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U.S. Securities and Exchange Commission
Washington, D.C. 20549
FORM 10-KSB
(Mark One)
[X] ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934 [Fee Required]
For the fiscal year ended March 31, 1997
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934 [NO FEE REQUIRED]
For the transition period from ________________ to _____________
Commission file number: 0-9617
TERRITORIAL RESOURCES, INC.
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(Name of Small Business Issuer in its charter)
State of Colorado 84-0821158
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(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
734 7th Ave. S.W., Suite 1345
Calgary, Alberta
Canada T2P 3P8
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(Address of principal executive offices) (Zip Code)
Issuer's telephone number, including area code: (403)233-7914
Securities registered pursuant to Section 12(b) of the Act: NONE
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, no par value
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(Title of Class)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
YES X NO
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Check if there is no disclosure of delinquent filers pursuant to Item 405
of Regulation S-B contained herein, and no disclosure will be contained, to the
best of the 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. [X]
-
State issuer's revenues for its most recent fiscal year: $22,000.
State the aggregate market value of the voting stock held by non-affiliates
computed by reference to the price at which the stock was sold, or the average
bid and asked prices of such stock, as of July 9, 1997: approximately
$2,238,988. The information provided shall in no way be construed as an
admission that any person whose holdings are excluded from the figure is an
affiliate or that any person whose holdings are included is not an affiliate,
and any such admission is hereby disclaimed. The information provided is solely
for record keeping purposes of the Securities and Exchange Commission.
(APPLICABLE ONLY TO CORPORATE REGISTRANTS)
AS OF JUNE 30, 1997, THE NUMBER OF SHARES OF COMMON STOCK, NO PAR VALUE,
OUTSTANDING WAS 10,156,133.
Transitional Small Business Disclosure Format (check one): Yes ; No x
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PRIVATE SECURITIES LITIGATION
REFORM ACT SAFE HARBOR STATEMENT
When used in this Annual Report on Form 10-KSB and in other public
statements by the Company and Company officers, the words "anticipate,"
"expect", "estimate", "project", "intend", and similar expressions are intended
to identify forward-looking statements regarding events and financial trends
which may affect the Company's future operating results and financial condition.
Such statements are subject to risks and uncertainties that could cause the
Company's actual results and financial condition to differ materially. Such
factors include. among others: (i) the timing and success of the Company's and
its partners' efforts to secure necessary additional capital, equipment,
supplies and qualified labor and complete the various projects in which the
Company has interests; (ii) political developments in Mongolia, China and
Thailand, among others; (iii) the results of further testing of the various
geographic areas in which the Company has direct or indirect interests; (iv)
unanticipated changes in recent weather patterns and related seasonal factors in
Mongolia and Thailand, (v) the effects of unanticipated actions on the part of
its various operating and contracting parties; (vi) the sensitivity of the
Company's business to general economic conditions in the geographic regions
(generally Asia and the Far East) in which its projects exist; and (vii) other
economic, competitive, governmental and technological factors affecting the
Company's operations, markets, products, services and prices. Readers are
cautioned not to place undue reliance on these forward-looking statements, which
speak only as of the date made. The Company undertakes no obligation to
publicly release the results of any revision of these forward-looking statements
to reflect events or circumstances after the date they are made or to reflect
the occurrence of unanticipated events.
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PART I
ITEM 1. DESCRIPTION OF BUSINESS
BUSINESS DEVELOPMENT
Territorial Resources, Inc. ("Territorial," the "Company" or the
"Registrant"), a Colorado corporation whose principal business office is located
at Suite 1345, 734 7th Ave. S.W., Calgary, Alberta, Canada T2P 3P8, is engaged
in the business of exploring for and developing oil and natural gas in the Far
East region of Asia. Territorial resulted from the merger of Target Oil & Gas
Incorporated with and into Egret Energy Corporation on December 31, 1984.
Target Oil & Gas Incorporated was incorporated in the State of Colorado in 1980,
and Egret Energy Corporation was incorporated in the State of Delaware in 1981.
The name of Egret Energy Corporation was changed to Territorial Resources, Inc.
in July 1988.
Territorial currently has interests in the Tamtsag Basin of northeastern
Mongolia, the Gulf of Thailand and various minor interests in the continental
United States. Prior to 1995, the Company was engaged in oil and gas
exploration and production in the continental United States. In March 1995, the
Company acquired a royalty interest in the Saddle Hills area of central Alberta,
Canada which was sold in December 1996. The Company currently owns working
interests, mineral and/or royalty interests in Colorado and Texas. Since March
1995, the Company has primarily pursued international exploration and production
opportunities and has been disposing of its domestic United States interests.
In the future, Territorial plans to concentrate its activities primarily on
obtaining foreign oil and gas interests and actively pursuing their development.
During the last three fiscal years ended March 31, 1997, the Company has
acquired a number of assets and properties and disposed of certain assets and
properties as a result of the application of its business strategy. See
"Business of Territorial" and Item 2 "Description of Property."
BUSINESS OF TERRITORIAL
The Company's current strategy is to participate primarily as a non-
operator with minority interests in projects managed by operators who have
extensive knowledge and experience in the countries in which the projects are
located. Typically, Territorial's staff evaluate projects based on their
analysis of geological, geophysical and engineering data. Many of these
interests have been acquired by the Company from persons or parties affiliated
with it. Where such projects are initiated by Territorial staff, the Company
may make presentations of those projects to operators who are currently working
in the project area. As a minority interest holder in its projects, the Company
is not required to assume primary responsibility for the supervision and
management of day-to-day operations in the various jurisdictions in which the
projects are located. The Company believes that utilizing the expertise and
contacts of other competent operators will provide opportunities which would
otherwise be either prohibitively expensive or outside of the scope of its
participation. As the Company's staff gains operating experience and its
financial capability increases, it expects to undertake future projects as
operator with larger working interests. Unless otherwise provided herein, all
amounts stated in dollars or ($) represent United States dollars, and all
references to
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shares of common stock, no par value ("Common Stock"), of Territorial have been
adjusted to reflect a one-for-three reverse stock split (the "Reverse Stock
Split") effected in May 1997.
TAMTSAG BASIN, MONGOLIA
The Company owns varying direct and indirect oil and gas interests in the
Tamtsag Basin in northeastern Mongolia. These interests were acquired in
several transactions beginning in 1995.
Territorial became aware of opportunities in Mongolia because of the
involvement of Mr. William Penttila, President and a director of Territorial,
Mr. Dennis (Mike) Buck, Vice President, Exploration of Territorial, and Mr.
Edward T. Story, Jr., a former director of the Company. Mr. Story is the
President of SOCO International plc ("SOCO International"), the operator of SOCO
Tamtsag Mongolia, Inc., a Delaware close corporation ("SOTAMO"). SOTAMO was
formed for the purpose of acquiring, exploring for, developing and producing oil
and gas interests in the Tamtsag Basin in northeastern Mongolia for the benefit
of its stockholders.
SOCO International became interested in the petroleum potential of Mongolia
and in 1993 submitted the first bid for Contract Area XXII under the new
Mongolian Petroleum Law which had been enacted in 1991. A production sharing
contract for the area, the first in Mongolia's history, was awarded in 1993 to
SOCO Mongolia, Inc., at that time a wholly-owned subsidiary of SOCO
International. A second production sharing contract, for Contract Area XIX, was
awarded in 1993 to Medallion Mongolia Oil Corporation ("Medallion"). Both
contracts were ratified by the Mongolian Parliament in September 1993.
SOTAMO currently holds varying interests in four exploration contracts in
the Tamtsag Basin. In 1994, SOTAMO acquired SOCO Mongolia, Inc. in exchange for
shares of SOTAMO and acquired the Mongolian assets of Medallion Mongolia Oil
Corporation in exchange for a 1.25% overriding royalty on all contract areas in
the Tamtsag Basin. Two additional production sharing contracts for Contract
Areas XX and XXI in the Tamtsag Basin were awarded to SOTAMO and its partners in
August 1996.
In early 1995, Mr. Story alerted the Company that two shareholders of
SOTAMO had expressed an interest in acquiring an interest in a public company in
exchange for a portion of their SOTAMO Shares. On March 31, 1995, Territorial
acquired 10 shares of common stock of SOTAMO (representing approximately 1% of
the issued and outstanding shares of SOTAMO) in exchange for approximately
666,667 shares of Common Stock of Territorial, and warrants to acquire an
additional approximately 666,667 shares of Common Stock at an exercise price of
$0.33 per share, exercisable through December 31, 1996 (the "Purchase
Warrants").
In March 1996, the Company acquired an additional 109 shares of common
stock of SOTAMO (representing approximately 12% of the outstanding common stock
of SOTAMO) in exchange for the issuance of approximately 1,816,667 shares of
Common Stock of Territorial. A value of $1,550,198 was placed on the additional
investment in SOTAMO. As part of the acquisition, Purchase Warrants to acquire
325,000 shares of Common Stock were cancelled. William C. Penttila and Dennis
M. Buck each received approximately 29.2% of
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the shares of Common Stock issued in such transaction. Thereafter, Mr. Penttila
was appointed as a director and the Chief Operating Officer of Territorial, and
Mr. Buck was appointed as Vice President, Exploration of the Company. See also
Item 12. "Certain Relationships and Related Transactions."
In May 1996, Territorial sold five shares of SOTAMO to Asia Energy Ltd.
("AEL"), Territorial's largest shareholder, pursuant to an option agreement. In
July 1996, Territorial issued to AEL approximately 639,584 shares of Common
Stock of Territorial in exchange for $267,000 in cash, five shares of SOTAMO,
elimination of a payable to AEL of $25,000, and the cancellation of an option
agreement pursuant to which AEL had been granted the right to acquire certain
shares of SOTAMO from Territorial. Territorial also agreed to pay certain
administrative costs of AEL in the future.
Daniel A. Mercier, currently the Chairman of the Board and Chief Executive
Officer of the Company, is the President, a director and, in combination with
his wife, is an 11.8% shareholder in AEL. Richard A. N. Bonnycastle, a director
and 12.9% shareholder in AEL, has since been elected a Director of the Company,
and Mr. Baker, the Vice President-Finance, Chief Financial Officer, Secretary
and Treasurer of the Company, is also an officer of AEL. See also Item 12
"Certain Relationships and Related Transactions."
After the fiscal year ended March 30, 1997, Territorial completed the sale
to SOCO International of 72 shares of SOTAMO ("72 SOTAMO Shares"). The sale was
consummated pursuant to a Shareholders' Exchange Agreement between Territorial
and SOCO International. Edward T. Story, Jr., the President and Chief Executive
Officer of SOCO International, is a former director of Territorial and currently
holds approximately 4.64% of the issued and outstanding shares of Common Stock
of Territorial. In addition, Jimmy M. McCarroll, a director of Territorial, and
Exploration Associates, Inc., an affiliate of Messrs. Penttila and Buck, have
served as consultants to SOCO International and/or its affiliates in connection
with certain of their international oil and gas projects.
In exchange for the sale of the 72 SOTAMO Shares, Territorial received
approximately $926,000 in cash and 873,250 ordinary shares of SOCO
International. SOCO International, a corporation organized under the laws of
England, recently completed an initial public offering and listing of its shares
for trading on the London Stock Exchange. The 873,250 shares of SOCO
International represent approximately 1.77% of the outstanding shares of SOCO
International, based on information provided to Territorial by SOCO
International. Based on the initial offering price of SOCO International shares
in the public offering, the total proceeds received by Territorial in connection
with the sale of its interests in SOTAMO were equal to approximately $4.6
million.
