by fax and in counterpart.
IN WITNESS WHEREOF the parties have hereunto set their hands and seals effective
as of the date first above written.
SIGNED, SEALED AND DELIVERED BY
SANTA CATALINA (BERMUDA) I LTD. per:
- ----------------------------
Authorized Signatory
Name of Signatory: LUKAS H. LUNDIN
Title of Signatory: Director
<PAGE>
SIGNED, SEALED AND DELIVERED BY
SANTA CATALINA (ALGERIA) LTD. per:
- -----------------------------
Authorized Signatory
Name of Signatory: LUKAS H. LUNDIN
Title of Signatory: Director
SIGNED, SEALED AND DELIVERED BY
ESSEX RESOURSE (BARBADOS)
CORPORATION per:
- -------------------------------
Authorized Signatory
Name of Signatory: IAN J. ROZIER
Title of Signatory: Director
SIGNED, SEALED AND DELIVERED BY
CVL RESOURSES (BARBADOS) LTD. per:
- ---------------------------------------
Authorized Signatory
Name of Signatory: IAN J. ROZIER
Title of Signatory: Director
SIGNED, SEALED AND DELIVERED BY
DRUCKER PETROLEUM (ALGERIA) LTD. per:
- ----------------------------------------
Authorized Signatory
Name of Signatory: GERALD WILLIAM RUNOLFSON
Title of Signatory: Director
<PAGE>
SCHEDULE "A" TO THE LETTER AGREEMENT MADE BETWEEN
SANTA CATALINA (BERMUDA) I LTD., SANTA CATALINA (ALGERIA) LTD.,
ESSEX RESOURCE (BARBADOS) CORPORATION, CVL RESOURCES (BARBADOS) LTD.
and DRUCKER PETROLEUM (ALGERIA) INC.
FARMOUT AGREEMENT
-----------------
<PAGE>
FARMOUT AGREEMENT
BETWEEN
ARCO GHADAMES INC.
AND
SANTA CATALINA L.H. LUNDIN (ALGERIA) LIMITED
CONCERNING
HASSI BIR REKAIZ BLOCK
ONSHORE ALGERIA
<PAGE>
TABLE OF CONTENTS
-----------------
1 DEFINITIONS....................................................... 1
2 REPRESENTATIONS................................................... 5
3 FARMOUT TERMS..................................................... 7
4 ASSIGNMENT AND GOVERNMENT APPROVAL................................ 10
5 WORK PROGRAM AND EXPLORATION PHASE................................ 12
6 INFORMATION AND CONFIDENTIALITY................................... 14
7 GOVERNING LAW AND ARBITRATION..................................... 15
8 NOTICES........................................................... 15
9 MISCELLANEOUS..................................................... 16
Attachment "A" Form of Assignment
Attachment "B" Form of Avenant
Attachment "C" Form of Parent Company Guarantee
Attachment "D" Form of Novation
Attachment "E" Contract Area
Attachment "F" Estimate of Drilling Costs
Attachment "G" Bank Guarantee
Attachment "H" Data Room Index
<PAGE>
FARMOUT AGREEMENT
THIS AGREEMENT, made and entered into as of this _______ day of October 1999 by
and between:
ARCO GHADAMES INC, a company organized and existing under the laws of the State
of Delaware, U.S.A. ("ARCO"); and
SANTA CATALINA L.H. LUNDIN (ALGERIA) LIMITED a company organized and existing
under the laws of Bermuda ("Santa Catalina").
WITNESSETH
WHEREAS, the National Enterprise SONATRACH ("Sonatrach") and ARCO Algeria Inc.
entered into the "Contrat pour la Recherche et I'Exploitation d'Hydrocarbures
(Perimetre : Hassi Bir Rekaiz)" dated May 10, 1992, as amended (the "Contract");
and
WHEREAS, ARCO Algeria Inc. assigned an undivided one hundred percent (100%)
Participating Interest in the Contract to ARCO; and
WHEREAS, ARCO assigned an undivided twenty-five (25%) Participating Interest in
the Contract to Turkiye Petrolleri Anonim Ortakligi ("TPAO"); and
WHEREAS, ARCO desires to transfer and assign to Santa Catalina and Santa
Catalina desires to acquire a twenty-five percent (25%) Participating Interest
in the Contract in accordance with the terms and conditions of this Agreement.
NOW THEREFORE, in consideration of the covenants and premises set forth below,
it is hereby mutually agreed as follows:
1. DEFINITIONS
For purposes of this Agreement, the following terms shall have the meanings
given to them below:
"Agreement" Means this Farmout Agreement;
<PAGE>
"Affiliate" Means a company, partnership or other legal entity
which controls, or is controlled by an entity which
controls a Party. "Control" in this context means
the legal or beneficial ownership directly or
indirectly of fifty percent (50.00%) or more of the
shares conferring upon the holder the right to vote
for or appoint the directors or officers of such
company, partnership or legal entity;
"Agreed Interest
Rate" Means the rate of LIBOR as set out on page 3750 of
the Telerate Screen for 3 months LIBOR for US
dollars from time to time, calculated for the
relevant period;
"Approval Date" Means the date on which the Assignment Approval
has been obtained;
"Assigned Means an undivided twenty-five percent (25.00%)
Interest" Participating Interest in and under the Contract
and the Operating Agreement;
"Assignment" Means the transfer by ARCO in favour of Santa
Catalina and in accordance with the terms of this
Agreement, substantially in the form as attached
hereto as Attachment "A", whereby ARCO shall assign
and Santa Catlina shall accept the Assigned
Interest;
"Assignment Means any and all formal authorizations to be given
Approval" by Sonatrach and/or the Government and any such
other authorisations which by the Contract or by
operation of applicable law must be obtained in
order for the Assignment to be legally valid and
enforceable or but for which ARCO would be in
breach of any contractual or other authorization
should the Assignment be effected without such
authorization; and shall specifically include,
without limitation, the approval of an "Avenant",
substantially in the form as attached hereto as
Attachment "B" and the publication in the official
Gazette of Algeria of an approval of the
Assignment;
<PAGE>
"Conditions Means the conditions specified in Article 4.3below;
Precedent" below;
"Contract" Means the "Contrat pour la Recherche et
I'Exploitation d'Hydrocarbures (Perimetre: Hassi
Bir Rekaiz)" dated May 10, 1992 between
SONATRACH and ARCO Algeria Inc., as amended by
amendments 1 and 2 dated 2nd October 1995 and 16th
November 1996 respectively, and extended by
amendment 3 dated 9th March 1999;
"Contract Area" Means the geographical area covered by the Contract
as at the Effective Date and known as the Hassi Bir
Rekaiz Block as the same may be or may have been
modified from time to time, including the extension
relating thereto dated 9th March 1999, as set out
in Attachment "E" to this Agreement;
"Drilling Costs" Means all costs for which the parties to the
Operating Agreement would be liable that are
incurred in connection with the drilling and
testing operations of a well under the Contract,
including without limitation: the cost of
permitting, site preparation, mobilization and
demobilization of the drilling rig and ancillary
equipment, drilling, sidetracking, fishing,
suspending, testing, logging, coring and completing
or plugging and abandoning, data study and analysis
and General and Administrative Costs;
"Exclusive Has the meaning ascribed thereto in the Operating
Operation" Agreement;
"Exploration Means the exploration phase as determined pursuant
Phase" to Article 5.1 of the Contract and terminated
pursuant to Article 5.4 of this Agreement;
"Effective Date" Means the date first written above;
<PAGE>
"Estimate" Means the estimate of Drilling Costs attached as
Attachment F to this Agreement;
"Final Well Logs" Means the full set of log data available upon
completion of logging operations for electric,
nuclear, and seismic logs, and cores (if
collected);
"First Well" Means the well in the Contract Area anticipated to
spud in November, 1999;
"General and Means all costs of Operator and its Affiliates
Administrative which facilitate the ongoing operations of the
Costs" Contract Area. These costs include, but are not
limited to, employee salaries, rent, office
supplies, travel and similar costs, as well as a
charge for Operator's overhead as permitted under
the Operating Agreement;
"Government" Means the governnent of the Democratic and Popular
Republic of Algeria and any instrumentality or
subdivision thereof;
"Information" Means Jointly Owned Information as defined in the
Operating Agreement identified below;
"Joint Operation" Has the meaning ascribed thereto in the Operating
Agreement;
"Minimum Work Means any Work Program required to be performed by
Program" the Partner pursuant to the Contract and any Work
Program required to be performed by the Partner
pursuant to any subsequent amendment to the
Contract;
"Operating Means the Joint Operating Agreement signed by ARCO
Agreement" on 14th May 1997 and TPAO on 5th June 1997;
<PAGE>
"Participating Means an undivided interest in the rights and
Interest" obligations of the Partner in and under each of the
Contract and the Contract Area and the rights and
obligations of a party to the Operating Agreement
thereunder, expressed as a percentage of a whole,
including without limitation all rights to
participate pro rata in the unrecovered balance of
costs previously incurred in operating under the
Contract, such unrecovered costs estimated but not
warranted as of the Effective Date to be
approximately $75 million;
"Partner" Has the meaning ascribed thereto in the Contract;
"Party" Means a party to this Agreement;
"Second Well" Means the well which at the date hereof is to be
drilled in the Contract Area after the drilling of
the First Well;
"Work Program" Has the meaning ascribed thereto in the Contract.
All terms and expressions which are used in this Agreement and which are also
defined in the Contract or Operating Agreement shall have the same meaning as
expressed in the Contract or Operating Agreement unless otherwise defined
herein.
REPRESENTATIONS
2.1 ARCO hereby represents to Santa Catalina that:
(a) It is a corporate entity which has been duly formed and
currently exists with the full power and authority to execute
and deliver this Agreement and the Assignment; and
(b) The transactions contemplated by this Agreement will not violate
or be in conflict with: (i) any provision of its charter,
articles of incorporation, or other organizational agreement
(as the case may be), as the same may be amended from time to
time; (ii) any present law, agreement or instrument by which it
is bound; or (iii) any present judgment, order or decree
applicable to it; and
<PAGE>
(c) ARCO's Participating interest and the hydrocarbons to be
derived therefrom are not subject to any contractual obligations
to third parties, liens, pledges, burdens or encumbrances other
than such as are contained in, referred to in or revealed by,
the Contract, the Operating Agreement, this Agreement or any
document referred to therein; and
(d) To the best of ARCO's knowledge and belief, the Contract and
Operating Agreement are valid and in full force and effect, as
amended to date and all the obligations contained in the
Contract and the Operating Agreement requiring performance on or
before the Effective Date have been performed; and
(e) ARCO's Participating Interest at the Effective Date is seventy-
five percent (75.00%), and the Participating Interest of ARCO at
the time application is made for the Assignmnent Approval shall
be no less than that stated above; and
(f) To the best of its knowledge and belief, there is no pending
litigation, arbitration, or administrative proceedings connected
with the conduct of operations pursuant to the Contract and the
Operating Agreement; and there is no claim, judgment or award
given or made by any court, tribunal, or governmental agency
which relates to ARCO's Participating Interest, or connected
with the conduct of operations and which would materially affect
the interest which may be assigned by ARCO to Santa Catalina
pursuant to this Agreement.