As a result of these transactions, Territorial directly or through its
subsidiary, TRI Mongolia, Inc., owns an aggregate of approximately five percent
of the outstanding shares of common stock of SOTAMO, in addition to its other
interests in the Tamtsag Basin.
GULF OF THAILAND
In late 1996, Territorial became aware of an opportunity to acquire a farm-
in interest in a block in the Gulf of Thailand on which a well drilled during
1993 tested oil at a rate of 730
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BOPD from the Miocene section at a depth of approximately 3,700 feet. The well
was drilled to a total depth of 7,095 feet to test the Permian Ratburi formation
which, although it was low and wet at this location, had reservoir quality rock
which, if found in a stratigraphically trapped location, was thought to be
prospective. In October 1996, a concession relating to the Block comprising
approximately 2,350,000 acres, now known as Block B8/38, was awarded by the
Government of Thailand to SOCO Exploration (Thailand) Co. Ltd., an affiliate of
SOCO International. In addition, SOCO International holds a concession in the
Gulf of Thailand covering approximately 150,000 acres in an area known as Block
B4/32 which is located approximately 60 miles north of Block B8/38. SOCO
International holds this interest through its affiliate, SOCO Thaitex, Inc. The
two concessions described in this paragraph are sometimes referred to as the
"Concessions."
There is considerable seismic data available from the Government of
Thailand on the Block B8/38 project area. Recent discoveries have been made in
other areas in the Gulf of Thailand from the Miocene and Permian formation
intervals. The Nang Nuan field, which has produced approximately 3 million BBLS
to date, is located approximately 60 miles from the edge of Block B8/38. In
addition, there are a number of gas fields located approximately 125 miles from
the western boundary of Block B8/38, the most significant of which is the
Tantawan field, currently producing at a rate of more than 100 MMCFD with proven
reserves of over 1,000 BCF. The Company believes that Block B8/38 has greater
potential than Block B4/32. Until further information is available, however,
there can be no assurance that oil or gas in quantities sufficient to justify
future operations will be found on either Block B8/38 or Block B4/32.
Immediately after Block B8/38 Concession was awarded, SOCO International
farmed out half of its interest in both Concessions to MMC Exploration &
Production (Thailand) Ltd. ("MMC") in consideration of MMC paying 100% of the
cost to casing point of the first well on Block B8/38 to a maximum of
$3,000,000.
On June 30, 1997, the Company was assigned a 2.5% undivided working
interest in each of the two Concessions from the SOCO International affiliates
holding interests in such Concessions. The assignment was made as a result of
the Company's purchase of a right to acquire such working interests from Jimmy
M. McCarroll, a director of the Company, pursuant to an Asset Purchase Agreement
by and among the Company, Mr. McCarroll and the SOCO International affiliates
with interests in the Concessions. In exchange therefor, the Company paid to
Mr. McCarroll, $210,000 in cash and issued to Mr. McCarroll an aggregate of
550,000 shares of Common Stock of Territorial, 300,000 of which shares are held
in escrow pending the occurrence of certain events. See Item 12 "Certain
Relationships and Related Transactions." Mr. McCarroll earned his interests in
the Concessions by completing a farm-out of the interests to MMC on behalf of
affiliates of SOCO International.
On July 10, 1997, the Company acquired an additional 5% undivided working
interest in each of the two Concessions from the same SOCO International
affiliates holding interests in such Concessions, pursuant to a Farmout
Agreement among the Company and such SOCO International affiliates. The parties
thereto agreed that, with respect to the first well drilled on Block B8/38,
Territorial will not be obligated to pay any portion of the costs and expenses
thereof until (a) the sum of $3,000,000 has been expended in connection with
drilling such well or (b) the first well has been drilled and logged and the
well logging tools have been
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recovered on the rig floor, whichever of (a) or (b) occurs first. With respect
to its aggregate 7.5% interests in the two Concessions, Territorial is required
to pay an aggregate of 12.5% of all costs and expenses of the first well drilled
on Block B8/38 to the casing point in excess of those set forth in the preceding
sentence, and an aggregate of 12.5% of all costs and expenses of the second
well, whether such well is drilled on Block B8/38 or Block B4/32, until such
second well has been drilled and logged and the well logging tools have been
recovered on the rig floor. Other than as described above, Territorial will be
required to pay an aggregate of 7.5% of all costs and expenses with respect to
future operations of the Concessions.
Although the assignments with respect to the working interests of
Territorial in the Concessions have been made by the respective SOCO
International affiliates, each such assignment remains subject to certain
consents or approvals from the Government of Thailand and/or its
instrumentalities. The Company anticipates that application for all such
consents or approvals will be made on or before September 1, 1997.
OTHER
In December 1996, Territorial sold its interest in a producing property
known as Saddle Hills, located in the Province of Alberta, Canada.
CERTAIN FACTORS AFFECTING THE COMPANY'S BUSINESS
Equipment. The source and availability of raw materials affecting the
Company is limited to the availability of oil field equipment and supplies,
including tubular steel products and drilling rigs. Such source and
availability can be scarce for international operations. Drilling activity in
the Gulf of Thailand has increased considerably in the recent past, making it
difficult to secure drilling equipment for the near term. SOCO International
and its partners have a rig available to drill the first well beginning in
August or September of 1997. The second well is expected to be spudded in
September or October of 1997. The Blocks are located in an area with average
water depth of approximately 200 feet.
Competition. The exploration for, development, production, distribution
and marketing of oil and gas are subject to intense competition. The principal
methods of competition in the industry for the acquisition of oil and gas
concessions and leases are up front lease bonus payments at the time of award or
acquisition, location damage payments, supplemental payments, differential
royalty rates, annual delay rental payments, the payment of a co-owner's related
financial obligations, and stipulations requiring exploration, and production
and other work commitments and obligations by the concession holder or lessee.
Competitive factors in the distribution and marketing of oil and natural gas
include price, methods and reliability of delivery. Organizations with greater
financial resources, existing staff and labor forces, equipment for exploration,
and experience may be in a better position than the Company to compete for such
concessions or leases.
The Company's ability to increase reserves in the future will depend not
only on its ability to develop its current properties, but also on its ability
to select and acquire suitable producing properties or prospects for exploratory
drilling. Also, since the Company has an insignificant competitive position in
the industry, its ability to market its oil and gas could be
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severely limited by its inability to compete with larger companies operating in
the same area who may be willing or able to offer any oil or gas produced by
them at a price lower than that of the Company. In addition, the availability of
a ready market for oil and gas will depend upon numerous factors beyond the
Company's control, including the extent of foreign and domestic production and
exports or imports of oil, proximity and capacity of pipelines and the effect of
foreign, federal and state regulation on oil and gas sales. With its focus being
international, the Company is subject to significant political risk, especially
since it is presently concentrating on primarily two countries, Mongolia and
Thailand.
Government Regulations. The oil and gas industry is subject to regulation
by the public policies of foreign, domestic and local governments relating to
such matters as the award of exploration and production interests, the
imposition of specific drilling obligations, environmental protection controls,
control over the development and abandonment of a field (including restrictions
on production and abandonment of production facilities) and, in some cases,
possible nationalization, expropriation, regulatory taking, cancellation or
frustration of contract rights, and other political risks in general. The
industry is also subject to the payment of royalties and taxes, which tend to be
higher as compared to those levied on other commercial activities. The Company
cannot predict the impact of future regulatory and taxation initiatives.
Further, the Company is subject to various foreign, federal, state and
local provisions regarding environmental matters, the existence of which may
either hinder or adversely affect the Company's business. Although the Company
does not believe its business operations presently impair environmental quality,
compliance with foreign federal, state and local regulations which have been or
may be enacted or adopted regarding the environment could have an adverse effect
upon capital expenditures, earnings and the competitive position of the Company.
Since inception, the Company has not made any material capital expenditures for
environmental control facilities and does not expect to make any such
expenditures during the current and succeeding fiscal years.
The Company is currently evaluating the most effective corporate structure
for holding its various interests and may establish one or more subsidiaries in
the countries in which it holds interests. These laws and regulations include
matters relating to land tenure, drilling, production practices, environmental
protection, marketing and pricing policies, royalties, and various taxes and
levies including income tax, all of which are subject to change from time to
time.
. Mongolia. The exploration for and production of oil and gas in
Mongolia is governed primarily by the Petroleum Law and the Regulations for
Implementing the Petroleum Law, but is also affected by the Foreign Investment
Law, the Customs Law as it relates to import of goods and services and the
General Tax Law.
The Petroleum Law, which became effective in 1991, governs the relations
between the Government of Mongolia and foreign and domestic companies and
individuals involved in the exploration, development, production, processing,
transportation, storage and marketing of petroleum in Mongolia. Under the law,
petroleum operations may be carried out following approval from the Petroleum
Authority of Mongolia and the Mongolian Government.
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Successful applicants are granted petroleum production sharing contracts by the
Petroleum Authority. The term of the exploration period may not exceed five
years, however, upon mutual agreement between the contractor and the Petroleum
Authority, the term of the exploration period may be extended twice for a period
of two years each time. The production term may be for a period of up to 20
years beginning on the day approval is granted by the Petroleum Authority, which
term may be extended under certain circumstances for up to two additional terms
of five years each.
The contractor may be required to pay royalties to the Mongolian Government
on the production. The amount of royalties for each project is fixed by
negotiations between the contractor and the Petroleum Authority.
The contractor is required to share with the Mongolian Government the
remaining portion of the total production after deduction of royalties and
recovery of costs. The sharing percentage is negotiated with reference to the
daily production rate and is fixed in the contract. The contractor is permitted
to export its share of the production. With respect to capital cost recoveries,
the Petroleum Law states that the amount of oil a contractor may deduct to
recover its costs may not exceed 40% of the total annual production.
Unless otherwise stated in the Customs Law, the Petroleum Law grants to the
contractor an exemption from customs duties with respect to the import and re-
export of equipment and materials necessary for operations and the export of the
contractor's share of petroleum. The law further provides that disputes which
arise during the course of a project shall be resolved in the courts of
Mongolia. Any disputes related to a contract awarded by the Petroleum Authority
may, upon the request of the parties, be settled in accordance with the UNCITRAL
Arbitration Rules.
The Foreign Investment Law became effective on July 1, 1993. The law is
evidence of the country's continued commitment to foreign enterprises and its
willingness to provide foreign investors with legal protection. It sets out, in
general terms, the methods for establishing and operating an entity with foreign
investment in Mongolia. To qualify as a foreign investment entity ("FIE"), at
least 20% of the entity's registered capital must be contributed by a foreign
party. The law grants FIE's various exemptions from and reductions in customs,
duties and taxes.
. Thailand. Oil and gas activities in Thailand are regulated by the
Mineral Fuels Division of the Department of Mineral Resources, a department of
the Thailand Ministry of Industry. Thailand currently utilizes a concession
system for regulating petroleum exploration and production activities as opposed
to a production sharing system. The primary difference between the two systems
is the concept of ownership of the resources. In the concession system, the
resource belongs to the concessionaire once the concession is awarded, subject
to the obligation to pay royalties, taxes and other payments to the Thailand
Government. In the production sharing system, the resources belong to the
government after the production sharing contract is awarded. The contractor
obtains a portion of the production from the contract area according to the
split specified in the contract. The contractor has the obligation to pay taxes
based on its share of production and other charges specified in the contract.
Part of the production is also allocated to the contractor before splitting to
compensate the contractor for the cost of exploration and production.
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Thailand is currently considering replacing the existing concession system
with a production sharing system. Details regarding the proposed change have
not been presented to the industry. However, given Thailand's desire to attract
more interest from foreign oil and gas companies, many industry analysts expect
the changes, if any, to be primarily of an administrative nature rather than an
attempt to increase the government's share of production.
Companies operating in Thailand are subject to a number of laws regulating
the oil and gas industry including taxation, customs, duties, environment, and
import and export of materials and services. Petroleum activities are primarily
regulated by the Mineral Fuels Division, Department of Mineral Resources of the
Thailand Ministry of Energy. The current Petroleum Act, known as Thailand III,
came into effect in 1989. A primary difference between Thailand II, which came
into effect in 1982 in response to increasing international oil and gas prices,
and Thailand III is the provision for sliding scale royalties to accommodate
commercial production from fields of varying sizes.
The first offshore exploration rights in the Gulf of Thailand were granted
in 1967 and the first offshore well drilled by a private company was drilled by
Conoco in 1971. Licensing rounds which may include over 100 exploration blocks
available for bid are held on a regular basis.
Current daily production of oil, liquids and condensate from Thailand is
approximately 27,000 BBLS, 42,000 BBLS and 1,500 MMCF/D, respectively. Thailand
is a significant importer of energy and has one of the highest growth rates of
energy consumption in the world. Refining capacity in Thailand's three main
refineries exceeds 500,000 BBLS per day and has been projected by certain
industry analysts to increase to approximately 750,000 BBLS per day by the year
2000. As a result, markets exist for any new production which is developed in
Thailand and there is an extensive infrastructure of both oil and gas facilities
to accommodate production.
The Thailand Government has a first right of refusal to purchase any oil or
gas produced in Thailand. However, because it is a first right, sale prices
generally reflect international prices for both oil and gas. Access to markets
is essentially assured, subject to pipeline space limitations, particularly for
gas, but there is strong national desire to supply as much of Thailand's energy
requirements from domestic supplies in order to reduce the country's dependence
on imported oil and gas.
. Tax Regulations. The nature of Territorial's operations and
investments results in income being taxed in several jurisdictions. Territorial
is a Colorado corporation and is subject to United States income tax on income
earned by the Company directly from operations carried on in the United States
through a permanent establishment. Territorial's remaining U.S. oil and gas
assets are not significant and it is anticipated that any future income
generated from these assets will be offset by unused non-capital loss carry
forwards.
As a U.S. corporation, SOTAMO is subject to United States income tax on
income earned from operations carried on outside the United States. SOTAMO is
also subject to U.S. income tax on direct foreign investments.
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SOTAMO holds a direct interest in Contract Areas XIX and XXII in Mongolia.
Income from Contract Areas XIX and XXII, after deduction of related exploration
and development expenses, will be subject to U.S. federal income tax at a rate
of 35%, and possibly state income tax. SOTAMO's interest in Contract Areas XX
and XXI are owned by a wholly-owned subsidiary, SOCO Tamtsag Mongolia (XXI)
Ltd., a company incorporated in the Cayman Islands. Similarly, Territorial's 15%
direct interest in Contract Area XX is owned by its wholly-owned subsidiary,
Territorial Resources (Caymen) Ltd., a Cayman Islands corporation. There is no
Cayman Islands corporate income tax nor withholding tax on dividends paid by
Cayman Islands companies. However, dividends paid by a Cayman Islands company to
SOTAMO or Territorial will be subject to U.S. income tax.
There is currently no income tax payable in Mongolia on revenue generated
from the production sharing contracts. There also is currently no tax treaty
between Mongolia and the United States. If such a treaty is established in the
future, then a portion of the production allocated to the Mongolian Government
may be credited against U.S. taxes payable.
Under the provisions of the Thailand's Petroleum Income Tax Act BE 2514 and
(No. 4) BE 2532, net profits derived from the petroleum business are subject to
income tax at the rate specified by the Royal Decree Prescribing Petroleum
Income Tax Rates BE 2514, which must not be lower than 50% and not be higher
than 60% of such net profits. Under the Royal Decree, the income tax rate to be
imposed on Territorial's anticipated net profits is 50%.
Weather Conditions. The Company's oil and gas business is not generally
seasonal in nature, but, at certain times, weather conditions may affect the
Company's ability to access its oil and gas properties and its ability to drill
and operate oil and gas wells. For example, prior to 1997, exploration and
drilling operations in Mongolia were halted during the Winter months, from
December to March. Also, at times, the sale of gas and possibly oil is
curtailed due to lack of demand related to seasonal conditions.
Oil and Gas Industry Generally. Oil and natural gas exploration involves
many risks, which even a combination of experience, knowledge and careful
evaluation may not be able to overcome. There is no assurance that commercial
quantities of oil and natural gas will be discovered by the Company. The
marketability of oil and natural gas acquired or discovered will be affected by
numerous factors beyond the control of the Company. These factors include
reservoir characteristics, market fluctuations, the proximity and capacity of
oil and natural gas pipelines and processing equipment and government
regulation.
Oil and natural gas operations (exploration, production, pricing, marketing
and transportation) are subject to extensive controls and regulations imposed by
various levels of government which may be amended from time to time, some of
which are described above under "Government Regulations." The Company's oil and
natural gas operations may also be subject to compliance with laws and
regulations controlling the discharge of materials into the environment or
otherwise relating to the protection of the environment.
Oil and natural gas exploration operations are subject to all the risks and
hazards typically associated with such operations, including hazards such as
fire, explosion, blowouts, cratering and oil spills, each of which could result
in substantial damage to oil and natural gas wells, producing facilities, other
property and the environment or in personal injury.
9
<PAGE>
Although the operators of the Company's properties may maintain liability
insurance, the nature of these risks is such that liabilities could exceed
policy limits, in which event the Company could incur significant costs that
could have a materially adverse effect upon its financial condition. Oil and
natural gas production operations are also subject to all the risks typically
associated with such operations, including premature decline of reservoirs and
the invasion of water into producing formations.
Both oil and natural gas prices are unstable and are subject to
fluctuation. Any material decline in prices could result in a reduction of the
Company's future net production revenue. The economics of producing from some
wells may change as a result of lower prices, which could result in a reduction
in the volumes of the Company's reserves. The Company might also elect not to
produce from certain wells at lower prices. All of these factors could result
in a material decrease in the Company's net production revenue causing a
reduction in the value of its oil and gas assets and corresponding reduction in
oil and natural gas acquisition and development activities.
The Company internally reviewed the ownership records associated with its
properties prior to the acquisition thereof and was satisfied both as to the
title and to the ability of the vendors to convey good title. In additional, it
has secured legal opinions regarding certain title matters relating to its
interests in Mongolia and Thailand. If title defects exist, however, it is
possible that the Company may lose a portion of its right, title, estate and
interest in and to the properties to which the title defect relates.
Factors Associated with Foreign Investment. As the principal assets of the
Company are located outside the United States, its operations are subject to the
risks associated with foreign investment, including increases in taxes and
royalties, renegotiation of contracts, currency exchange fluctuations and
political uncertainty.
Mongolia. In addition to general factors associated with oil and gas
companies, additional factors relating to Mongolia include:
(a) Realization of revenues is significantly dependent upon exports, the
levels and approvals of which are determined by national laws and regulations.
There can be no guarantee that exports will not be interrupted as a result of
these laws or regulations or the failure by the Company to continue to obtain
the relevant export approvals;
(b) The current policy of encouraging foreign investment in Mongolia may
change. This could increase the difficulties of the Company's activities.
Other unforeseen government restrictions or requirements, such as the need to
seek additional licenses or permits, may have a similar effect.
(c) Political, socio-economic and legal uncertainties may affect, among
other things, the enforceability or interpretation of agreements, including any
oil sale contracts and production sharing contracts, and may adversely affect
field operations and revenues.
(d) The imposition of currency exchange control or controls over the
movement of oil or gas or the loss of tax or currency concessions could result
in extra costs being incurred or income receivable by the Company being
adversely affected.
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<PAGE>
(e) The number of options currently available for transporting oil or
refined products to markets is limited. More extensive sales and marketing of
the oil and gas produced is dependent on new pipelines being built, the
construction of which could face significant obstacles. Such obstacles may
include the obtaining of the necessary government approvals and the uncertainty
of obtaining the necessary funding. The options currently available for
transporting oil or refined products to markets would be subject to negotiating
suitable agreements with the nations bordering Mongolia.
(f) Tax law and practice is not as fully developed as that of western
nations. It is possible that the current interpretation of the law or
understanding or practice may change or that the law may be changed with
retrospective effect.
Thailand. In addition to general factors associated with oil and gas
companies, additional factors relating to Thailand include:
(a) The Company's interests are located offshore and therefore have risks
associated with storms, typhoons and other weather related hazards.
(b) Essentially all production in Thailand is purchased by government
affiliates pursuant to the provisions of the Petroleum Act. As a result, there
may be less competition for purchasers of oil and gas and the Company may be
required to accept sales prices for its products which are lower than world
prices.
(c) The number of wells drilled and completed in Thailand has recently
increased significantly making it more difficult to obtain oilfield supplies and
services. The Company must compete for such supplies and services with other
companies which have greater resources, have been operating in the region for a
greater length of time, and may have contracted the required services on a long
term basis. There is no assurance that such services can be obtained on a
timely or cost effective basis.
OTHER
Four customers have accounted for more than 10% of the Company's oil and
gas sales during the years ended March 31, 1997 and 1996. AFG Energy, Inc.,
Synder Oil Corporation ("Snyder"), Norcen Energy Resources ("Norcen") and Merit
Energy Company accounted for approximately $6,000, $5,000, $3,000 and $3,000,
respectively, of the Company's oil and gas sales in 1997; and Norcen and Synder
accounted for approximately $14,000 and $6,000, respectively, of the CompanyOs
oil and gas sales in 1996.
EMPLOYEES
As of June 30, 1997, Territorial had one part-time employee.
11
<PAGE>
ITEM 2. DESCRIPTION OF PROPERTY
The Company's properties consists primarily of its direct and indirect
interests in the Tamtsag Basin, Mongolia and its interests in the Gulf of
Thailand, as described in further detail below. As these properties remain in
the exploration and/or early development stages, no commercial quantities of oil
or gas have been sold from these properties during the last three fiscal years
of the Company.
Territorial continues to hold certain proven oil and gas properties
located in the States of Colorado and Texas. These properties generate cash
flow of approximately $15,000 annually and have a value of less than $60,000.
Other properties owned or acquired in the past five years have been disposed of
or determined to be uneconomic through exploration and development activities.
The properties remaining are currently being offered for sale and, given their
economic significance in relation to Territorial's international assets, are not
material.
UNDEVELOPED ACREAGE
MONGOLIA
SOTAMO holds varying interests in four exploration contracts in the Tamtsag
Basin. SOCO Mongolia, Inc. entered into the first production sharing contract
in the history of Mongolia for Contract Area XXII in March 1993. A second
production sharing contract for Contract Area XIX was signed with Medallion
Mongolia Oil Corporation shortly thereafter. Both contracts were subsequently
ratified by the Mongolian Government and exploration work began in September
1993. In 1994, SOTAMO acquired SOCO Mongolia, Inc. in exchange for shares of
SOTAMO and acquired the Mongolian assets of Medallion Mongolia Oil Corporation
in exchange for a 1.25% overriding royalty on all contract areas in the Tamtsag
Basin. Two additional production sharing contracts for Contract Areas XX and
XXI were awarded to SOTAMO and its partners in August, 1996. In addition to its
interest in SOTAMO, Territorial owns a direct 15% interest in Contract Area XX
and is the operator of the block. The production sharing contracts cover an
area of approximately 40,000 square kilometers (10.8 million acres). Management
believes that the area is geologically similar to the adjacent Daqing Field in
northeastern China which has produced over nine billion barrels of oil.