2.2 Santa Catalina hereby represents to ARCO that:
(a) It is a corporate entity which has been duly formed and
currently exists with the full power and authority to execute
and deliver this Agreement and the Assignmnent; and
(b) The transactions contemplated by this Agreement will not
violate or be in conflict with: (i) any provision of its
charter, articles of incorporation, or other organizational
agreement (as the case may be), as the same may be amended
from time to time; (ii) any present law, agreement or
instrument by which it is bound, or (iii) any present
judgment, order or decree applicable to it; and
<PAGE>
(c) It is, by virtue of its management, a sophisticated and
experienced investor in the international exploration for and
production of hydrocarbons and it has substantial resources
available to assist it in evaluating investments of the type
contemplated by this Agreement; it is capable of evaluating
the merits and risks of investments in international oil and
gas properties in Algeria; it is able to bear the economic
risk of any oil and gas investment it might decide to make
with respect to this Agreement and the Contract; and, it has
consulted with its own or independent technical, financial and
commercial experts and legal counsel.
3. FARMOUT TERMS
3.1 Upon the fulfillment of the Conditions Precedent and the fulfillment of
the obligations in Article 3.2 below, ARCO shall assign the Assigned
Interest to Santa Catalina with effect from the Effective Date. Upon
fulfillment of the Conditions Precedent, Santa Catalina shall be deemed
to have been a party to the Operating Agreement as from the Effective
Date.
3.2 Santa Catalina shall bear and pay to ARCO, in accordance with Article
3.4, an amount equal to:
(a) fifty percent (50.00%) of the first Eight Million United States Dollars
(U.S.$8,000,000) of Drilling Costs associated with the drilling and
testing of the First Well; and
(b) twenty-five percent (25.00%) of the Drilling Costs in excess of Eight
Million United States Dollars (U.S.$8,000,000) associated with the
drilling and testing of the First Well.
3.3 Subject to the right of withdrawal in Article 3.5 and obligation for
repayment pursuant to Article 4.6, Santa Catalina shall bear and pay to
ARCO, in accordance with Article 3.4, an amount equal to:
(a) fifty percent (50.00%) of the first Eight Million United States
Dollars (U.S.$8,000,000) of Drilling Costs associated with the
drilling and testing of the Second Well; and
<PAGE>
(b) twenty-five percent(25.00%) of the Drilling Costs in excess of
Eight Million United States Dollars (U.S.$8,000,000) associated
with the drilling and testing of the Second Well.
3.4 (a) From the Effective Date ARCO shall issue monthly cash calls to
Santa Catalina for the amounts to be paid by Santa Catalina
under Articles 3.2 and 3.3 above in accordance with the cash
call procedure established in the Operating Agreement and
Santa Catalina shall pay each cash call in the manner and within
the time period specified in the Operating Agreement as though
Santa Catalina had been named as a party thereto. The cash call
procedure, the manner and time period for payment of cash calls,
and the allocation of Drilling Costs specified in the Operating
Agreement are hereby incorporated into this Agreement by
reference. The first of such cash calls shall include Santa
Catalina's share of all costs and expenses incurred in relation
to the Drilling Costs prior to the Effective Date. Santa
Catalina shall have no liability for any costs other than
Drilling Costs accruing prior to the Effective Date.
(b) ARCO has provided an estimate of the Drilling Costs incurred
prior to the Effective Date and a forecast of likely Drilling
Costs after the Effective Date (the Estimate), as set out in
Attachment F. The Parties acknowledge that the Estimate is an
estimate only, and that ARCO make no representation or warranty
as to the accuracy of the Estimate.
(c) Santa Catalina shall provide a bank guarantee from a bank
acceptable to ARCO for its obligations relating to the First
Well, which shall be five million United States dollars
$5,000,000), in the form provided in Attachment G to this
Agreement or as otherwise agreed by ARCO.
(d) Santa Catalina shall have the right to audit Drilling Costs
under the procedures set out in Article 1.8 of the accounting
procedure of the Operating Agreement, provided, however, that
the notice required to commence an audit must be issued by Santa
Catalina within six (6) months of the date upon which ARCO
provides Final Well Logs to Santa Catalina, and if Santa
Catalina fails to issue a notice of audit within this six (6)
month period, Santa Catalina shall have no further right to
audit Drilling Costs relating to the First Well
<PAGE>
3.5 (a) Prior to:
<PAGE>
1. that date which is ten days after the receipt by Santa
Catalina of the Final Well Logs relating to the First
Well; or
2. the spudding of the Second Well whichever is the later,
Santa Catalina shall have the right to withdraw from
this Agreement by written notice to ARCO in accordance
with the provisions of this Article 3.5. ARCO shall use
reasonable endeavours to provide Final Well Logs relating
to the First Well in a timely manner.
(b) If upon the occurrence of the later of the two events specified
in Article 1.5(a) ARCO receives written notice of withdrawal
from this Agreement from Santa Catalina, then neither Party
shall have any further obligation to the other, other than
obligations arising under Article 6 below or any obligation
arising under this Agreement prior to the date of service of the
said notice on ARCO. Furthermore, following Santa Catalina's
withdrawal from this Agreement in accordance with the terms
thereof, ARCO agrees to indemnify Santa Catalina from any
further obligations or liabilities arising under the Operating
Agreement or from future work. obligations under the Contract.
(c) If Santa Catalin's notice of withdrawal has not been received in
accordance with this Article 3.5 above then Santa Catalina shall
have no right to withdraw from this Agreement.
(d) If, upon the occurrence of the later of the two events specified
in Article 3.5(a), Santa Catalina has not provided a notice of
withdrawal, then the Parties agree that, subject to Article 9.6
of this Agreement, the terms of the Operating Agreement shall
be deemed to govern the relationship between them. For the
avoidance of doubt, should Santa Catalina become a "Defaulting
Party" (as that term is defined in the Operating Agreement)
prior to Assignment Approval, then the remedies for default
specified in the Operating Agreement, including forfeiture of
Santa Catalina's Participating Interest, shall apply between the
<PAGE>
Parties and any forfeiture of Santa Catalina's interest shall be
to ARCO and not to any other person.
4. ASSIGNMENT AND GOVERNMENT APPROVAL
4.1 In the event that Santa Catalina fulfills its obligations under Article
3.2 above, ARCO agrees to transfer and assign to Santa Catalina, and
Santa Catalina agrees to accept, subject to the satisfaction of the
conditions in Article 4.2 below and to Article 4.3 below, the Assigned
Interest, such that the Participating Interests in the Contract and
Operating Agreement shall be:
PARTY INTEREST
ARCO 50.00%
TPAO 25.00%
Santa Catalina 25.00%
4.2 As soon as reasonably practicable (but in no event later than seven (7)
days) following the date hereof ARCO shall notify Sonatrach and TPAO of
its intention to assign the Assigned Interest to Santa Catalina on the
terms of this Agreement thereby triggering the preemption period under,
the Contract and the Operating Agreement. The Parties shall use all
reasonable efforts and perform all economically reasonable and necessary
acts to obtain the Assignment Approvals and procure the performance of
the Conditions Precedent. ARCO and Santa Catalina shall execute the
Novation and Assignment within fourteen (14) days of the date hereof.
4.3 The assignment of the Assigned Interest in Article 4.1 above shall be
subject to the following conditions:
(a) the prior written consent and approval of Sonatrach and the
Government to the Assignmnent; and
(b) the written notification by Sonatrach to ARCO of the waiver or
nonexercise of its right of preemption under the Contract in
respect of the Assigned Interest to be assigned to Santa
Catalina or the effluxion of the period of time specified in
the Contract during which Sonatrach's right of preemption
thereunder must be exercised; and
<PAGE>
(c) the written notification by TPAO to ARCO of the waiver or
nonexercise of its right of preemption under the Operating
Agreement and under the Contract in respect of the Assigned
Interest to be assigned to Santa Catalina or the effluxion of
the period of time specified in the Operating Agreement and the
Contract during which TPAO's right of preemption must be
exercised; and
(d) any other Assignment Approvals and such further consents or
approvals required under the Contract, the Operating Agreement
or any applicable laws;
(e) the publication in the Official Gazette of Algeria of the
transfer of the Assigned Interest to Santa Catalina;
(f) if required by Sonatrach, the provision, by the parent company
of Santa Catalina, of a guarantee in favour of Sonatrach,
and in a form acceptable to Sonatrach (see Attachment "C"), of
the proper performance of the obligations of Santa Catalina or
its nominee under the Contract; and
(g) the execution by the Parties and TPAO of a Novation Agreement,
substantially in the form attached hereto as Attachment "D", in
respect of the Operating Agreement.
4.4 In the event the Conditions Precedent are not satisfied within twelve
(12) months of the spudding of the Second Well or the Government
formally rejects the Assignmnent to be made hereunder to Santa Catalina
in writing, this Agreement shall have no further force or effect and the
Parties shall have no further obligations to each other other than in
respect of Articles 4.5 (if applicable) and 6 below or any obligation
arising under this Agreement prior to such aforementioned dates. The
Parties shall agree to extend the time limit set out in this Article 4.4
for up to six (6) months should the Parties be making reasonable
progress toward satisfaction of the Conditions Precedent.
4.5 If (1) the Conditions Precedent are not fulfilled within the time
periods specified in clause 4.4 and the delay in obtaining Assignment
approvals was not the direct result of Santa Catalina's fault or
<PAGE>
neglect, or (2) TPAO and/or Sonatrach exercise their preemption rights
under the Contract or the Operating Agreement, then ARCO shall repay
within thirty days of written demand by Santa Catalina all cash calls
paid by Santa Catalina and received by ARCO pursuant to this Agreement
with interest thereon at the Agreed Interest Rate from the date such
cash calls were actually received by ARCO to the date they are repaid
to Santa Catalina. For the avoidance of doubt, the "fault or neglect" of
Santa Catalina under this Article 4.5 shall not include a failure to
fulfill the Conditions Precedent based on the financial capability of
Santa Catalina or (in relation to Article 4.1(f) above) its parent
company, provided that Santa Catalina has not altered its financial
capability in a manner likely to adversely affect Assignment Approval.
Further, the "fault or neglect" of Santa Catalina under this Article 4.5
shall not include a failure to fulfill the Condition Precedent set out
in Article 4.3(f) based on the financial capability of the parent
company of Santa Catalina, provided that the financial capability of the
parent company has not been altered in a matter intended to adversely
affect fulfillment of the Condition Precedent set out in Article
4.3(f). The entire time limit created by Article 4.4 shall be extended
to the extent necessary if a delay in fulfillment of Conditions
Precedent is a direct result of some fault or negligence of ARCO.
5. WORK PROGRAMME DURING EXPLORATION PHASE
5.1 Effective from the earlier of (1) Assignmnent Approval or (2) the time
when, pursuant to Article 3.5(d), the terms of the Operating Agreement
are deemed to apply between Santa Catalina and ARCO, the Parties shall
adopt the measures set out in this Article 5 to procure that Santa
Catalina shall for the duration of the Exploration Phase have the option
to participate or not participate in operations that are in excess of
the Minimum Work Program.
5.2 If ARCO wishes to propose any operations relating to the Contract during
the Exploration Phase in excess of those required by the Minimum Work
Program with a gross cost greater than One Million United States Dollars
($1,000,000) ("Excess Work"), ARCO shall provide a written description
of the Excess Work to Santa Catalina.