The following table sets forth Territorial's net effective interest in each
Contract Area in the Tamtsag Basin as a result of its participation in the
production sharing contracts as at June 30, 1997:
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<PAGE>
TAMTSAG BASIN, MONGOLIA
SOTAMO'S TERRITORIAL'S GROSS NET
Property Interest Interest (1) Acres Acres
Contract Area XIX 100% 5.00% 2,586,000 129,300
Contract Area XX 80% 19.00% 2,649,000 503,310
Contract Area XXI 85% 4.25% 2,750,000 116,875
Contract Area XXII 100% 5.00% 2,817,000 140,850
---------- -------
10,802,000 890,335
_______________
(1) Territorial's interest in each Contract Area is an indirect interest based
on its 5% shareholding in SOTAMO, except for Contract Area XX which also
includes a direct 15% interest.
The production sharing terms for each Contract Area vary slightly but
provide for approximately 40% of production to be allocated to the contractor
for cost recovery and the balance to be allocated as between the contractor and
the Mongolian Government. See "Mongolia Production Sharing Contract Terms"
below for a further description of the terms of the arrangements governing these
properties. The four Contract Areas are contiguous.
Contract Areas XIX and XXII are each held 100% by SOTAMO. Contract Area XX
is held 80% by SOTAMO, 15% by Territorial and 5% by two privately owned
Mongolian corporations. Contract Area XXI is held 85% by SOTAMO and 15% by the
same two Mongolian corporations. A gross overriding royalty of 1.25% is payable
on production from all of the Contract Areas and a 0.5% gross overriding royalty
is payable on production from all Contract Areas (except Contract Area XX) to
former working interest owners in the project.
Territorial has made application to the Petroleum Authority of Mongolia to
obtain two other Contract Areas in Mongolia. Territorial also intends to
participate in applications for two additional Contract Areas during July or
August of 1997. At this time, it is impossible for the Company to predict
whether or not any of (a) the applications currently pending or (b) the two
additional applications in which Territorial currently intends to participate,
will be granted by the Petroleum Authority, and if granted, whether or not they
will be approved and/or confirmed as required by the Mongolian Parliament.
Mongolia Production Sharing Contract Terms. The following is a brief
summary of certain of the terms of the production sharing contracts governing
the Contract Areas in Mongolia described below. Such summary is qualified in
its entirety by reference to the applicable production sharing contracts.
Term. The contracts in the Tamtsag Basin provide for an initial
exploration period of five years with provision for two extensions of two years
each. Each contract specifies relinquishment of 25% of the acreage after two
years and again after four years, however, such relinquishment has been waived
for Contract Areas XIX and XXII, each of which is in year four of the initial
exploration period. Each Contract Area may be extended for a
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<PAGE>
development period of 20 years from the date of a commercial discovery being
made on the Contract Area.
Production Sharing Terms. Each production sharing contract provides for
40% of the production to be designated as "Cost Oil" and allocated to the
contractor for recovery of costs and expenses incurred in respect of petroleum
operations. The balance, referred to as "Profit Oil," is allocated on a sliding
scale as follows:
(a) for production rates up to 50,000 BOPD per Contract Area, 60% is
allocated to the contractor and 40% to the Mongolian Government, except for
Contract Area XXII where the allocation is 65% to the contractor and 35% to the
Mongolian Government;
(b) for production rates of 50,001 BOPD to 100,000 BOPD per Contract Area,
50% is allocated to the contractor and 50% to the Mongolian Government; and
(c) for production rates in excess of 100,001 BOPD per Contract Area, 45%
is allocated to the contractor and 55% to the Mongolian Government, except for
Contract Area XXII where the allocation is 40% to the contractor and 60% to the
Mongolian Government.
After all exploration and development costs have been recovered, the
portion of production that formerly represented Cost Oil is allocated 40% to the
contractor and 60% to the Mongolian Government for Contract Areas XX and XXI and
37.5% to the contractor and 62.5% to the Mongolian Government for Contract Area
XIX. For Contract Area XXII, the former Cost Oil portion reverts to the same
allocation as the Profit Oil after recovery of exploration and development
costs.
Contract Areas XIX and XXII specify no royalty payable over and above the
production sharing allocation described above. In addition to the production
allocation, a royalty of 5% is payable on all production from Contract Area XX
and a royalty of 7.5% is payable on all production from Contract Area XXI.
Fees and Bonuses. Various fees are specified in the production sharing
contracts including annual surface rental of $1.00 per square kilometer
(approximately $40,000 per year in total for all of the Contract Areas), $25,000
for each extension to the initial exploration period, $50,000 for evaluation of
a development area contract, $25,000 for any change to a development area,
$100,000 for each extension to the term of a development area contract and
$100,000 for each transfer of rights for petroleum operations. A production
bonus of $500,000 is specified in all contracts, payable when the daily
production rate from the Contract Area exceeds 100,000 BOPD.
Each of the contracts specifies that the contractor is exempt from
Mongolian income tax, other taxes, social security payments and social insurance
payments. All materials and supplies imported or exported are similarly exempt
from customs and duties pursuant to the terms of the contracts.
Title to the contractor's share of production passes to the contractor at
the point of measurement and may be exported free of duties or other charges.
14
<PAGE>
THAILAND
The following table sets forth, as at July 11, 1997, the net effective
interest which Territorial holds as well as the interest it will earn in each of
Block B8/38 and Block B4/32 in the Gulf of Thailand by fulfilling its farm-out
commitments under the applicable Concessions relating to such Blocks:
<TABLE>
<CAPTION>
TERRITORIAL'S APPROXIMATE APPROXIMATE
PROPERTY INTEREST GROSS ACRES NET ACRES
<S> <C> <C> <C>
Block B8/38 7.5% 2,350,000 176,250
Block B4/32 7.5% 150,000 11,250
--------- -------
2,500,000 187,500
</TABLE>
The two Blocks are approximately 60 miles apart.
Thailand Concession Terms. The following is a brief summary of certain of
the terms of the Concessions relating to Block B8/38 in the Gulf of Thailand.
Such summary is qualified in its entirety by reference to such Concession.
Term. The Concession relating to Block B8/38 provides for an exploration
period of six years ending October 23, 2002. At the end of the initial
exploration term on October 23, 2002, Thailand petroleum law permits the
government to grant, upon application by the concessionaire, an additional
three-year exploration term on up to 50% of the Concession acreage that has not
been previously designated as a production area or relinquished, subject to
certain terms and conditions including the agreement to undertake a work program
and the payment of fees and rentals to be negotiated.
Before the exploration period, the concessionaires may pay surface
reservations fees to retain acreage subject to forfeiture. Any fees payable
will be at the rate prescribed by Department of Mineral Resources on the date of
submission of the application for the surface reservation.
If production does not commence within four years of the designation of the
production area, the production period will be deemed expired. For Block B8/38,
production must commence by October 2000, unless an extension is granted on the
basis that the delay was not due to the fault of the concessionaires. The
petroleum production period for producing areas extends 20 years from the date
of termination of the exploration period plus a ten year extension, subject to
agreement on the terms thereof.
Production Bonuses. Pursuant to the terms of each of the Concessions, the
concessionaire thereunder is required to make the following payments
("Production Bonuses") to the Department of Mineral Resources: (i) $250,000
within 180 days of signing such Concession; (ii) $50,000 annual payment when
petroleum production from the relevant Block reaches an average of 5,000 barrels
of crude oil equivalent per day for a period of 30 consecutive days; (iii)
$500,000 when the petroleum production from such Concession area is maintained
at an average of 5,000 barrels per day of crude oil equivalent for a period of
60 consecutive days; and (iv) $1,000,000 when the petroleum production from such
Concession
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<PAGE>
area is maintained at an average of 25,000 barrels per day of crude oil
equivalent for a period of 60 consecutive days.
Sale to Thailand Government and Preference for Local Services. Each
concessionaire is required to give first priority to the Thailand Government to
purchase the oil and natural gas produced from the relevant Block. Each
concessionaire also is required to give preference to the use of local
contractors, materials and equipment available in Thailand with regard to
transport vehicles and other matters related to the petroleum operation and must
also employ and train Thailand nationals at all operational levels.
Royalties. The following table summarizes the monthly royalties required
to be paid based on barrels of oil equivalent produced within Block B8/38:
PERCENT OF VALUE OF
MONTHLY VOLUME OF PRODUCT (BOE) PRODUCT SOLD OR DISPOSED
Not exceeding 60,000 5.00%
Portion exceeding 60,000 but not exceeding 150,000 6.25%
Portion exceeding 150,000 but not exceeding 300,000 10.00%
Portion exceeding 300,000 but not exceeding 600,000 12.50%
Portion exceeding 600,000 15.00%
Special Remuneratory Benefit. The concessionaires are required to pay a
special remuneratory benefit (the "Benefit") under the Thailand Petroleum Act.
The Benefit is calculated annually on a block-by-block basis. No Benefit is
payable if the block has no annual petroleum profit (as defined to be
hydrocarbon revenues net of, among other things, royalties, production bonuses,
capital expenses and operating expenses). The Benefit, expressed as a
percentage of annual petroleum profit, varies from zero to 75%, depending on the
level of annual revenue per meter drilled in the Block.
Termination and Revocation. Each Concession terminates (i) upon the
termination of the petroleum production period; (ii) when the "Effective
Concession Area" (as defined in such Concession) ceases to exist by virtue of
the provisions of the Petroleum Act B.E. 2514, which governs statutory
percentage relinquishment, or through the voluntary relinquishment made by the
concessionaires; (iii) upon revocation of the Concession; or (iv) upon
termination of the concessionaires' status as a juristic person (i.e., subject
to the jurisdiction of Thailand courts). Under the Petroleum Act, either
Concession may be revoked by the Ministry of Industry if the concessionaire:
(i) fails to furnish the production bonuses or pay the royalties, the Benefits
or income taxes; (ii) becomes bankrupt; or (iii) fails to comply with good
petroleum industry practice or to conduct petroleum operations with due
diligence or violate certain other provisions of the Concession (including
giving special priority to Thailand nationals) or of the Petroleum Act (such as
restrictions on transfer). Also, all production, storage and transportation
equipment and facilities must be turned over to the Thailand Government at the
end of the production term.
The obligations of the concessionaires under the Concession are joint and
several for all such concessionaires under such Concession, including without
limitation the obligation to pay income taxes, if any, under the Concession.
16
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RESERVES
MONGOLIA
Territorial's interests in SOTAMO have been evaluated by GEO Engineering
Inc., the results of which are summarized in GEO Engineering, Inc.'s report (the
"GEO Report") dated May 28, 1997, effective December 31, 1996. The following
table summarizes the crude oil reserves as evaluated in the GEO Report. The
information presented is adjusted to reflect Territorial's sale of 72 SOTAMO
Shares to SOCO International effected after the fiscal year ended March 31,
1997. See Item 1 "Description of Business - Business of Territorial - Tamtsag
Basin, Mongolia."