(a) If Santa Catalina wishes to participate in the Excess Work, ARCO
shall propose the Excess Work as Joint Operations pursuant to
Article 5 and 7.1 (B) of the Operating Agreement.
<PAGE>
(b) If Santa Catalina does not wish to participate in the Excess
Work, ARCO shall propose the Excess Work as an Exclusive
Operation pursuant to Article 7.2 of the Operating Agreement.
Santa Catalina shall provide its written response to ARCO's notification of
proposed Excess Work stating its desire to participate or not participate within
ten (10) days of receipt of the notification.
5.3 If Santa Catalina chooses not to participate in the Excess Work pursuant
to Article 5.2, then:
(a) Santa Catalina shall not elect to participate in the Exclusive
Operation proposed by ARCO pursuant to Article 5.2(b);
(b) Santa Catalina shall have no right and shall be deemed to have
waived any right arising under the Operating Agreement to
reinstate its right to participate in the Exclusive Operation;
(c) Santa Catalina shall waive any right to receive Production for
the Reimbursement arising under the Contract and resulting from
the Excess Work, and such Production for the Reimbursement shall
be allocated to participants in the Contract other than Santa
Catalina in conformity with the procedures set out in Article
7.4 of the Operating Agreement; and
(d) if the Excess Work relates to or results in the development of
G&G Data, then Santa Catalina shall have no right to such G&G
Data and shall have no right to participate in any Development
relating to such G&G Data.
5.4 The procedure set out in this Article 5 shall apply only during the
Exploration Phase. The Exploration Phase shall be deemed to have ended
for the Contract Area, or for any part of the Contract Area, upon the
earlier of (1) the Operator submitting a final discovery report
pursuant to Article 13.4 of the Contract for the Contract Area or some
part of the Contract Area, or (2) the Partner making a formal
notification of relinquishment of the entirety of the Contract Area.
<PAGE>
6. INFORMATION AND CONFIDENTIALITY
6.1 Santa Catalina has, through an associated company, reviewed information
provided by ARCO in a data room relating to the Contract and the
Operating Agreement. An index to the information in the data room is
attached as Attachment H. ARCO represents that, to the best of its
knowledge and belief, the information in the data room is a materially
complete and accurate description of the Contract Area.
6.2 ARCO represent that Final Well Logs provided to Santa Catalina pursuant
to Article 3.5(a) shall be materially identical to Final Well Logs
presented to Partners pursuant to the Contract.
6.3 Subject to applicable law and third party restrictions, the Contract and
other agreements relating to the Contract, ARCO shall provide Santa
Catalina with copies of technical information acquired in respect of the
Contract Area and which relates solely to the Contract Area. ARCO shall
have no obligation to provide any technical information relating to the
Contract Area which also relates to areas outside the Contract Area.
Such technical information shall include all non-proprietary geological,
geophysical, engineering and other information, save and except the
internal reserve evaluations of ARCO. Except as provided in Articles 6.1
and 6.2 above, ARCO makes no representations or warranties with respect
to the accuracy or completeness of the information provided pursuant to
the provisions of this Article. Any reliance on this information, or
any other information furnished by ARCO or contained in the files of
ARCO, shall be at the sole risk and expense of Santa Catalina. Santa
Catalina will have sole responsibility for any actions taken by it,
based on the information or any action taken by others relying on Santa
Catalina's advice or relying on information provided by Santa Catalina.
6.4 All data and information disclosed to Santa Catalina pursuant to Article
6.2 above and all Information shall be subject to the confidentiality
provisions contained in Article 15 of the Operating Agreement which are
incorporated herein by reference. Such confidentiality provisions shall
survive the termination of this Agreement.
<PAGE>
6.5 Pending Assignment Approval, ARCO shall use all reasonable endeavors,
subject to applicable law, the Contract and other contracts, to provide
Santa Catalina access to available technical information acquired in
respect of the Contract Area. Disclosure of such information to Santa
Catalina shall be subject to the terms and provisions of the
Confidentiality Agreement dated 20th October 1999, by and between ARCO
and Santa Catalina, which Confidentiality Agreement shall continue and
remain in full force and effect.
7. GOVERNING LAW AND ARBITRATION
7.1 This Agreement shall be governed by and construed in accordance with
the laws of England without regard to any of such jurisdiction's rules
regarding conflict of laws which would apply the laws of
another jurisdiction.
7.2 Any and all disputes, controversies, claims or differences between the
Parties in connection with this Agreement, or relating to this
Agreement, or the existence, construction, validity, interpretation or
meaning, performance, nonperformance, enforcement, operation, breach,
continuance or termination of this Agreement which cannot be resolved
amicably by the Parties through prompt good faith negotiations, shall be
submitted to and finally resolved through an arbitration proceeding in
accordance with the arbitration provision of Article 18 of the Operating
Agreement, which shall be deemed to be incorporated by reference.
8. NOTICES
8.1 Notices given under this Agreement shall be given in writing, in the
English language, and shall be deemed to have been sufficiently given
when received, whether delivered personally, mailed postage paid, or
sent by electronically or facsimile, addressed to a Party at its address
as set forth below or such other address as such Party may have
designated by notice given in accordance with this Article 8.
ARCO: ARCO GHADAMES INC.
2300 West Plano Parkway
Plano, Texas 75075, USA
Attention: Vice-President, Exploration
Telephone: 972-509-3701
Facsimile: 972-509-6292
E-mail: [email protected]
<PAGE>
SANTA CATALINA: Santa Catalina L H Lundin (Algeria) Limited
Suite 1320, 885 West Georgia Street
Vancouver, BC V6C 3E8
Canada
Attention: Mr Lukas H Lundin
Telephone: (1 604) 689-7842
Facsimile: (1 604) 689-4250
E-mail: [email protected]
with copy to:
Lundin Oil AB
29 Rue de la Rotisserie
1204 Geneva
Switzerland
Attention: Mr Keith Hill
Telephone: (41 22) 817-1200
Facsimile: (41 22) 817-1201
E-mail: [email protected]
9. MISCELLANEOUS
9.1 The captions and headings for the Articles of this Agreement are made
for convenience only and shall not be interpreted or construed so as to
limit or in any way change the substantive provisions of any part of
this Agreement.
9.2 None of the rights, requirements or provisions of this Agreement shall
be deemed to have been waived by any Party by reason of such Party's
failure to enforce any right or remedy granted it hereunder or to take
advantage of any default, and each Party shall at all times hereunder
have the right to require the strict compliance of the other Parties
with the provisions of this Agreement.
9.3 It is understood that time is of the essence in this Agreement and that
upon execution of this Agreement no provisions of this Agreement shall
be modified, altered or waived except by prior written consent of the
Parties. Subject to the provisions of Article 9.4 herein, this Agreement
shall be binding upon the successors and assigns of the Parties hereto.
<PAGE>
9.4 Santa Catalina may at any time assign its rights to receive a
Participating Interest in the Contract to Lundin Oil AB. Santa Catalina
shall not assign any rights or interests conveyed hereunder to any
Affiliate or third party until after all obligations specified in
Article 3 above have been fulfilled or the Government has approved the
Assignment, whichever is later. Any such assignment shall be subject to
this Agreement and to the Operating Agreement.
9.5 This Agreement (together with the Confidentiality Agreement dated 20th
October 1999) constitutes the entire understanding of the Parties with
respect to the subject matter hereof and supersedes all prior
negotiations and agreements pertaining to the subject matter hereof,
whether oral or written, of the Parties.
9.6 As between the Parties, in the case of a conflict, express or implied,
between the provisions of this Agreement, and those of the Contract or
the Operating Agreement, this Agreement shall control.
9.7 Santa Catalina shall be responsible for, and shall bear and pay for any
and all reasonable costs, expenses, fees, duties and taxes or other
governmental changes of whatsoever nature incurred in connection with
the Assignment and the Assignment Approval. Such costs, fees, duties and
taxes shall include, without limitation, registration fees, stamp duties
and assignment fees, but shall not include taxes levied on or measured
by ARCO's profit or income. Any such costs, expenses, fees, duties and
taxes shall be in addition to Drilling Costs charged pursuant to this
Agreement, and shall not be reimbursable pursuant to Article 4.6 of this
Agreement
9.8 For United States federal income tax purposes, each Party hereto elects
to be excluded from the application of all of the provisions of
Subchapter "K", Chapter 1, Subtitle "A" of the United States Internal
Revenue Code of 1986, as amended (the Code), as permitted and
authorized by Code Section 761(a) and the Treasury Regulations
promulgated thereunder.
9.9 The rights, duties, obligations and liabilities under this Agreement
shall be individual, not joint or collective. It is not the intention
of the Parties to create, nor shall this Agreement be deemed or
construed to create, a mining or other partnership, joint venture,
association or trust.
<PAGE>
9.10 This Agreement may be executed in counterpart and shall be effective as
though both Parties had signed the same document.
IN WITNESS WHEREOF, the duly authorized representatives of the Parties hereto
have executed this Agreement in duplicate on the day, month and year first
written above.
ARCO GHADAMES INC. SANTA CATALINA L.H. LUNDIN
(ALGERIA) LIMITED
By:--------------------------- By:---------------------------
Name: Scot W. Anderson Name: Keith C. Hill
Title: Attorney-in-fact Title: New Ventures Manager
<PAGE>
ATTACHMENT "A"
(FORM OF ASSIGNMENT)
DEED OF ASSIGNMENT
THIS AGREEMENT is made and entered into on the ___ day of ______, 1999, by and
between
ARCO Ghadames Inc, a company established and existing under the laws of the
State of Delaware, U.S.A. (hereinafter called "ASSIGNOR"), and
Santa Catalina L.H. Lundin (Algeria) Limited, a company established and existing
under the laws of Bermuda (hereinafter called "ASSIGNEE").
WHEREAS, Assignor holds seventy five percent (75.00%) of PARTNER's interest in
that certain Production SHaring COntract (hereinafter the "Contract") dated 10th
May, 1992, by and between The National Enterprise SONATRACH (hereinafter called
"SONATRACH") and ASSIGNOR covering the Hassi Bir Rekaiz area (hereinafter called
the "Field"), and
WHEREAS, ASSIGNOR and ASSIGNEE have agreed that ASSIGNEE shall acquire an
undivided twenty five percent (25.00%) of PARTNER's interest in the Contract,
subject to certain conditions.
NOW, THEREFORE:
1. ASSIGNOR hereby assigns to ASSIGNEE an undivided twenty five percent (25.00%)
of PARTNER's interest in the COntract, thereby vesting in ASSIGNEE twenty five
percent (25.00%) of PARTNER's interest in the Contract, subject to the
Conditions Precedent defined in the Farmout Agreement between the ASSIGNOR and
ASSIGNEE executed contemporaneously with or immediately prior to this Deed of
<PAGE>
Assignment, and ASSIGNOR warrants to ASSIGNEE the title to the above described
interest against any person or entity claiming by through, or under ASSIGNOR.
2. ASSIGNEE hereby assumes twenty five percent (25.00%) of the obligations,
liabilities, duties and rights of PARTNER under the Contract.
3. The assignment shall be effective as between Assignor and Assignee as of
(******).
IN WITNESS WHEREOF, the Parties have caused this Assignment to be executed by
their respective duly authorized representatives.
"ASSIGNOR"
ARCO Ghadames Inc
BY:_________________________
NAME:_______________________
TITLE:______________________
"ASSIGNEE"
Santa Catalina L.H. Lundin (Algeria) Limited
BY:_________________________
NAME:_______________________
TITLE:______________________
<PAGE>
<TABLE>
<CAPTION>
ATTACHMENT "B"
(FORM OF AVENANT)
FORM OF AVENANT
<S> <C>
AMENDMENT NO. 4 TO THE "HASSI AVENANT NO. 4 AU
BIR REKAIZ" PRODUCTION CONTRAT DE PARTAGE DE
SHARING CONTRACT DATED 10TH PRODUCTION "HASSI BIR
MAY 1992 REKAIZ" CONCLU LE 10 MAI 1992
Between: Entre:
The National Company SONATRACH L'Enterprise Nationale SONATRACH
with its headquarters in Algiers, 10 Rue du dont le siege social est a Alger, 10, Rue du
Sahara, Hydra, hereinafter called Sahara, Hydra, ci-apres designee
"SONATRACH", represented by Mr. "SONATRACH" representee par
_____________, (name) ____________________
_____________, (title) acting with ____________________ agissant en
powers bestowed upon him regarding the vertu des pouvoirs qui lui sont conferes a
present document, l'effet des presentes,
On one hand, d'une part,
And Et
ARCO Ghadames Inc with its headquarters La Societe ARCO Ghadames Inc, dont le
at 2300 West Plano Parkway, Plano, Texas siege social est a 2300 West Plano
75075, USA, hereinafter called "ARCO", Parkway, Plano, Texas 75075, USA ci-
represented by apres designee "ARCO", representee par
__________________ (name), ____________________,
__________________ (title), acting with ____________________ agissant en vertu
powers bestowed upon him regarding the des pouvoirs qui lui sout conferes a l'effet
present document, des presentes,
And Et
__________________ with its La Societe __________________, dont
headquarters at _____________________, le siege social est au
_________________, represented by representee par ____________ agissant
<PAGE>
________________, en vertu des pouvoirs qui lui sont conferes
_______________, acting with a l'effet des presentes.
powers bestowed upon him regarding the
present document.
on the other hand, d'aure part,
And Et
_____________, with its La Societe __________________, dont
headquarters at _________________, la siege social est au
_____________, represented by representee par ___________ agissant
_______________, en vertu des pouvoirs qui lui sont conferes
_____________, acting with a l'effet des presentes,
powers bestowed upon him regarding the
present document,
d'autre part,
on the other hand,
the following is agreed upon: Il est convenue et arrete ce qui suit:
Considering the Production Sharing Considerant le Contrat de Partage de
Contract "Hassi Bir Rekaiz" executed in Production "Hassi Bir Rekaiz" conclu a
Algiers on 10th May 1992, between the Alger le 10 mai 1992 entre l'Enterprise
National Enterprise SONTRACH and Nationale SONATRACH et la societe
ARCO Algeria Inc., approved by executive ARCO Algeria Inc approuve par decret
Decree No. (****) dated (******); executif no (**********) du (********);
Considering the request of _____________ Considerant la demande du ___________
1999 by ARCO requesting approval to _____________ 1999 par laquelle ARCO a
transfer to ______________ an undivided demande l'autorisation de ceder a
25.00% of its rights and obligations under _________ 25.00% de ses droits et
the subject Contract; obligations dans le Contrat sas-vise;
Considering the decision by SONATRACH Considerant la renonciation par
<PAGE>
not to exercise its right of preemption, and SONATRACH a l'exercice de son droit
its approval of this assignment; de preemption, et son accord pour cette
cession.
Considering the letter of the Minister of Considerant la lettre no _____ datee du
Energy and Mines No. ______ dated ___________ 1999 portant accord de
______________ 1999 approving this Monsieur le Ministre de l'Energie et des
assignment. Mines a la dite cession.
Article 1: Subject of the Amendment Article 1: Objet de l'avenant
The subject of this Amendment is the Le present avenant a pour objet le cession
transfer by ARCO to _______ of twenty par ARCO a __________, de vingt cinq
five percent (25.00%) of its right and pour cent (25.00%) de ses droits et
obligations resulting from the Hassi Bir obligations decoulant du Contrat de
Rekaiz Production Sharing Contract dated Partage de Prodcution "Hassi Bir Rekaiz"
10th May 1992, hereafter called the conclu le 10 mai 1992, ci-apres denomme
"Contract". "le Contrat".
Article 2: Participating Interests Article 2: Taux de Participation:
As from the effective date of this A compter de la date d'entree en vigueur
Amendment, the participation of the du present avenant, le taux de
companies in the Contract is divided as participation des associes dans le Contrat
follows: est reparti comme suit:
50%: for ARCO 50%: for ARCO
25%: for TPAO 25%: for TPAO
25%: for ___________ 25%: for ____________
Article 3: Notification Article 3: Notification
To be valid any notification sent by one of Toute notification faite par l'ure a
the parties to the other in the framework of Parties a l'autre dans le cadre du Contrat
<PAGE>
the Contract, will have to be done by letter, devra, pour etre valable, etre faite par
or telex or fax with return receipt, and lettre ou par telex ou telefax avec accuse
addressed to the other party at the address de reception et addressee a l'autre partie a
indicated below or any other address that l'addresse indiquee ci-dessous ou a toute
the a party may from time to time indicate autre addresse que la partie interessee
by written notice to the other party. pourra indiquer en tant que de besoin par
notification ecrite a l'autre Partie.
For SONATRACH Pour SONATRACH
10, Rue du Sahare 10, Rue du Sahare
Hydra - Algiers 16035 - Algeria Hydra - Alger 16035 (Algerie)
Telex No. 62 103 SH DG and 62 104 SH DG Telex nO 62 103 SH DG et 62 104 SH DG
Fax No. (213) 260.70.37 Fax nO (213) 260.70.37
Tel. No. (213) 260.56.34 Telephone nO (213) 260.56.34
For ARCO Ghadames Inc. Pour ARCO Ghadames Inc.
2300 West Plano Parkway 2300 West Plano Parkway
Plano, Texas 75075 Plano, Texas 75075
United States of America Etats Unis d'Amerique
Telex 163511 AIOGC PLANO Telex 163511 AIOGC PLANO
Fax no. 214-509-4030 Fax no. 214-509-4030
Tel no. 214-509-3000 Tel no. 214-509-3000
For______________________ For ____________________
__________________________ ________________________
__________________________ ________________________
__________________________ ________________________
Telex_____________________ Telex___________________
Fax no.___________________ Fax no._________________
Tel no. __________________ Tel no. ________________
<PAGE>
Article 4: Contractual Documents Article 4: Documents Contractuels
This Amendment constitutes an integral Le present avenant fait partie integrante du
part of the Contract. Contrat.
Article 5: Commitment Article 5: Engagement d'execution
The company ____________ commits to La societe _________ s'engage a
fulfill in the same position and under the executer au meme titre et dans le memes
same conditions as ARCO, to the extent the conditions que ARCO, a concurrence de
its level of participation, the entirety of the son taux de participation, l'ensemble de
obligations resulting from the Contract. obligatins qui lui incombent au titre du
Contrat.
Article 6: General Provisions Article 6: Dispositions Generales
All provisions of the contract and of its Toutes les dispositions du Contrat, de ses
Annexes which are not expressly modified annexes qui ne sont pas modifiees et / ou
and/or supplemented by the present completees par le present avenant
Amendment remain in effect. demeurent en vigueur et s'appliquent aussi
bien a ARCO qu'a _____________.
Article 7: Effective Date Article 7: Entree en viguer
This Amendment will be effective as from Le present avenant entrera en vigueur des
its approval by the competent authorities in son approbation par les autorites
accordance with the required procedures. competentes dans les formes rEquises.
Done in Algiers, on _______________, 1999 Fait a Alger, le _______________, 1999
in six (6) originals. en six (6) exemplaires originaux.
For SONATRACH For ARCO Ghadames Inc.
Title:_________________________ Title:________________________
<PAGE>
Name:__________________________ Name:_________________________
for TURKIYE PETROLLERI ANONIM For:__________________________
ORTAKLIGI
Title:_________________________ Title:________________________
Name:__________________________ Name:_________________________
</TABLE>
<PAGE>
ATTACHMENT "C"
(FORM OF PARENT COMPANY GUARANTEE)
The form as attached or such form as may be required by Sonatrach.
<PAGE>
LETTER OF GUARANTY
Atlantic Richfield Company hereby refers to the Agreement for the Exploration
and Exploitation of Hydrocarbons (hereinafter the "Agreement") between its
subsidiary ARCO Algeria Inc. ("ARCO") and the National Enterprise SONATRACH
("SONATRACH") within the Contract area called Hassi Bir Rekaiz composed of
Blocks 424a/443a entered into pursuant to Law no. 86-14 of 19 August 1986, in
particular its Article 22-2 and Decree No. 87-159 of 21 July 1987 in particular
its Article 3.
Atlantic Richfield Company acknowledges it has read all the clauses contained in
the Agreement, especially those relating to ARCO's commitments vis-a-vis
SONATRACH.
Atlantic Richfield Company acknowledges that ARCO possesses full technical
capabilities for the execution of the operations provided for in the Agreement
and guarantees that the commitments of ARCO in this respect will be fulfilled.
Atlantic Richfield Company acknowledges that ARCO possesses full financial
capabilities for the execution of its financial commitments provided for in the
Agreement and guarantees that such commitments will be fulfilled.
Atlantic Richfield Company guarantees in particular ARCO's contractual
obligations relating to:
- - In the event that all or part of the Exploration Work Programs are not
completed, payment to SONATRACH of the amount of the investments corresponding
to such programs (Article 6.7);
<PAGE>
Page 2
Letter of Guaranty
- - Completion of the Work Programs and investments provided for in the Agreement
(Articles 7.1 and 7.2);
- - Financing of the totality of the Exploration investments, and in the event of
a discovery of commercially exploitable Hydrocarbons, Exploitation investments
(Articles 14.1.1, 14.1.2 and 21.4.1); and
- - Payment of the costs corresponding to training programs (Article 19.4).
The present guaranty is irrevocable and shall expire as of the date of the
accomplishment of all the obligations set forth in the Agreement, or, subject to
the application of Article 22 of the Agreement, as of the date ARCO assigns all
of its obligations.
All payments due by virtue of the present guaranty must be made within thirty
(30) days after written notification by SONATRACH to Atlantic Richfield Company
of the default by ARCO. Such written notification shall specify (i) the nature
of the default by ARCO, (ii) the amount of the payment due to SONATRACH by
virtue of such default and (iii) the method for determining the amount of such
payment.
However, Atlantic Richfield Company, shall have, during such period of thirty
(30) days, the right to remedy such default before this guaranty comes into
effect.
<PAGE>
Page 3
Letter of Guaranty
These payments will be made in U.S. dollars by transfer to an account to be
specified by SONATRACH, free of all charges or deductions.
The definitions used in the present guaranty have the meaning given to them
in the Agreement.
<PAGE>
ATTACHMENT "D"
(FORM OF NOVATION)
NOVATION AGREEMENT
THIS AGREEMENT is made and entered into effective as of the ______ day of
_____________, 1999.
BETWEEN:
ARCO GHADAMES INC., a company established and existing under the laws of the
State of Delaware, U.S.A. and having an office at _________________(address)
(herein the "Transferor")'
SANTA CATALINA L.H. LUNDIN (ALGERIA) LIMITED, a company established and existing
under the laws of Bermuda and having an office at ___________ (address) (herein
"Transferee"); and
TURKIYE PETROLLERI ANONIM ORTAKLIGI, a company established and existing under
the laws of the Republic of Turkey and having an office at ___________ (address)
herein the "Transferee").