TAMTSAG BASIN, MONGOLIA
TERRITORIAL'S SHARE OF OIL RESERVES
(MMBBLS)
Gross (1) Net (2)
--------- ------
Proved (3)
Developed (4) - -
Undeveloped (5) - -
--------- ------
Total Proved - -
Indicated Additional (6) 2.0 1.4
--------- ------
TOTAL 2.0 1.4
- ---------------
(1) "GROSS" reserves are the total of the Company's working interests and/or
royalty interest share of reserves before deducting royalties owned by
others.
(2) "NET" reserves are the total of the Company's working interests and/or
royalty interests share of reserves after deducting the amounts attributable
to royalties owned by others.
(3) "PROVED" reserves are the estimated quantities of reserves which geological
and engineering data demonstrate with reasonable certainty to be recoverable
in future years from known reservoirs under existing economic and operating
conditions. Such quantities are estimated as recoverable from that portion
of a reservoir which can be reasonably evaluated as economically productive
on the basis of analysis of drilling, geological, geophysical and
engineering data, including the reserves to be obtained by enhanced recovery
processes demonstrated to be economic and technically successful in the
subject reservoir.
(4) "PROVED DEVELOPED" reserves are those reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods.
(5) "PROVED UNDEVELOPED" reserves are those reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where
a relatively major expenditure is required for recompletion. Reserves on
undrilled acreage is limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled.
(footnotes continued)
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(footnotes continued)
(6) "INDICATED ADDITIONAL" reserves are those reserves which analysis of
drilling, geological, geophysical and engineering data does not demonstrate
to be proved under current technology and anticipated economic conditions,
but where such analysis suggests the likelihood of their existence and
future recovery. Probable additional reserves to be obtained by the
application of enhanced recovery processes will be the increased recovery
over and above that estimated in the proved category which can be
realistically estimated for the pool on the basis of enhanced recovery
processes which can be reasonably expected to be instituted in the future.
Indicated Additional reserves do not constitute proved developed or proved
undeveloped reserves.
THAILAND
As of March 31, 1997, Territorial had no interests in the Gulf of Thailand.
Territorial's interests in the Gulf of Thailand acquired in June and July, 1997,
have been evaluated by Gaffney, Cline & Associates, the results of which are
summarized in the Gaffney Cline Report dated May 16, 1997, effective December
31, 1996. The following table summarizes the crude oil and oil reserves as
evaluated in the Gaffney Cline Report. The information presented is adjusted to
reflect Territorial's acquisition of an aggregate of 7.5% working interests in
Block B8/38 and Block B4/32 in June and July, 1997. See Item 1 "Description of
Business - Business of Territorial - Gulf of Thailand." Quantities attributable
to indicated additional reserves have not been reduced to account for the risk
of obtaining production from such reserves.
GULF OF THAILAND
TERRITORIAL'S SHARE OF OIL RESERVES
(MMBBLS)
Gross (1) Net (2)
--------- -------
Proved (3)
Developed (4) - -
Undeveloped (5) 6.6 0.5
---- ---
Total Proved 6.6 0.5
Indicated Additional (6) 7.3 0.5
---- ---
TOTAL 13.9 1.0
- ---------------
(1) "GROSS" reserves are the total of the Company's working interests and/or
royalty interest share of reserves before deducting royalties owned by
others.
(2) "NET" reserves are the total of the Company's working interests and/or
royalty interests share of reserves after deducting the amounts attributable
to royalties owned by others.
(3) "PROVED" reserves are the estimated quantities of reserves which geological
and engineering data demonstrate with reasonable certainty to be recoverable
in future years from known reservoirs under existing economic and operating
conditions. Such quantities are estimated as recoverable from that portion
of a reservoir which can be reasonably evaluated as economically productive
on
(footnotes continued)
18
<PAGE>
(footnotes continued)
the basis of analysis of drilling, geological, geophysical and engineering
data, including the reserves to be obtained by enhanced recovery processes
demonstrated to be economic and technically successful in the subject
reservoir.
(4) "PROVED DEVELOPED" reserves are those reserves that can be expected to be
recovered through existing wells with existing equipment and operating
methods.
(5) "PROVED UNDEVELOPED" reserves are those reserves that are expected to be
recovered from new wells on undrilled acreage, or from existing wells where
a relatively major expenditure is required for recompletion. Reserves on
undrilled acreage is limited to those drilling units offsetting productive
units that are reasonably certain of production when drilled.
(6) "INDICATED ADDITIONAL" reserves are those reserves which analysis of
drilling, geological, geophysical and engineering data does not demonstrate
to be proved under current technology and anticipated economic conditions,
but where such analysis suggests the likelihood of their existence and
future recovery. Probable additional reserves to be obtained by the
application of enhanced recovery processes will be the increased recovery
over and above that estimated in the proved category which can be
realistically estimated for the pool on the basis of enhanced recovery
processes which can be reasonably expected to be instituted in the future.
Indicated Additional reserves do not constitute proved developed or proved
undeveloped reserves.
TITLE TO PROPERTIES
Internationally, rights to explore for and produce hydrocarbons are generally
obtained through a concession and/or production sharing contract with the host
government which can include both national and local authorities, with the
involvement of petroleum, taxation and export agencies. The assignment of the
Company's interests in the Gulf of Thailand Concessions is subject to certain
consents from the Government of Thailand. See Item 1 Description of Business -
Business of Territorial - Gulf of Thailand." While the Company believes that
the material requirements of each concession or production sharing contract in
which it owns a direct or indirect interest are met in all material respects
such that title to each such concession can be maintained, no assurance can be
given that all necessary requirements are met. Further, the pertinent laws are
subject to change and, as discussed above, significant risks (among other risks,
political and product market risks) apply to international activities. See Item
1 "Description of Business - Business of Territorial - Certain Factors
Affecting the Company's Business."
As is customary in both the North American and international oil and gas
industry, only a perfunctory investigation as to ownership is performed when
acquiring undeveloped properties believed suitable for drilling operations.
Prior to commencement of drilling operations, a thorough title analysis is
normally conducted and any material defects are remedied before proceeding with
operations. In addition, the Company secured legal opinions regarding certain
title matters relating to its interests in Mongolia and Thailand. The Company's
properties are subject to royalties, overriding royalties, carried and other
similar interests, contractual arrangements, liens incident to operating
agreements, liens for current taxes not yet due and other relatively minor
encumbrances, all of which are customary in the oil and gas industry. For a
discussion of certain of the terms of the Mongolian production
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<PAGE>
sharing contracts and the Thailand Concession terms, see "Undeveloped Acreage -
Thailand -Thailand Concession Terms."
DRILLING AND PRESENT ACTIVITIES
MONGOLIA
To date, six wells have been drilled in the Contract Areas located in the
Tamtsag Basin, Mongolia, resulting in four apparent discoveries and two dry
holes. During 1995, SOTAMO drilled two wells, the first of which was spudded in
April 1995, and drilled to a total depth of 9,843 feet. Although the results of
this well confirmed the presence of source rock, no reservoir rock was
encountered and the well was plugged. The second well, SOTAMO 19-2, was drilled
in late 1995 to a total depth of 9,875 feet. The well was suspended for the
winter of 1995-96 and was stimulated and swab tested during the summer of 1996.
The oil pay zone, a sandstone in the upper part of the Lower Cretaceous-Upper
Jurassic Tsagaantsav Formation, was severely damaged with drilling mud and lost
circulation material when the well was drilled. Stimulation and testing efforts
to date have been partially successful and Territorial expects the well to be
completed as a low rate pumping oil well during the Summer of 1997. The well
produced 41 API oil at various rates during swab testing from perforations
between 8,865 feet and 8,944 feet. Production rates are yet to be determined.
A number of seismically controlled structures have been identified in close
proximity to the 19-2 well. The first follow-up well was spudded in late April
1997, and in early June 1997, flowed 37 degrees API oil to surface at a rate of
687 barrels per day ("BBLS") per day from an interval of 7,825 to 7,973 feet.
The 1996 summer drilling program consisted of two wells, the SOTAMO 22-1
and 21-1 wells. The SOTAMO 22-1 well (95 miles east of the 19-2 well) was
drilled to a total depth of 8,589 feet within Contract Area XXII. No oil shows
were encountered in the Lower Cretaceous-Upper Jurassic interval penetrated.
However, approximately 2,100 feet of reservoir quality sands with porosities as
high as 28% were encountered above basement.
The SOTAMO 21-1 well (60 miles east of the 19-2 well) was drilled in
Contract Area XXI to a depth of 7,966 feet and penetrated approximately 26 feet
of oil saturated sand with approximately 18% porosity in the upper part of the
Lower Cretaceous-Upper Jurassic Tsagaantsav Formation. A drillstem test of the
interval between 6,272.6 feet and 6,307.4 feet recovered medium gravity oil with
no water. The crude oil recovered contained approximately 15% paraffin which
plugged off the drill pipe during the test. The well has been suspended until
completion and production equipment can be installed. A number of prospects and
well locations have been identified offsetting well 21-1, the first of which,
SOTAMO 21-2, was spudded on January 8, 1997. The 21-2 well was drilled to a
total depth of 8,038 feet in March 1997. Four intervals were cored while
drilling. Drillstem tests of two intervals recovered medium gravity crude oil
with a small amount of load water from each interval. The crude oil recovered
has a high paraffin content similar to that encountered in the 21-1 well and
plugged off the drill pipe during the tests. The Company is currently
investigating various methods of controlling the wax produced from these
intervals. The well is expected to be completed during July or August, 1997
and, if successful, is expected to be placed on production in the latter half of
the calendar year.
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<PAGE>
In June 1997, the SOTAMO 19-3 well tested oil to surface over a sixteen-
hour period at a stabilized rate of 687 barrels per day with 47 thousand cubic
feet per day of associated gas and no water from an interval of 2,385 meters to
2,421 meters at a flowing well head pressure of 145 psi on a 3/8" choke. The
oil was approximately 37 API gravity, which is similar to that tested in the 19-
2 well.
The 19-3 well is expected to be completed during July or August of 1997,
while the other three previously announced discoveries, as well as installation
of production facilitates, are expected to be completed thereafter.
The following table summarizes the drilling activities of Territorial
described above during the periods set forth below:
THREE MONTHS ENDED YEARS ENDED MARCH 31,(1)
June 30, 1997 1997 1996
------------- ---- ----
Gross NET GROSS NET GROSS NET
----- ---- ----- --- ----- ---
Oil Wells 1 0.05 2 0.20 1 0.13
Natural Gas Wells - - - - - -
Dry and Abandoned Wells - - 1 0.13 1 0.13
- ---- - ---- - ----
Total Wells 1 0.05 3 0.33 2 0.26
- ----------
(1) There were no wells drilled by Territorial in the three years ended March
31 prior to 1996.
The wells drilled to date have been drilled under contract by China
National United Oil Corporation ("CNUOC") and China Petroleum Engineering
Construction Corporation ("CPECC"), both affiliates of China National Petroleum
Corporation ("CNPC"). For the 1997 program, SOTAMO has negotiated a four well
turnkey drilling contract for $8.8 million. All moving, rigging up, drilling,
logging, testing, coring, casing and cementing services are included in the
contract. As part of the contract, CPECC winterized the rig which previously
had been equipped for summer drilling only.
SOTAMO has also executed a contract with CNUOC under which CNUOC has agreed
to purchase any crude oil produced by SOTAMO from the Tamtsag Basin for the
Daqing Export Price, a price which is published monthly in international
publications, less $2.00 per BBL for transportation. The delivery point
specified in the contract is a mutually acceptable Mongolia/China border point.
SOTAMO delivered the first load of crude oil from the 19-2 well to the border on
December 12, 1996 as a test of the transportation and delivery provisions of the
crude oil purchase and sale contract. CNUOC accepted the oil at a point located
approximately 200 kilometers from the 19-2 well. SOTAMO was paid $20.75 per BBL
for the approximately 100 BBLS delivered.
A total of approximately 3,000 kilometers of seismic has been acquired by
SOTAMO to date. This data has been shot using Mongolian contractors and has
been processed in Houston, Texas. Territorial's personnel have identified
numerous locations to follow up on the wells drilled to date. The next well,
called 19-4, offsets the 19-3 well by approximately
21
<PAGE>
1/3 of a mile and will be spudded in July 1997. An additional approximately 930
miles of new seismic data are expected to be acquired during calendar year 1997.
The program commenced on Contract Area XX and, combined with the drilling
program and a training program led by Territorial's personnel in Houston, will
exceed the work program requirements for all of the Contract Areas for the next
two years.
THAILAND
To date, the Company has not participated in any drilling activities in the
Gulf of Thailand. A well is expected to be drilled on Block B8/38 in August
1997 and located adjacent to the previously-drilled discovery well on such Block
at a location which is thought to be approximately 50 feet higher than the
previous well at the Miocene level and may be approximately 1,000 feet higher at
the Permian level. It is anticipated that the first well on the project will be
drilled to test the Permian Ratburi interval at a depth of approximately 6,000
feet as well as the Miocene at approximately 4,000 feet.
For a description of certain work commitments of the Company relating to
its interests in Mongolia and the Gulf of Thailand, see Item 6 "Management's
Discussion and Analysis or Plan of Operation - Liquidity, Capital Expenditures
and Work Commitments."
OTHER
No estimates of total, proved net oil or gas reserves have been filed with
or included in reports to any other federal authority or agency since the
beginning of the fiscal year.
Office Facilities
Territorial's executive and administrative office is located at 734 7th
Ave. S.W., Suite 1345, Calgary, Alberta, Canada T2P 3P8. The Company leases
this space on a month-to-month basis.
The Company also leases office space at 450 North Sam Houston Parkway East,
Suite 140, Houston, Texas 77060. The Company leases this space from
Exploration Associates, an affiliate of Messrs. Penttila and Buck, on a month-
to-month basis at a base rent of $750 per month. The Company has prepaid this
rent obligation through March 31, 1997. Mr. Penttila is a director and the
President and Chief Operating Officer of Territorial, and Mr. Buck is the
Company's Vice President, Exploration.
ITEM 3. LEGAL PROCEEDINGS
In September 1996, a summary judgment was entered in favor of TRI Mongolia,
Inc., a subsidiary of Territorial ("TRM"), and certain other parties in a
previously reported action styled, Leo T. Metcalf III vs. Amgol Inc., SOCO
International, Inc., Exploration Associates International, Inc. et al., Cause
No. 94-29503, in the 113th Judicial District Court of Harris County, Texas (the
"Metcalf Lawsuit"). The plaintiff has appealed the summary judgment.
Territorial anticipates that arguments will be heard regarding the appeal during
the 1997 calendar year.
22
<PAGE>
The plaintiff in the Metcalf Lawsuit, a former director of Amgol, Inc., has
requested certain amounts be awarded to him based on alleged damages suffered as
a result of transactions entered into by Amgol without his approval and without
Amgol contemporaneously acquiring and paying for certain interests the plaintiff
claims to have owned. TRM has been named as a defendant, according to the
lawsuit, as a result of its ownership interest in SOTAMO (which was owned by
TRMOs predecessor in interest at the time the alleged damages were suffered).
Each of the shareholders from whom Territorial acquired TRM have granted
certain limited indemnification rights in favor of Territorial in the event TRM
or Territorial is held liable under the Metcalf Lawsuit. Such shareholders have
also pledged certain of the shares of Territorial common stock received by them
in connection with such acquisition, in order to secure such indemnification
obligations.
Although it is impossible at this time to predict the outcome of the
Metcalf Lawsuit, the Company believes TRM is not liable, in whole or in part,
for the claims made in the Metcalf Lawsuit and that the Metcalf Lawsuit will not
have a material adverse effect on the CompanyOs assets or financial condition.
The Company intends to vigorously pursue the defense of the Metcalf Lawsuit in
the event the summary judgment motion is overturned.
There are currently no other legal actions to which the Company is a party.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted during the fourth quarter of the fiscal year
covered by this report to a vote of the Company's security holders.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Territorial's Common Stock is traded in the over-the-counter market on the
National Association of Securities Dealer's Electronic Bulletin Board and is
carried in the "pink sheets" under the symbol, "TERX." In May 1997, the Company
effected a one-for-three reverse stock split of the Common Stock. Prior to such
reverse stock split, the shares of Common Stock were traded under the symbol,
"TERI."
The following table sets forth the range of high and low bid prices of the
Common Stock for the two most recent fiscal years. These prices are believed to
be representative inter-dealer quotations, without retail markup, markdown or
commissions, and may not represent actual transactions. The bid information set
out in the table below has not been adjusted to reflect the reverse stock split
effective in May 1997.
23
<PAGE>
BID PRICE*
Fiscal 1996 HIGH LOW
----------- ---- ---
First Quarter $ 0.25 $ 0.0625
Second Quarter 0.625 0.0625
Third Quarter 1.25 0.0625
Fourth Quarter (March 31, 1996) 0.125 0.125
Fiscal 1997
-----------
First Quarter $0.6875 $ 0.125
Second Quarter 0.1875 0.1875
Third Quarter 0.1875 0.0625
Fourth Quarter (March 31, 1997) 0.125 0.09375
- ----------
* The bid information presented in this table has not been adjusted to
reflect the one-for-three reverse stock split effect subsequent to the
fiscal year ended March 31, 1997.
The approximate number of shareholders of record of Common Stock as of June
30, 1997, was 2,681. The Company has not paid any dividends on its Common Stock
during the last two fiscal years and does not expect to do so in the foreseeable
future.
Effective April 1, 1997, the Company issued an aggregate of 187,500 shares
of Common Stock in connection with the conversion of shares of Preferred Stock,
Series B, $0.10 par value each (the "Series B Shares"), 83,334 of which shares
of Common Stock were acquired by Mr. Tolley, 62,500 of which shares of Common
Stock were acquired by Mr. Mercier, and the remaining 41,667 of which shares of
Common Stock were acquired by Mr. Bonnycastle. These shares of Common Stock
were issued in reliance upon Section 3(a)(9) and Section 4(2) of the Securities
Act of 1933, as amended (the "Securities Act"), and/or Regulation S thereunder.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
RESULTS OF OPERATIONS
In 1995 Territorial shifted its emphasis to international oil and gas
exploration and development activities. Since that period it has conducted an
orderly disposition of its North American oil and gas properties. As a result,
oil and gas revenues have decreased from $39,000 for the year ended March 31,
1996, to $21,000 for the year ended March 31, 1997.
For the year ended March 31, 1997, the scope of operating activities
increased with greater participation by Territorial in the SOTAMO operations.
As a result, general and administrative expenses increased to $206,000, a 222%
increase over such expenses for the
24
<PAGE>
year ended March 31, 1996, and was the primary factor contributing to the net
loss for the year of $198,000, a 254% increase over the net loss for 1996.
Territorial's international activities are in a pre-development stage and
as yet have not demonstrated any significant cash flow generating capability.
As a result, Territorial must raise equity capital or secure other sources of
funding to meet its ongoing funding commitments. For the year ended March 31,
1997, Territorial's share of SOTAMO expenditures was $1,076,000 compared to
$66,000 for the year ended March 31, 1996.
Territorial funded its activities for the year ended March 31, 1997, as
follows:
Share issues $ 728,000
Advance from shareholders 224,000
Bank loan 166,000
Property sales 138,000
Operations and changes in operating assets and liabilities (196,000)
---------
$1,060,000
Territorial raised $726,000 through a series of private placements and
$2,000 through the exercise of warrants. On July 19, 1996, Territorial issued
approximately 639,584 shares of Common Stock to Asia Energy Ltd. in exchange for
$267,000 cash, five shares of SOTAMO, the elimination of a payable to Asia
Energy Ltd. of $25,000 and the cancellation of an option agreement to purchase
shares of SOTAMO from the Company. The total consideration received was
$515,000 or $0.27 per share. In October 1996, the Company issued 112,500 Series
B Preferred Shares for cash of $168,000 or $1.50 per share. In November 1996,
the Company issued 47,500 shares of Common Stock at $0.30 per share for a cash
consideration of $43,000. The Series B Preferred Shares were converted on April
1, 1997, into 187,500 shares of Common Stock.
Territorial also obtained advances from shareholders of $224,000. The
advances, due on demand and bearing interest at a floating interest rate were
payable to two directors, Mr. R.A.N. Bonnycastle and Mr. Daniel Mercier. The
advance from Mr. Bonnycastle was repaid in early 1997 from additional funds
advanced by Mr. Mercier. The funds advanced by Mr. Mercier were repaid in the
quarter ended June 30, 1997. See also Item 12 "Certain Relationships and
Related Transactions."
In early 1997, Territorial negotiated a line of credit which was guaranteed
by Mr. Mercier. The amount owing on the line of credit at March 31, 1997, was
approximately $166,000 which resulted from ongoing SOTAMO expenditures, all of
which amount was repaid by the end of June 1997.
LIQUIDITY, CAPITAL EXPENDITURES AND WORK COMMITMENTS
Territorial has expended approximately $1,089,000 and $66,000 in the fiscal
years ended March 31, 1997 and 1996, respectively, for exploration and
development activities.
25
<PAGE>
As further described below, the estimated capital requirements for the year
ending March 31, 1998, relating to the Company's current projects are as
follows:
SOTAMO $ 650,000
Thailand 387,000
Overhead 165,000
----------
$1,202,000
Actual commitments required to be paid by Territorial may vary significantly
from such amounts based on a number of factors in the event additional costs and
expenses are incurred by SOTAMO, Territorial or its other partners in SOTAMO in
connection with the performance of operations in Mongolia, or additional costs
and expenses are incurred in connection with Territorial's activities in
Thailand. In addition, the Company intends to continue seeking to acquire
additional interests in the Far East and other areas on terms deemed beneficial
to it. In the event of any such acquisitions, actual capital requirements will
further vary from the estimates set out above.
Successful exploration activities may also lead to additional capital
expenditures which may be financed by private or public offerings of shares of
Common Stock or other securities of the Company, or by the sale of assets. The
Company may also attempt to obtain outside capital on a joint venture basis to
share the risk of such development with other operators engaged in the oil and
gas business, and may attempt to obtain any required capital for these
activities and for its work commitments relating to its interests in Mongolia
and Thailand through the sale of direct or indirect interests in its projects;
its securities; and, when appropriate, through borrowing. There is no assurance
that such capital will be obtained.
The sale of the 72 SOTAMO Shares to SOCO International in exchange for
approximately $926,000 in cash and certain shares of capital stock of SOCO
International (see Item 1 "Description of Business - Business of Territorial -
Tamtsag Basin, Mongolia") subsequent to the end of the 1997 fiscal year
generated sufficient working capital to repay existing indebtedness, and fund
currently anticipated ongoing overhead expenses and capital requirements
relating to the Company's interests in Mongolia and the Gulf of Thailand for the
1998 fiscal year.