(The Transferor, the Transferee and TPAO are hereinafter collectively called the
"Parties").
WHEREAS, the National Enterprise SONATRACH ("SONATRACH") and ARCO Algeria Inc.
entered into the "Contrat pour la Recherche et l'Exploitation d'Hydrocarbures
(Permieter: Hassi Bir Rekaiz)" dated May 10, 1992, as amended (the "Contract");
and
WHEREAS, ARCO Algeria Inc. heretofore assigned an undivided one hundred percent
(100%) Participating Interest in the Contract to ARCO; and
WHEREAS, ARCO heretofore assigned a twenty-five (25%) Participating Interest in
the Contract to Turkiye Petrolleri Anonim Ortakligi ("TPAO" with Effect from the
Effective Time; and
<PAGE>
WHEREAS, ARCO and TPAO entered into that certain Operating Agreement
(hereinafter the "Novated Agreement") dated ___________, 1996 to provide for the
conduct of the operations by, and determination of their respective rights,
interests and obligations as Contractor under the Contract; and
WHEREAS, with effect from _______________ (hereinafter the "Effective Time")
ARCO has agreed to assign an undivided twenty-five percent (25.00%) interest in
the Contract and the JOA (the "Assigned Interest") to Lundin, and TPAO is
willing to consent thereto.
NOW THEREFORE THE PARTIES HERETO AGREE AS FOLLOWS:
1. Nothwithstanding anything to the contrary in the Novated Agreement, this
novation of the Novated Agreement shall be subject to the publication in the
Official Journal of Algeria of the ministerial decrees effecting the transfer of
Assigned Interest from the Transferor to the Transferee and on and after the
said publication this novation shall take and have effect from the Effective
Time.
2. To the extent of the Assigned Interest the Transferor shall cease for all
purposes to be a party to the Novated Agreement and the Transferee shall become
for all purposes a party thereto in place of the Transferor and shall perform
and assume the obligations and liabilities and be entitled to the rights and
benefits of the Transferor thereunder.
3. To the extent of the Assigned Interest the Transferee undertakes with and to
each of the Continuing Parties to observe, perform and discharge the obligations
and liabilities imposed on the Transferor by the Novated Agreement as a party
thereto in place of the Transferor and as if each act or omission of the
Transferor had been an act or omission of the Transferee.
4. Each of the Continuing Parties releases and discharges the Transferor from
the performance and discharge of the obligations (other than any obligations of
confidentiality) and liabilities and all claims and demands in respect thereof
assumed by the Transferee pursuant to Clause 3 above and which but for the
operations of that Clause would have continued to be the obligations and
liabilities of the Transferor.
<PAGE>
5. Each of the Continuing Parties accepts the assumption by the Transferee of
the liabilities and obligations referred to in Clause 3 and all claims and
demands in respect thereof in place of the liability of the Transferor and
agrees to be bound by the terms of the Novated Agreement in every way as if the
Transferee were named in the Novated Agreement as a party thereto in place of
the Transferor.
6. The Transferee hereby undertakes to indemnify and hold harmless the
Continuing Parties and each of them in respect of any claim, proceedings, loss,
damage, costs or expense for which the Transferor would have been liable but for
the release and discharge referred to in Clause 4 above.
7. Notwithstanding the foregoing provisions of this Agreement the Transferor
shall be bound by this Clause 7 which shall take effect as an agreement separate
and independent from the Novated Agreement, to such duties of confidentiality
and non-disclosure owed to such persons as would have been applicable to it
under the Novated Agreement had it continued to be party to the Novated
Agreement.
8. The Transferee agrees to bear any stamp duty (including penalties and/or
fines) or similar or other taxes payable in connection with the execution or
enforcement of this Agreement and shall fully indemnify each of the other
parties in respect of any costs, expenses, loss or damage occasioned by its
failure to pay any such stamp duty or any delay in paying any such stamp duty.
9. This Agreement shall be treated as constituting all consents, actions,
waivers, confirmations and undertakings of the Transferor and the Transferee and
of the Continuing Parties required under the Novated Agreement for the
assumption by the Transferee of all of the Transferor's right, title and
interest thereunder and the Parties hereby give their irrevocable consent
thereto.
10. The Participating Interests as defined in the Novated Agreement and as set
out therein are with effect from the Effective Time hereof:
ARCO 50.00%
TPAI 25.00%
Santa Catalina 25.00%
<PAGE>
11. The particulars of the Transferee for the purposes of the Novated Agreement
shall be as follows:
( )
( )
( )
( )
12. Except as amended hereby the Novated Agreement shall remain in full force
and effect and binding on the parties thereto, insofar as the same are in force
and effect and binding on those parties immediately prior to the Effective Time.
13. This Agreement may be executed in any number of counterparts and by the
Parties on separate counterparts, each of which when so executed shall be an
original, but all the counterparts shall together constitute one and the same
instrument provided that this agreement shall not be effective until all of the
counterparts have been executed.
14. This Agreement shall be governed by and construed in accordance with English
Law and the Parties hereby irrevocably submit to the exclusive jurisdiction of
the English Courts.
IN WITNESS WHEREOF the Parties have caused these presents to be executed the
day and year first above written.
ARCO GHADAMES INC.
By:___________________
Name:_________________
Title:________________
<PAGE>
SANTA CATALINA L.H. LUNDIN (ALGERIA) LIMITED
By:___________________
Name:_________________
Title:________________
TURKIYE PETROLLERI ANONIM ORTAKLIGI
By:___________________
Name:_________________
Title:________________
<PAGE>
Attachment "E" Contract Area
<PAGE>
Hassi Bin Rekaiz Licence
Drawing Omitted
<PAGE>
Attachment "F" Estimate of Drilling Costs
ARCO Internal Charges Incurred to Date $1,000,000
Cost of Well (Turnkey Contract) $10,352,000*
* breakdown of well costs in attached Drilling Cost Estimate
<PAGE>
ARCO International Oil and Gas Company Drilling Cost Estimate - Page 1
Exploration - expected case -
Well Name: Sernhari East - 1 Cost Estimate TD 3860 M
Region: N. Africa Country: Algeria Field: Wildcat
Development X Single
X Exploratory Dual
Workover/Completion Multiple
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
Tubular goods - Major account 290 DRY COMPLETE DETAIL GROSS
- -----------------------------------------------------------------------------------------
1 030
30" 0.5 WT Grade B $13,000 020 $13,000
20" 1333 ppt K-55 $22,000 016 $22,000
13-3/8" 72ppf $77,000 012 $77,000
9-5/8" 47 ppf $246,000 009 $246,000
7" 32 ppf p-110 BTC $78,000 008 $78,000
4-1/2" 13.5 ppf $14,000 004 $14,000
2 WH EQUIP & TREE - TEMPLATE $80,000 022 $80,000
3 TUBING ACCESS. 023
4 ART LIFT EQUIP. 024
5 UNCLASS MAT'L (5%) $27,000 025 $27,000
TOTAL TANGIBLES $557,000 $557,000
Intangible Costs - Major Account 295
6 TUBULAR INSPECTION $15,000 026 $15,000
7 TUBULAR TRANS (S300/TON) 027
8 CASING ACCESSORIES 028
9 SITE PREPARATION $285,000 029 $285,000
10 PERMITS. INS. DAMAGES 030
11 MOVING EXPENSE $25,000 031 $25,000
12 BOAT & BARGE RENTAL 032
13 CAMP & CATERING 033
14 ROADS, SHORE BASE 034
15 AIR FREIGHT & TRANS 035
16 AIR TRANSPORTATION 036
17 DRILLING FOOTAGE S/FT. 037
18 DRILLING DAYWORK S/DAY $6,100,000 038 $6,100,000
19 MOB/DEMOB FEE 039
20 COMPLETION UNIT S/DAY 043
21 RENTAL DP. DC. TOOLS 044
22 WELL CONTROL EQUIPMENT 045
23 DRILL BITS 046
24 FUEL GAS DRAYAGE
25 WATER SUPPLY WELL GENSEI 047
26 DRLG MUD, MATL & DRAYAGE 048
27 DRLG MUD EQUIPMENT 049
28 COMPLETION FLUIDS 051
29 OPEN HOLE LOGS $600,000 052 $600,000
30 MUG LOGGING 053
31 CASED HOLE LOGS/PERF 054
<PAGE>
ARCO International Oil and Gas Company Drilling Cost Estimate - Page 2
Exploration
Estimated by D. Beaghan
Tubular goods - Major account 290 DRY COMPLETE DETAIL GROSS
- -----------------------------------------------------------------------------------------
32 WT. WORK & COIL TUBING 055
33 WELL TEST EQUIPEMENT $2,000,000 056 $2,000,000
34 CONVENTIONAL CORING 108 evaluation $180,000 057 $180,000
35 OST EQUIPMENT 058
36 ENVIRONMENT/SAFETY 059
37 STIMULATION (ACID/FRAC) $30,000 060 $30,000
38 CEMENTING & RUNNING FEES:
MOB/DEMOB
20" 079
13-3/8" 076
9-5/8" 073
7" 070
4-1/2" 068
39 CEMENT PLUGS, SQUEEZES 081
40 FISHING TOOLS 082
41 DIRECTIONAL DRILLING - LWD 083
42 UNCL. TOOL RENTAL 084
43 UNCL. SUPPLIES 085
44 UNCL. DRAYAGE 086
45 UNCL. SERVICES 087
46 ROV 088
47 TELECOMMUNICATIONS $10,000 089 $10,000
48 SUPPORT SERVICES 090
49 UNCL. MATERIAL LOSSES 091
50 TECHNICAL SERVICE $300,000 092 $300,000
51 RIG SUPERVISION - CONTRACT $250,000 093
52 RIG SUPERVISION - ARCO 094
53 FIELD SUPPORT 096
54 SECURITY
PRESPUD COST $1,089 M
LOADED DAY RATE $79,800
TOTAL INTANGIBLES $7,795 M $2,000 M $9,795 M
TOTAL COST $8,352 M $2,000 M $10,352 M
DRY HOLE COST $8,352 M $2,164/M
COMPLETED COST $2,000 M
TOTAL WELL COST $10,352 M $2,682/M
This is a turnkey drilling project with Arco free issuing tubulars and wellhead equipment.
Formation evaluation will be run under a separate Arco contract.
The first well is proposed to be tested with the rig offsite.
Detailed costs will be worked up after the technical scope is finalised.
Testing costs are a latest "best estimate".
</TABLE>
<PAGE>
ATTACHMENT "G" BANK GUARANTEE
LETTER OF GUARANTEE
(On the headed notepaper of the issuing Bank)
To: ARCO Ghadames Inc.
2300 West Plano Parkway
Plano, Texas 75075
USA
(date)
Dear Sirs:
Letter of Guarantee No. (___________)
Whereas our client, Santa Catalina L.H. Lundin (Algeria) Limited ("Santa
Catalina"), has entered into a Farmout Agreement concerning Hassi Bir Rekaiz
Block, Onshore Algeria dated (insert day and month) 1999 with you (the
"Agreement").