Territorial entered into a letter agreement in March 1997 with McDermid St.
Lawrence Securities Ltd., Calgary, Alberta, Canada ("McDermid"), pursuant to
which McDermid will act as the exclusive agent in connection with the proposed
offer and sale by the Company of up to 1,500,000 units, each unit consisting of
one share of Common Stock of Territorial and a warrant to purchase one
additional share of Common Stock. The Company intends to conduct the offering
during 1997 exclusively to non-U.S. persons, as defined in Regulation S,
promulgated by the Securities and Exchange Commission under the Securities Act
of 1933, as amended to date. If consummated, the Company currently intends to
use the net proceeds of such proposed offering for additional working capital.
MONGOLIA
SOTAMO and its stockholders have entered into a Stockholders' Agreement
(the "SOTAMO Stockholders' Agreement") that provides for, among other things,
capital budgets
26
<PAGE>
to be approved by a majority vote of the holders of common stock of SOTAMO. SOCO
International is the operator of SOTAMO. Under the SOTAMO Stockholders'
Agreement, the stockholders are required to advance funds for approved budget
expenditures as costs are incurred. SOCO International and its affiliates
currently own approximately 51% of the outstanding common stock of SOTAMO.
Failure to advance such funds in a timely manner could result in the forfeiture
of a stockholder's interest in SOTAMO.
Territorial must fund its share of expenditures relating to its interests
in Mongolia and the Gulf of Thailand as they are incurred so that minimum work
commitments can be met, thus maintaining the contracts in good standing. The
estimated direct cost to Territorial of the minimum work commitments for each of
the Contract Areas in the Tamtsag Basin for the next two years is as follows:
YEAR ENDING MARCH, 31
1998 1999
---- ----
CONTRACT AREA (thousands of U.S.$)
XIX $ 75 $ 175
XX 109 314
XXI 91 149
XXII 175 175
----- -----
$ 450 $ 813
The estimates set out above are Territorial management's minimum estimated
required work commitments under the contracts described herein. Such estimates
are based on the requirements set out in such contracts, and certain information
provided to the Company by SOTAMO and other sources. The actual work
commitments may vary significantly from those set out above, based on a number
of factors as operations with respect to each such contract area progress.
As of March 31, 1997, work commitments on each of the Contract Areas had
been fulfilled by SOTAMO. SOTAMO has budgeted expenditures which exceed the
minimum work commitments required by the production sharing contracts for the
next 12 months. Territorial's estimate of its share of such expenditures for
the year ended March 31, 1998, is $650,000.
THAILAND
Drilling activity in the Gulf of Thailand has increased considerably in the
recent past, making it difficult to secure drilling equipment for the near term.
SOCO and its partners have a rig available to drill the first well beginning in
August or September of 1997. The second well is expected to be spudded in
September or October of 1997. The Blocks are located in an area with average
water depth of approximately 200 feet.
The terms of the Concession relating to Block B8/38 require the
concessionaire thereunder to drill two exploratory wells and conduct geological
surveys and seismic programs during the first six year period ending October 23,
2002. Management of Territorial currently anticipates such obligations being
performed prior to the end of the fiscal quarter ending June
27
<PAGE>
30, 1998. The estimated direct cost to Territorial of the minimum work
commitments relating to its Thailand interests for the next two years is as
follows:
YEAR ENDED MARCH 31,
1998 1999
-------- --------
COST (thousands of U.S.$)
Earning expenditures $ 375 $ -
Seismic and geological 12 25
----- ----
$ 387 $ 25
The estimates set out above are Territorial management's minimum estimated
required work commitments relating to the Thailand interests described herein.
Such estimates are based on the requirements set out in such contracts, and
certain information provided to the Company by SOCO International and other
sources. The actual work commitments may vary significantly from those set out
above, based on a number of factors as operations with respect to each such
contract area progress.
ITEM 7. FINANCIAL STATEMENTS
The financial statements and supplementary data are presented beginning on
page F-1 of this Report and are incorporated by reference thereto.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
As previously reported by the Company, in April 1997, the Company dismissed
Hein + Associates, LLP, as its principal independent accounting firm. The
report of such accounting firm during neither of the fiscal years ended March
31, 1994 and 1995, contained an adverse opinion or disclaimer of opinion, nor
was it modified as to uncertainty, audit scope or accounting principles. There
were no disagreements with such accounting firm on any matter of accounting
principles or practices, financial statement disclosure or auditing scope or
procedure. The decision to change accountants and to appoint Price Waterhouse,
Calgary, Alberta, Canada, was recommended by the Audit Committee of the Board of
Directors and by the Board of Directors of the Company. The shareholders of the
Company ratified the selection of Price Waterhouse, Calgary, Alberta, Canada, as
the principal accountant to audit the Company's financial statements at the
annual meeting of shareholders held on April 30, 1997.
There have been no disagreements between the Company and its independent
auditors on any matter of accounting principles or practices, financial
statement disclosure or auditing scope or procedure during the year ended March
31, 1997.
28
<PAGE>
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(a) OF THE EXCHANGE ACT
DIRECTORS AND EXECUTIVE OFFICERS
The names, ages and positions of all directors and executive officers of
the Company are as follows:
DIRECTOR
NAME AGE POSITION SINCE
Daniel A. Mercier 42 Chairman of the Board and 1996
Chief Executive Officer
William C. Penttila 63 President, Chief Operating 1995
Officer and Director
Douglas N. Baker 43 Vice President Finance, 1997
Treasurer, Chief Financial
Officer, Secretary and Director
Richard A.N. Bonnycastle 62 Director 1996
Jimmy M. McCarroll 54 Director 1996
Donald L. Oliver 54 Director 1987
Lamont C. Tolley 61 Director 1997
Dennis M. Buck 51 Vice President, Exploration
All directors of the Company hold such office until the next annual meeting
of shareholders of the Company or until their successors have been elected and
have qualified. Executive officers hold office at the pleasure of the Board of
Directors.
PRINCIPAL OCCUPATION AND BUSINESS EXPERIENCE
Daniel A. Mercier. Mr. Mercier became a Director of the Company in 1996
and became its Chairman of the Board and Chief Executive Officer on June 20,
1996. He has been President and a Director of Asia Energy Ltd. ("AEL"), a
private oil and gas company since its inception in December 1995. AEL is the
Company's largest shareholder. Mr. Mercier was President and Chief Executive
Officer of Canadian Conquest Exploration Inc. ("Canadian Conquest"), a publicly-
held Canadian oil and gas company listed on the Toronto Stock Exchange, until
November 1995. He resigned as an officer of Canadian Conquest as part of a
refinancing. Mr. Mercier was a director of Canadian Conquest until October
1996. From December 1995 to March 1996, Mr. Mercier was the Chief Operating
Officer of
29
<PAGE>
Chancellor Energy Resources Inc., a publicly-held Canadian oil and gas company
listed on The Toronto Stock Exchange. Mr. Mercier is also a director of APF
Energy Inc., the manager of a Canadian royalty trust fund. Mr. Mercier is a
mechanical engineer with over twenty years of experience in the oil and gas
industry in Canada and the United States.
William C. Penttila. Mr. Penttila became a Director of the Company in 1995
and became its President and Chief Operating Officer on June 20, 1996. Mr.
Penttila is Vice President of Exploration Associates, Inc., an international oil
and gas exploration consulting firm, of which he has been an officer since 1989.
He was a consultant between 1984 and 1989, and held management positions at
Weeks Petroleum and its affiliates from 1980 to 1984. He held various technical
positions at ARCO and its predecessors from 1962 until 1980. He holds both
Geological Engineering and Master of Science degrees from the Colorado School of
Mines.
On September 1, 1996, Mr. Penttila was appointed as Technical Advisor to
the Petroleum Authority of Mongolia. As such, Mr. Penttila evaluates proposals
and screens corporations and individuals who have expressed interests in
becoming involved in the petroleum industry in Mongolia. Each of Territorial
and Mr. Penttila recognizes that the possibility exists that his role as an
officer and director of Territorial may at times conflict with his role as
Technical Advisor to the Petroleum Authority. Mr. Penttila has agreed that if
such conflicts arise, he will fully disclose such conflicts to Territorial and,
if appropriate, will resign either as Technical Advisor or as an officer and
director of Territorial. Mr. Penttila receives no compensation in his role as
Technical Advisor to the Petroleum Authority of Mongolia.
Douglas N. Baker. Mr. Baker became a Director of the Company in February
1997 and became its Vice President, Finance, Treasurer and Chief Financial
Officer on June 20, 1996, and its Secretary on April 30, 1997. Mr. Baker is
also Vice President Finance and Chief Financial Officer of AEL. Mr. Baker has
over 13 years of experience in senior financial positions with Canadian public
oil and gas companies. From November 1993 to March 1996, Mr. Baker served as
Vice President Finance and Chief Financial Officer of Chancellor Energy
Resources, Inc. From February 1991 to August 1993, Mr. Baker served as Vice
President Finance and Corporate Secretary for American Eagle Petroleum Ltd.
Prior thereto Mr. Baker was Vice President Finance of Canadian Conquest.
Richard A. N. Bonnycastle. Mr. Bonnycastle became a Director of the
Company on June 20, 1996. Mr. Bonnycastle is Chairman and President of Harvest
Fund Inc., an investment banking company, and Chairman and President of
Cavendish Investing Ltd., a private investment company. Mr. Bonnycastle is also
a Director of AEL. Mr. Bonnycastle serves on the boards of directors of a
number of other publicly listed companies outside the United States.
Jimmy M. McCarroll. Mr. McCarroll became a Director of the Company in
October 1996. Mr. McCarroll is the President of McCarroll Energy, Inc., an
independent oil and gas operator on the Texas Gulf Coast, a position he has held
for more than ten years. Mr. McCarroll has been the Managing Partner of
McCarroll and Young Energy Funds since 1980. Mr. McCarroll has also assisted
SOCO International, Inc. in certain of their farmout endeavors
30
<PAGE>
during the past four years. Mr. McCarroll also serves as a Director of Pan Ocean
Explorations Inc., a Vancouver, Canada-based corporation whose shares are traded
on the Vancouver Stock Exchange.
Donald L. Oliver. Mr. Oliver joined the Company as President and a
Director in December 1987, and served as President until November 1994. He
currently serves as a Production Superintendent of Forest Oil Corporation in
Denver, Colorado, whose principal business is oil and gas exploration and
production in North America. Mr. Oliver spent fifteen years with Cities Service
Company, where he held various engineering and managerial positions in
exploration and production. Subsequently, he held the positions of Vice
President and General Manager of the Texas division for Bawden Drilling and Vice
President of Operations for Conquest Exploration Company.
Lamont C. Tolley. Mr. Tolley became a Director of the Company in March
1997. For more than 10 years, Mr. Tolley has served as the Chairman and a
Director of Starvest Capital Inc., a private Canadian oil and gas management
corporation, and as President, CEO and a Director of Pencor Petroleum Limited, a
Canadian corporation that acquires and manages oil and gas properties. He is
also the President and a Director of Canadian Pencrown Resources Limited, a
private Canadian exploration corporation which has invested over $100 million in
oil and gas exploration programs and is wholly owned by a group of institutional
investors.