Unless the contrary intention appears, words and expressions defined in the
Agreement have the same meaning when used in this Letter of Guarantee (this
"Guarantee").
Whereas the Agreement contains an obligation on the part of Santa Catalina to
provide an irrevocable bank guarantee in the amount of ($****), we (insert name
of bank), a bank organised under the laws of (insert jurisdiction) and having
its registered/principal office at (insert address) (the "Bank") do hereby
undertake to pay you up to an aggregate amount of ($****) subject to the terms
and conditions hereinafter provided; provided, however, that the said amount
shall be automatically reduced by the amount of any and all intermediate payment
or other payment or satisfaction made by us under this Guarantee from time to
time (said amount, as so reduced from time to time, the "Guaranteed Amount").
We shall only make payment under this Guarantee upon receipt by us of a written
demand, in the form attached as Appendix 1, signed by two (2) of your duly
appointed and authorised directors or other duly authorised officers for a
specified sum, where -
(1) such written demand arises because Santa Catalina has failed to pay you an
amount due and owing to you, and required to be paid by Santa Catalina to you,
under and in accordance with the ex-press terms of the Agreement (the "Sum
Demanded").
<PAGE>
(2) such written demand is accompanied by each of the following -
(a) a copy of the written notice sent by you to Santa Catalina before making
claim under this Guarantee, specifying the payment that Santa Catalina has
failed to make under and in accordance with the terms of the Agreement in the
amount of the Sum Demanded, and requesting Santa Catalina to remedy any such
failure;
(b) a letter signed by your duly authorised officer certifying that Santa
Catalina has failed to remedy the payment default in the amount of the Sum
Demanded within the period allowed for remedial action under the Agreement, if
any; and
(c) a copy of your written notice to Santa Catalina stating your intent to claim
under this Guarantee because of Santa Catalina's failure to remedy the payment
default in the amount of the Sum Demanded in accordance with the relevant
request referred to in 2(a) above.
Except for the documents herein specified, no other documents or other action
shall be required notwithstanding any applicable law or regulation.
Our liability under this Guarantee shall be to pay to you whichever is the
lesser of the Sum Demanded or the Guaranteed Amount as in effect and applicable
hereunder from time to time, without being entitled to require whether or not
the payment is lawfully demanded.
This Guarantee shall be valid on the date hereof in the full Guaranteed Amount
and shall become null and void on (insert expiry date), except with respect to
any demand duly made hereunder prior to such date. This Guarantee shall not be
valid with respect to any written notice given after such date. When the
validity of this Guarantee has expired, it must be returned to us for
cancellation, but we shall be released from any further obligation hereunder
even if, in breach of this provision, that return has not taken place. Such
release will be without prejudice to any liability under this Guarantee which
arose prior to such date.
Any payment by us hereunder shall be immediately available and freely
transferable in United States Dollars, free and clear of and without any
deduction for or on account of any present or future taxes, levies, imposts,
duties, charges, fees, set off, counterclaims, deductions or withholdings of any
nature whatsoever and by whomsoever imposed.
We hereby agree that any part of the Agreement may be amended, renewed,
extended, modified, compromised, released or discharged by mutual agreement
between you and Santa Catalina, and this Guarantee may exchanged or surrendered
without in any way impairing or affecting our liabilities hereunder without
notice to us and without the
<PAGE>
necessity for any additional endorsement, consent or guarantee by us, provided,
however, that the Guaranteed Amount shall not be increased or decreased.
This Guarantee is not personal to you, but may only be assigned by you to a
Person concurrently and in connection with an assignment to such Person of the
whole of your interest under the Agreement, and provided that you notify us in
writing of any such Guarantee to the Person specified in the notice which shall
constitute a full and valid discharge to us in relation to that payment. No
action, event or condition which by any applicable law should operate to
discharge us from liability hereunder shall have any effect and we hereby waive
any right we may have to apply such law so that in all respects our liability
hereunders shall be irrevocable and, except as stated herein, unconditional in
all respects.
Any notice hereunder shall be deemed to be duly given when delivered (in the
case of the personal delivery) or 48 hours after being dispatched by prepaid
registered post or recorded delivery (in the case of letter) to our address
appearing on the Guarantee or such other address as we may notify to you by not
less than (5) days' prior written notice.
This Guarantee shall be governed by and construed in accordance with English
law.
IN WITNESS of which this Guarantee has been executed by us as AS A DEED and has
been delivered on the date first written above.
(THE COMMON SEAL OF )
( ) PLC )
was affixed to this deed )
in the presence of:- ))
<PAGE>
APPENDIX 1 TO SCHEDULES
FORM OF NOTICE
(On the headed notepaper of ARCO Ghadames Inc.)
To: (Issuing Bank)
Dear Sirs:
Re: Letter of Guarantee No. (___)
We refer to the Letter of Guarantee No. (___) dated (______) and hereby give you
this written notice that in the sole and absolute judgment of the two (2)
undersigned duly appointed and authorised directors or other duly authorised
officers of this company:
Santa Catalina has failed to pay us L(insert amount) (the "Sum Demanded"), which
is an amount that is due and owing to us, and required to be paid by Santa
Catalina to us, under and in accordance with the express terms of the Agreement,
and has not been questioned or disputed by Santa Catalina, written notice of
such failure having been given by us to Santa Catalina;
As required by the Letter of Guarantee referenced above, we attach hereto the
following documents (which in respect of any copy attached hereto, is a true,
correct and complete copy of the original of such document):
(i) a copy of the written notice sent by us to Santa Catalina before making this
claim, which notice specifieds the payment that Santa Catalina has failed to
make under and in accordance with the terms of the Agreement in the amount of
the Sum Demanded, and requests Santa Catalina to remedy such failure;
(ii) a letter signed by our duly authorised officer certifying that Santa
Catalina has failed to remedy the payment default in the amount of the Sum
Demanded within the period allowed for remedial action under the Agreement.
(iii) a copy of our written notice to Santa Catalina stating our intent to claim
under this Guarantee because of Santa Catalina's failure to remedy the payment
default in the amount of the Sum Demanded in accordance with the relevant
request referred to in (i) above
<PAGE>
We hereby demand that you pay us the Sum Demanded immediately upon receipt
of this notice.
- -----------------------------------------
For and on behalf of ARCO British Limited
<PAGE>
Attachment "H" Data Room Index
<PAGE>
1999 REPORTS
1. Biostratigraphic Analysis of selected core samples from eight Arco
Algerian Wells (ONR-1, AT-2, EHT-1, RDC-4, TO-1, DJF-1)
2. Diagenetic Evolution of Cambrian Sandstones, HBR
3. Discovery Report Bir Seba-1 Touggourt Block 433A BRS-1
4. Geochemical Evaluation of Oils from Semhari-1, Hassi Bir Rekaiz
5. Geologic Analysis of Triassic Cores, Semhari-1 Well HBR & Geologic
Analysis Cambro-Ordovician Cores
6. HBR Exploration Area: Discovery Report Semhari-1
7. Hydrocarbon Charge Analysis
8. Lithology and Reservoir quality of core samples from Triassic cores
Semhari 1 well, Hassi Bir Rekaiz, Ghadames Basin
9. Mesures Petrophysiques sur Carottes (Core Petrophysics SMR-1)
10. Palynology and Biostratigraphy of Well EHT-1 (35410.33-3909.75m)
11. Palynology & Biostratigraphy of the Semhari-1 Well, Algeria
12. Petr. Analysis of Core Saples from Trias. T2 & T1 Sandstones (Trias
Greseux) * Andesite & Serle Inferieure sed...
13. PVT Laboratory Study Report SMR-1 (Zone DST 1b)
14. PVT Laboratory Study Report SMR-1 (Zone DST 2)
15. Rapport d'Implantation Semhari East-1
16. Rapport de fin Sondage El Hammamt EHT-1 (End of Well Report)
17. Regional Geological Evaluation & Seismic Interpretation of Semhari Area
18. RS-1 Well Completion Report
<PAGE>
19. Districts 4 & 5 and Preliminary Sequence Stratigraphy, Implications
Algerian Sanata
20. SMR-1 Final Well Report
21. Structural Interpretation of the Boulefa Structure, HBR
22. Timing of cementation in Triassic, Ordovician and cambrian sandstones,
HBR, Algeria
OPERATING AGREEMENTS
23. Operating agreement by and between ARCO GHADAMS INC and TURKIYE
PETROLLERI ANONIM ORTAKLIGI (TPAO) Hassi Bir Rekaiz Block
24. Agreement for exploration and exploitation of hydrocarbons between
Sonatrach and ARCO Algeria Inc (Area: Hassi Bir Rekaiz)
HBR DATAROOM 1999 DISPLAYS
25. Hercynian Unconformity in depth 1:50 000 (AJ)
26. Hercynian Unconformity in TWT 1:50 000 (AJ)
27. Internal velocity maps
28. Semhari East-1 montage (SM)
29. Petrophysical Interpretation (RH)
30. Acreage Position Map
31. Seismic displays AGS97-03 to 42 (from workstation)
32. Synthetic impedance log/seismic display AGS97-12
33. Geogram, synthetic seismogram (Schlumberger)
34. W-E Triassic-Ordovician Structural Section (TG)
35. SW-NE Triassic-Ordovician Structural Section (TG)
VIEWGRAPHS
36. Miscellaneous viewgraphs (circa 100)
37. NW Berkine HBR Isopach Triassic Volcanics (TG)
38. Preliminary Ordovician Reservoir Distribution & Concep. Paleogeography
39. Farmout document, HBR Exploration Area (SM)
GEOPHYSICAL LOGS
BAT-1
BLF-1
BRS-1
BRT-1
BST-1
EAT-1
EHT-1
GEF-1
HB-1A
HBR-1
HN-2
LD-1
OER-1
RBN-1
RBT-1BIS
RDC-4
REL-1
REN-1
RS-1
SD-1
SMR-1
<PAGE>
SCHEDULE "B" TO THE LETTER AGREEMENT MADE BETWEEN
SANTA CATALINA (BERMUDA) I LTD., SANTA CATALINA (ALGERIA) LTD.,
ESSEX RESOURCE (BARBADOES) CORPORATION, CVL RESOURCES (BARBADOS) LTD.
and DRUCKER PETROLEUM (ALGERIA) INC.
SHAREHOLDERS' AGREEMENT
<PAGE>
SHAREHOLDERS' AGREEMENT
THIS AGREEMENT dated for reference the 27" day of October, 1999,
AMONG:
SANTA CATALINA (ALGERIA) LTD., a corporation duly incorporated pursuant to
the laws of Bermuda and having an office at Suite 1320, 885 West Georgia
Street Vancouver, British Columbia, V6C 3E8
(hereinafter called the "Company")
AND:
SANTA CATALINA (BERMUDA) I LTD., a corporation duly incorporated pursuant
to the laws of Bermuda and having its registered office at Cedar House, 41
Cedar Avenue, HM EX Hamilton, Bermuda
(hereinafter called "Santa Catalina")
AND:
ESSEX RESOURCE (BARBADOS) CORPORATION, a corporation duly incorporated
pursuant to the laws of Barbados and having its registered office at
"Whitepark House", Whitepark Road, Bridgetown, Barbados
(hereinafter called "Essex")
AND:
CVL RESOURCES (BARBADOS) LTD., a corporation duly incorporated pursuant to
the laws of Barbados and having its registered office at "Whitepark House",
Whitepark Road, Bridgetown, Barbados
(hereinafter called "CVL")
AND:
DRUCKER PETROLEUM (ALGERIA) INC., a corporation duly incorporated pursuant
to the laws of the British Virgin Islands and having an office at Craigmuir
Chambers, Road Town, Tortola, British Virgin Islands
(hereinafter called "Drucker")
<PAGE>
WHEREAS:
A. The authorized capital of the Company consists of 24,000 common shares (the
"Common Shares") without par value, of which the following Common Shares are
issued and outstanding as fully paid and non-assessable:
Name Number of Common Shares
---- -----------------------
Santa Catalina 12,000
Essex 4,800
CVL 4,800
Drucker 2,400
TOTAL: 24,000
B. Santa Catalina, Essex, CVL and Drucker (collectively, the "Shareholders") and
the Company desire to enter into this Agreement in order to record their
respective rights and obligations.
NOW THEREFORE THIS AGREEMENT WITNESSETH that in consideration of the
recitals, the following agreements, the payment of US One Dollar (US$1.00) made
by each party to the other, and other good and valuable consideration, the
receipt and sufficiency of which is acknowledged by each party, the parties
agree as follows:
1. INTERPRETATION
1.1 Where used in this Agreement each of the words and phrases set out in
the agreement and recitals hereto shall have the meanings therein set
forth.
1.2 This Agreement shall in all respects be governed by and be construed in
accordance with the laws of the Province of British Columbia.
1.3 If any one or more of the provisions contained in this Agreement shall
be invalid, illegal or unenforceable in any respect in any jurisdiction,
the validity, legality and enforceability of such provision or
provisions shall not in any way be affected or impaired thereby in any
other jurisdiction and the validity, legality and enforceability of the
remaining provisions contained herein shall not in any way be affected
or impaired thereby.
1.4 Wherever the singular or the masculine is used herein the same shall be
deemed to include the plural or the feminine or the body politic or
corporate where the context or the parties so require.
1.5 The headings of the Parts of this Agreement are inserted for
convenience only and shall not affect the construction hereo(pound)
1.6 Unless otherwise stated a reference herein to a numbered or lettered
paragraph or Part refers to the paragraph or Part bearing that number or
letter in this Agreement.
<PAGE>
1.7 All accounting terms not defined in this Agreement shall have those
meanings generally ascribed to them in accordance with generally
accepted accounting principles, applied consistently.
2. CONDUCT OF THE AFFAIRS OF THE COMPANY
2.1 Subject to paragraph 2.2, each of the Shareholders shall vote his
Common Shares so that the Board of Directors of the Company (the
"Board") shall be comprised of four directors nominated by Santa
Catalina, two of whom are resident in Bermuda. In the event that a
position on the Board shall be open for any reason whatsoever, Santa
Catalina shall be entitled to nominate a new director to fill such
vacancy.
2.2 In the event that a nominee to the Board shall fail to vote and act as
a director to carry out the provisions of this Agreement, then the
Shareholders agree to exercise their right as shareholders of the
Company and in accordance with the By-laws of the Company to remove
such nominee from the Board and to elect in the place or stead thereof
such individual nominated by Santa Catalina who will use his best
efforts to carry out the provisions of this Agreement.
2.3 Unless otherwise provided herein, the conduct of the business of the
Company shall be governed in accordance with the By-laws of the
Company.
2.4 A quorum required for the transaction of business at a meeting of the
Board shall be two directors or their alternates.
2.5 The following matters shall only be undertaken upon the unanimous
resolution of all the directors of the Company able to vote:
(a) the sale, lease, transfer, mortgage, pledge or other disposition
of the undertaking of the Company, or any of its subsidiaries;
(b) any increase or reduction in the capital of the Company;
(c) the consolidation, merger or amalgamation of the Company with any
other company, association, partnership or legal entity;
(d) any single capital expenditure of the Company in excess of
US$50,000, or any lease by the Company of property having a fair
market value in excess of US$50,000;
(e) any borrowing by the Company or any of its subsidiaries which
would result in the aggregate indebtedness of the Corn any (other than
amounts due to Shareholders) being in excess of US$50,000 at any one
time;
(f) any loans by the Company or any of its subsidiaries to any
Shareholder, or to an Affiliate;
<PAGE>
(g) any transaction out of the ordinary course of the business of the
Company;
(h) any contract (or amendment thereof) between the Company and any
Shareholder or an Affiliate;
(i) any change in the authorized signing officers in respect of legal
documents or any bank or other financial institution;
(j) any agreement by the Company which restricts or purports to
restrict, or which permits any other party to accelerate or demand the
payment of any indebtedness of the Company upon the sale, transfer or
other disposition by a Shareholder of his Common Shares, provided that
nothing in this paragraph 2.5 shall be construed so as to fetter the
discretion of the directors of the Company or require such directors
to act in a particular manner with respect to any of the foregoing
matters.
2.6 Each Shareholder shall for so long as it is the owner of Common Shares
of the Company use its best efforts, skill and abilities to promote the
interest of the Company.
2.7 Except with the unanimous consent in writing of the other Shareholders,
no Shareholder shall, while it is a Shareholder of the Company, or
within a period of two years after it ceases to be a Shareholder:
(a) directly or indirectly, whether as principal, agent, employee,
director of a company, or otherwise, or be means of any corporate or
other device, solicit or aid in the solicitation of any business
similar to the business being carried on by the Company from any
customer or customers of the Company or, in the event of it having
ceased to be a Shareholder, any customer or customers of the Company
with whom it has business dealings on behalf of the Company; or
(b) directly or indirectly, use or disclose to any person, except to
duly authorized officers and employees of the Company entitled
thereto, any trade secret, business date or other information acquired
by it by reason of its involvement and association with the Company.
2.8 Each of the Shareholders acknowledges that by reason of its unique
knowledge of and association with the business of the Company, the
scope of the covenants in paragraph 2.7 is reasonable and commensurate
with the protection of the legitimate interests of the Company. It is
understood and agreed that the covenants contained in paragraph 2.7
shall subsist even if the rest of this agreement shall be terminated
for any reason whatsoever and is severable for such purpose.
3. RESTRICTIONS ON TRANSFER/RIGHT OF FIRST REFUSAL
3.1 Except as otherwise expressly permitted in this Agreement:
<PAGE>
(a) no Shareholder shall sell, transfer or otherwise dispose or offer to
sell, transfer or otherwise dispose of, any of its Common Shares unless
that Shareholder (the "Offeror") first offers to the Company and to the
other Shareholders (the "Others") by notice in writing (the "Offer")
delivered to the Secretary, the prior right to purchase, receive or
otherwise acquire the same;
(b) the Offer shall state that the Offeror has determined to avail itself
of the provisions of this Part 3 and shall set forth:
(i) the number of Common Shares offered for sale (the "Offered
Shares"),
(ii) the price as determined by the Offeror, in lawful money of the
United States for the Offered Shares (the "Purchase Price"),
(iii) that the terms and conditions of the sale are that at closing,
100% of the Purchase Price is to be paid by certified cheque
to the Offeror, and
(iv) that the Offer shall either be accepted in the aggregate in its
entirety or not at all and that it is open for acceptance by
the Company and the Others for a period of 60 days after receipt
of such Offer by the Secretary;
(c) upon receipt of the Offer, the Secretary shall forthwith:
(i) transmit the Offer to each director of the Board,
(ii) trasmit the Offer to each of the Others, and
(iii) call a meeting of the Board to consider the Offer;
(d) the Company shall have the first right to accept the Offer and to the
extent that it is accepted the Others agree to refuse any pro rata
offer by the Company to purchase shares which is required to be made by
the Company under the corporate laws of Bermuda, the By-laws of the
Company or this Agreement;
(e) if the Offer is not wholly accepted by the Company within 30 days after
receipt thereof by the Secretary:
(i) the Secretary shall advise the Others of the extent to which
the Offer is still open forthwith upon the expiration of the
aforesaid 30 day period;
(ii) that portion of the Offer not accepted by the Company shall be
open for acceptance within the next 14 days by the Others pro
rata in accordance with their respective holdings of Common
Shares in the Company;
(iii) acceptance by the Others shall be by written notice to the
Secretary and by such acceptance a Shareholder may specify any
additional portion of the Common Shares offered for sale that
<PAGE>
such Shareholder is prepared to purchase in the event that any
of the Others fails to fully accept such Offer, and if any of
the Others fails to fully accept such Offer, such Shareholder
(pro rata if more than one) shall be entitled to purchase such
additional portion of the Common Shares as shall be so
available; and
(iv) the Secretary shall advise the Company of the extent to which
the Offer is still open forthwith upon the expiration of the
aforesaid 14 day period;
(f) if, and to the extent the Offer is not fully accepted by the Others
within the 14 days that it is open to them, the Company shall be
entitled prior to the expiration of the Offer to accept the Offer with
respect to that portion of the Offered Shares as shall then be
available, in which event the Others agree to refuse any pro rata offer
by the Company to purchase shares which is required to be made by the
Company under the corporate laws of Bermuda, the By-laws of the Company
or this agreement;
(g) prior to the expiration of the 60 day period, the Secretary shall advise
the Offeror whether the Offer has been accepted in its entirety and by
whom;
(h) if the Offer is not wholly accepted as set out herein, the Offeror may,
within 60 days after the expiry of the 60 day period for acceptance,
sell, transfer or otherwise dispose of the whole of that portion of the
Offered Shares to any other person, firm or corporation (a "Third
Party") for not less than the price and on no better terms and
conditions than as set out in the Offer. Upon the expiry of the 60 day
period without the completion of a sale to a Third Party, the
provisions of this paragraph 3.1 will again become applicable to the
sale, transfer or other disposition of the Common Shares owned by the
Offeror or part thereof and so on from time to time;
(i) no disposition permitted by this paragraph 3.1 shall be made to a Third
Party unless the Third Party shall have entered into an agreement with
the Others by which the Third Party shall be bound by and entitled to
the benefit of the provisions of this Agreement and the Others and
shall enter into such an agreement;
(j) upon the acceptance of the Offer, the Company, the Others or the Third
Party, as the case may be, shall purchase, at the Purchase Price, the
Offered Shares (or that part thereof) of the Offeror being sold and the
closing of the purchase thereof shall occur on the 30th day following
the date of the last acceptance in respect to the Offer or, if that day
is not a business day, then on the next ensuing business day (or such
other date as the parties thereto may agree), at which time the
appropriate parties shall execute and deliver such certified cheques,
share certificates, instruments, conveyances, assignments, escrow
agreements and releases as may be reasonably required to effect and
complete the sale; and
<PAGE>
(k) the Others and the Company covenant and agree, in respect of any
Shareholder who shall have disposed of all of its Common Shares in
compliance with the provisions of this Agreement, to use their best
efforts to cause to be discharged or cancelled any guarantee or pledge
issued or granted by such Shareholder in respect of the Company.
3.2 Except as specifically provided herein, no Shareholder shall mortgage,
pledge, charge, hypothecate or otherwise encumber its Common Shares or
any part thereof without the prior written consent thereto of the other
Shareholders, which consent may be unreasonably withheld without giving
any reason therefor.
3.3 Notwithstanding any other provision of this Agreement, any Shareholder
may sell, transfer or otherwise dispose of the whole or any part of his
Common Shares to a corporation or trust controlled by the Shareholder
(the "Affiliate") provided that the Shareholder and the Affiliate enter
into an agreement with the other Shareholders that:
(a) the Affiliate will remain an Affiliate of the Shareholder so long
as the Affiliate holds the Common Shares or any other part
thereof,
(b) prior to the Affiliate ceasing to be an Affiliate of the
Shareholder, the Affiliate will transfer the Common Shares back to
the Shareholder or to another Affiliate of the Shareholder,
provided that such other Affiliate enters into a similar
agreement with the Shareholder and the other Shareholders;
(c) the Affiliate will otherwise be bound by and have the benefit of
the provisions under this Agreement; and
(d) the Shareholder will continue to be liable for all obligations of
the Affiliate under this Agreement.
3.4 Notwithstanding any other provision of this Agreement, upon the death or
insolvency of a Shareholder, the Common Shares of the Shareholder will
be transferred in accordance with the applicable laws of intestacy or
bankruptcy.
3.5 Notwithstanding any other provision of this Agreement, no Shareholder
shall be entitled to sell, transfer or otherwise dispose of any of its
Common Shares in accordance with paragraph 3.1 if it is at such time a
Defaulting Shareholder as defined in Part 5, unless prior to or
concurrently with such sale, transfer or other disposition it ceases to
be a Defaulting Shareholder.
3.6 Notwithstanding any other provision of this Agreement, no Shareholder
shall be entitled to sell, transfer or otherwise dispose of any of its
Common Shares or any part thereof without first obtaining:
<PAGE>
(a) the prior written consent of the other Shareholders, if such
action would permit any other party to accelerate or demand
the payment of any indebtedness of the Company; or
(b) the consent of any other party, if such consent is required by
agreement of the Company with that party.
3.7 Notwithstanding any other provision of this Agreement, a Shareholder
may transfer its Common Shares to a third party with the written
consent of the other Shareholders.
3.8 Upon execution of this Agreement, the Shareholders shall surrender to
the Company and there shall be legibly stamped or endorsed upon each
certificate representing their Common Shares a statement as follows:
"The shares represented by this certificate are transferable only
in compliance with and pursuant to the terms of an agreement
among Santa Catalina (Algeria) Ltd., Santa Catalina (Bermuda) I
Ltd., Essex Resource (Barbados) Corporation, CVL Resources
(Barbados) Ltd. and Drucker Petroleum (Algeria) Inc. dated for
reference October 27, 1999."
4. ANTI-DILUTION PROVISIONS
4.1 Except as otherwise expressly permitted in this Agreement:
(a) In the event that all of the Shareholders continue to
participate on a pro-rata basis under the agreement (the
"Farm-In Agreement") among them dated October 27, any funds
required to be advanced by each Shareholder in respect of its
interest under the Farm-In Agreement will be advanced by such
Shareholder to the Company as a contribution to capital;
(b) In the event that any of the Shareholders do not continue to
participate on a prorata basis under the Farm-In Agreement, any
funds required to be advanced by any Shareholder in respect of
its interest under the Farm-In Agreement will be. advanced by
such Shareholder to the Company as a subscription for additional
common shares of the Company and the Shareholders agree to
increase the authorized capital of the Company and to take all
such other steps as may be necessary and execute and deliver any
necessary documentation to permit such share issuances;
(c) In the event that any of Essex, CVL or Drucker elects to
withdraw from the FarmIn Agreement within 10 days after the
receipt by the Company of final well logs relating to the First
Well or prior to the spudding of the Second Well, whichever is
later, in accordance with the terms of the Farm-In Agreement,
then that Shareholder must gift all of its Common Shares of the
Company back to the Company; and
<PAGE>
(d) In the event that Santa Catalina elects to withdraw from the Farm-In
Agreement, then each of Essex, CVL and Drucker will immediately gift
all of their respective Common Shares of the Company back to the
Company, unless otherwise agreed.
5. DEFAULT
5.1 It is an event of default (a "Default") if a Shareholder (the "Defaulting
Shareholder"):
(a) fails to observe, perform or carry out any of its obligations hereunder
and such failure continues for 30 days after any of the Shareholders
not in default (the "Nondefaulting Shareholder" individually and the
"Nondefaulting Shareholders" collectively) has in writing demanded that
such failure be cured;
(b) fails to take reasonable actions to prevent or defend assiduously, any
action or proceeding in relation to any of its Common Shares for
seizure, execution or attachment or which claims:
(i) possession,
(ii) sale,
(iii) foreclosure,
(iv) the appointment of a receiver or receiver-manager of his
assets, or
(v) forfeiture or termination,
of or against, any of the Common Shares owned by the Defaulting
Shareholder, and such failure continues for 30 days after a
Nondefaulting Shareholder has in writing demanded that the same be
taken or the Defaulting Shareholder fails to defend successfully any
such action or proceeding; or
(c) becomes a bankrupt or commits an act of bankruptcy or if a receiver
or receiver manager of its assets is appointed or makes an assignment
for the benefit of creditors or otherwise.
5.2 In the event of a Default under paragraph 5.1, the Nondefaulting
Shareholder(s) may do any one or more of the following:
(a) pursue any remedy available to them in law or in equity, it
being acknowledged by each of the Shareholders that specific
performance, injunctive relief (mandatory or otherwise) or other
equitable relief may be the only adequate remedy for a Default;
(b) take all actions in their own names or in the name of the
Defaulting Shareholder, as may reasonably be required to cure
the Default, in which event all payments,
<PAGE>
costs and expenses incurred therefor shall be payable by the
Defaulting Shareholder to the Nondefaulting Shareholder(s) on
demand with interest as provided in paragraph 5. 1;
(c) implement the buy-sell procedure as set out in paragraph 5.3 by
notifying the Secretary of the Default and the name of the
Defaulting Shareholder; or
(d) waive the Default provided, however, that any waiver of a
particular Default shall not operate as a waiver of any
subsequent or continuing Default.
5.3 In the event the buy-sell procedure herein is implemented, the
Defaulting Shareholder is deemed to offer to sell to the Company all but
not less than all of its Common Shares on the following terms and
conditions:
(a) the price payable for the Common Shares of the Defaulting
Shareholder shall be US$ 1.00 per Common Share;
(b) the terms and conditions of the sale shall be as provided in
subparagraphs 3.1 (b)(iii) and (iv) (as may be applicable);
(c) the Common Shares shall be sold in accordance with the
procedure specified in paragraphs 3.1(c), (d) and (e) (as
the Defaulting Shareholder was the "Offeror" and the
Nondefaulting Shareholders were the "Others");
(d) after compliance with paragraph 5.3(c) hereof, to the extent the
Offer has not been accepted, the Company shall purchase such
portion of the Common Shares as shall be available; and
(e) the provisions of paragraphs 3.1 (j) and (k) shall apply (as may
be applicable).
6. GENERAL PROVISIONS
6.1 This Agreement shall terminate:
(a) if the Company has a receiving order made against it, goes into
bankruptcy either voluntarily or involuntarily or makes a
proposal to its creditors; or
(b) if the parties hereto consent in writing to the termination
hereof.
6.2 Any Shareholder who shall have disposed of all of its Common Shares in
compliance with the provisions of this Agreement shall be entitled to
the benefit of and be bound by only the rights and obligations which
arose pursuant to this Agreement prior to such disposition.
6.3 The Shareholders shall execute such further assurances and other
documents and instruments and do such further and other things as may be
necessary to implement and carry out the intent of this Agreement.
<PAGE>
6.4 The provisions herein constitute the entire agreement between the
Shareholders and supersedes all previous expectations, understandings,
communications, representations and agreements whether verbal or
written between the Shareholders with respect to the subject matter
hereof.
6.5 Unless otherwise specified herein, any notice required to be given
hereunder by any party shall be deemed to have been well and
sufficiently given if such notice is delivered by personal delivery to
such party or transmitted to such party by fax at the following
addresses:
If to the Company:
Santa Catalina (Algeria) Ltd.
Suite 1320, 885 West Georgia Street
Vancouver, British Columbia
Fax No. (604) 689-4250
If to SANTA CATALINA:
Santa Catalina (Bermuda) I Ltd.
Suite 1320, 885 West Georgia Street
Vancouver, British Columbia
Fax No. (604) 689-4250
If to ESSEX:
Essex Resource (Barbados) Corporation
Suite 1220, 800 West Pender Street
Vancouver, B.C. V6C 2V6
Fax No. (604) 685-6493
If to CVL:
CVL Resources (Barbados) Ltd.
Suite 1220, 800 West Pender Street
Vancouver, B.C. V6C 2V6
Fax No. (604) 685-6493
<PAGE>
If to DRUCKER:
Drucker Petroleum (Algeria) Inc.
Suite 830, 789 West Pender Street
Vancouver, B.C. V6C I H2
Fax No. (604) 689-7654
or at such other address as the other party may from time to time direct in
writing. Any notice personally delivered to the party to whom such Notice is to
be given shall be deemed to have been given and received by the party to whom it
is addressed on the day it is personally delivered. Any Notice transmitted by
fax shall be deemed to have been received on the day it is faxed, if faxed prior
to 5:00 p.m. on such day and, otherwise, on the day next following the date of
transmission, provided that if such day falls on a weekend or statutory holiday,
then such notice shall be deemed to have been given and received on the business
day next following such day.
6.6 Time shall be of the essence hereof
6.7 This Agreement shall enure to the benefit of and be binding upon the
Shareholders and the Company and their respective personal
representatives, successors and permitted assigns.
6.8 This Agreement may be executed in as many counterparts as may be
necessary and by facsimile, each of such counterparts so executed will
be deemed to be an original and such counterparts together will
constitute one and the same instrument and notwithstanding the date of
execution will be deemed to bear the date as of the day and year first
above written.
IN WITNESS WHEREOF the parties have executed this Agreement all on the date
and year first above written.
SANTA CATALINA (ALGERIA) LTD.
Per:
- --------------------------------
Authorized Signatory
<PAGE>
SANTA CATALINA (BERMUDA) I LTD.
Per:
- --------------------------------
Authorized Signatory
ESSEX RESOURCE (BARBADOS) CORPORATION
Per:
- --------------------------------
Authorized Signatory
CVL RESOURCES (BARBADOS) LTD.
Per:
- ----------------------------------
Authorized Signatory
DRUCKER PETROLEUM (ALGERIA) INC.
Per:
- ----------------------------------
Authorized Signatory
<TABLE> <S> <C>
<ARTICLE> 5
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<CASH> 1867417
<SECURITIES> 0
<RECEIVABLES> 8202
<ALLOWANCES> 0
<INVENTORY> 0
<CURRENT-ASSETS> 1887666
<PP&E> 0
<DEPRECIATION> 0
<TOTAL-ASSETS> 3493956
<CURRENT-LIABILITIES> 81109
<BONDS> 0
0
0
<COMMON> 32115
<OTHER-SE> 3360732
<TOTAL-LIABILITY-AND-EQUITY> 3493956
<SALES> 0
<TOTAL-REVENUES> 0
<CGS> 0
<TOTAL-COSTS> 0
<OTHER-EXPENSES> 708114
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> (134930)
<INCOME-PRETAX> (573184)
<INCOME-TAX> 0
<INCOME-CONTINUING> (573184)
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</TABLE>