Dennis M. Buck. Mr. Buck is the Executive Vice President of Exploration
Associates, Inc. and was one of its original founders in 1984. Mr. Buck was
Chief Geophysicist for Weeks Petroleum from March 1981 to June 1984. From March
1977 to March 1981, Mr. Buck was Division Geophysicist for American Petrofina.
Prior thereto he held various technical positions with Amoco, Texas Crude and
Mitchell Energy. Mr. Buck has a B.S. Degree in Geology from the New Mexico
Institute of Mining and Technology.
SECTION 16(A) BENEFICIAL OWNERSHIP REPORTING COMPLIANCE
Based solely upon a review of Forms 3 and 4 and amendments thereto
furnished to the Company under Rule 16a-3(d) of the Securities Exchange Act of
1934, as amended to date (the "Exchange Act"), during its most recent fiscal
year and Form 5 and amendments thereto furnished to the registrant with respect
to its most recent fiscal year, the Company does not know of any director,
officer or beneficial owner of more than ten percent of its Common Stock that
failed to file on a timely basis reports required by Section 16(a) of the
Exchange Act during the most recent fiscal year or prior years.
ITEM 10. EXECUTIVE COMPENSATION
During the fiscal years ended March 31, 1995, 1996 and 1997, the Company
paid no compensation to its executive officers or directors for services
rendered in any such capacity by such persons to the Company or its
subsidiaries, other than certain options to acquire shares of Common Stock of
the Company which were granted by the Company on June 20, 1996:
31
<PAGE>
VALUE OF UNEXERCISED IN-THE-MONEY
NUMBER OF SHARES OPTIONS AT FISCAL YEAR-END*
NAME SUBJECT TO OPTIONS (EXERCISABLE/UNEXERCISABLE)
William C. Penttila 90,000 $0 / $0
Dennis M. Buck 90,000 $0 / $0
Daniel A. Mercier 90,000 $0 / $0
Douglas N. Baker 33,334 $0 / $0
Lois S. Milard 10,000 $0 / $0
Dawna Allinson 10,000 $0 / $0
Stephen Gray 10,000 $0 / $0
------- -- - --
333,334
_________
* Market value of underlying securities at year-end ($0.375, which number is
adjusted for reverse stock split effected subsequent to year-end), minus
the exercise price.
The options vested as to one-third immediately and one-third on the first
anniversary date and vest one-third on the second anniversary date in all cases
except Mr. Gray which vested immediately. The options are exercisable at $0.90
per share. None of such options has been exercised as of the March 31, 1997.
The Company believes the fair market value of the options at the time of
grant and as of March 31, 1997, was $0.90 and $0.375, respectively.
Other than reimbursement for the cost of attending meetings, the Company's
directors receive no compensation for services as directors.
Ms. Allinson is a part-time employee of the Company, Ms. Milard is an
employee of Exploration Associates, Inc., an affiliates of Messrs. Penttila and
Buck, and Mr. Gray is the former Secretary of the Company.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The following table sets forth certain information concerning each person
whom the Company, by virtue of filings with the Securities and Exchange
Commission, has reason to believe may be deemed the beneficial owners of more
than five percent (5%) of the Company's outstanding Common Stock as of June 30,
1997. Except as otherwise indicated, the persons listed below have sole voting
power and investment power over the shares beneficially held by them.
32
<PAGE>
NAME AND ADDRESS AMOUNT AND NATURE OF PERCENT OF CLASS (1)
OF BENEFICIAL OWNER BENEFICIAL OWNERSHIP
A. Andrew Davis 660,852 (2) 6.51
Alan Davis Media
Limited, Level 10,
35 York Street
Sidney, NSW 2000
Australia
Brian A. Lingard 1,164,140 (3) 11.46
401 Louisiana
Suite 206
Houston, Texas 77002
Dennis M. Buck 689,921 (4) 6.75
450 N. Sam Houston
Parkway E., #140
Houston, Texas 77060
William C. Penttila 689,921 (4) 6.75
450 N. Sam Houston
Parkway E., #140
Houston, Texas 77060
Michael C. Nemec 614,116 6.05
The Phoenix Resource
Companies
6525 N. Meridian Ave.
Oklahoma City,
Oklahoma 77116
Asia Energy Ltd. 2,406,167 (5) 23.69
734 7th Ave. S.W.
Suite 1345
Calgary, Alberta
Canada T2P 3B8
Jimmy M. McCarroll 550,000 (6) 5.42
1030 Townplace
Houston, Texas
77057-1942
(see footnotes on following page)
33
<PAGE>
__________
(1) Based upon 10,156,133 shares outstanding as of June 30, 1997.
(2) Consists of 393,141 shares either owned by Mr. Davis or by companies
controlled by him, with the remaining 267,711 shares owned by three sisters
of Mr. Davis but with voting proxy held by him.
(3) Includes 33,334 shares owned by his minor son with Mr. Lingard named as
custodian. Mr. Lingard disclaims beneficial ownership of these 33,334
shares.
(4) Includes options to acquire 60,000 shares. Does not include options to
acquire 30,000 shares that vest in June 1998.
(5) All shares reported are owned by AEL. See footnotes 4, 5 and 6 to table
below.
(6) Includes 300,000 shares held in escrow. See Item 12 "Certain Relationships
and Related Transactions."
Security Ownership of Management. The table below sets forth the beneficial
ownership of shares of Common Stock as of June 26, 1997, by the Company's
officers and directors, individually and as a group.
NAME OF BENEFICIAL AMOUNT AND NATURE OF
OWNER BENEFICIAL OWNERSHIP (1) PERCENT OF CLASS (2)
Donald L. Oliver 333,197 3.28
William C. Penttila 689,921 (3) 6.75
Dennis M. Buck 689,921 (3) 6.75
Daniel A. Mercier 2,528,667 (4) 24.75
Richard A.N. Bonnycastle 2,447,834 (5) 24.10
Douglas N. Baker 2,428,390 (6) 23.86
Jimmy M. McCarroll 550,000 (7) 5.42
Lamont C. Tolley 83,334 0.82
Directors and Officers
as a Group 4,935,930 48.60
(see footnotes on following page)
34
<PAGE>
__________
(1) The information as to beneficial ownership has been furnished by the
respective persons. Unless otherwise specified, each person or group has
sole voting and investment power with respect to the shares, except with
respect to the shares identified above relating to Messrs. Mercier,
Bonnycastle and Baker. See footnotes below.
(2) Based upon 10,156,133 shares outstanding as of June 26, 1997.
(3) Includes options to acquire 60,000 shares. Does not include options to
acquire 30,000 shares that vest in June 1998.
(4) Includes 62,500 shares and options to acquire 60,000 shares owned directly
by Mr. Mercier. All other shares reported are owned by AEL. Does not
include options to acquire 30,000 shares that commence vesting in June
1998. Mr. Mercier is a Director and the President of AEL and (together
with shares held by his wife) owns approximately 11.8% of the outstanding
shares of capital stock of AEL. Mr. Mercier's father and siblings own an
additional 10.9% of the outstanding shares of capital stock of AEL. Mr.
Mercier disclaims beneficial ownership of all shares of capital stock of
AEL owned by his father and siblings, and all shares of Territorial Common
Stock owned by AEL.
(5) Includes 41,667 shares owned directly by Mr. Bonnycastle. All other shares
reported are owned by AEL. Mr. Bonnycastle is a Director of AEL and owns
approximately 12.9% of the outstanding shares of capital stock of AEL. Mr.
Bonnycastle disclaims beneficial ownership of all shares of Territorial
Common Stock owned by AEL.
(6) Includes options to acquire 22,223 shares. Does not include options to
acquire 11,111 shares that commence vesting in June 1997. All other shares
reported are owned by AEL. Mr. Baker is the Vice President Finance and
Chief Financial Officer of AEL and (together with shares held by his wife)
owns approximately 1.7% of the outstanding shares of capital stock of AEL.
Mr. Baker disclaims beneficial ownership of all shares of Territorial
Common Stock owned by AEL.
(7) Includes 300,000 shares held in escrow. See Item 12 "Certain
Relationships and Related Transactions."
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
On March 29, 1996, the Company acquired an approximate 12% interest (in
addition to its previously held approximate 1% interest) in SOTAMO in exchange
for the issuance of 1,816,667 shares of the Company's Common Stock. The
acquisition of this interest was consummated through the acquisition by the
Company of a privately held corporation, of which each of William C. Penttila
and Dennis M. Buck was a director, officer and a significant shareholder. Each
of Messrs. Penttila and Buck received 529,861 shares of Territorial Common Stock
in connection therewith. At the time of the transaction, Mr. Penttila was a
Director of the Company. Subsequent to such transaction, Mr. Penttila also
became the President and Chief Operating Officer of the Company and Mr. Buck
became Vice President, Exploration of the Company.
35
<PAGE>
On March 31, 1996, Territorial entered into an Option Agreement (the
"Option") with Asia Energy Ltd., Territorial's largest shareholder ("AEL"). The
Option, as amended, granted to AEL the right to purchase up to 29 of the 119
shares of SOTAMO owned by Territorial at a per share price of $50,000. AEL paid
Territorial $20,000 cash in consideration for the granting of the Option.
Daniel A. Mercier, the President, a Director and a shareholder of AEL, was
appointed a Director of Territorial on April 12, 1996. On May 9, 1996, AEL
purchased five SOTAMO shares from Territorial for $250,000 cash. On June 20,
1996, Mr. Mercier was appointed Chairman of the Board and Chief Executive
Officer of the Company. Messrs. Bonnycastle and Baker are also affiliates of
AEL. See Item 11 "Security Ownership of Certain Beneficial Owners and
Management."
In mid-July 1996, Territorial issued to AEL 639,584 shares of Common Stock
primarily in exchange for approximately $267,000 in cash, the five shares of
SOTAMO referred to above, the elimination of a payable to AEL of $25,000 and the
cancellation of the Option. Territorial also agreed to pay certain
administration-related costs and expenses on behalf of AEL in the future.
In October 1996, Territorial issued 112,500 shares (the "Series B Preferred
Shares") of its newly designated voting Preferred Stock, Series B, $0.10 par
value each, 37,500 of which Series B Preferred Shares were acquired by Mr.
Mercier, 25,000 of which Series B Preferred Shares were acquired by Mr.
Bonnycastle and the remaining 50,000 of which Series B Preferred Shares were
acquired by Mr. Tolley, for a cash purchase price equal to (Cdn)$2.00 per share.
The Series B Preferred Shares were converted into an aggregate of 187,500 shares
of Common Stock effective April 1, 1997.
During 1996, Mr. Mercier made initial loans to Territorial of an aggregate
of approximately $72,000 and Mr. Bonnycastle loaned to Territorial an aggregate
of approximately 61,400. Such loans bear interest at an annual rate equal to
the floating prime rate announced from time to time by the Alberta Treasury
Branch, Okotoks, Alberta, Canada. The loans, together with all accrued and
unpaid interest thereon, were payable by Territorial upon demand. During the
year ended March 31, 1997, Territorial repaid the loan to Mr. Bonnycastle,
together with interest thereon in the amount of approximately $350, and borrowed
an additional approximately $152,000 from Mr. Mercier on the same terms as the
previous loans made to Territorial. In the quarter ended June 30, 1997, the
Company repaid to Mr. Mercier all such amounts loaned by him, together with an
aggregate of approximately $4,725 of interest thereon. It also entered into a
line of credit with Canadian Western Bank permitting the Company to borrow up to
approximately $253,000. The repayment obligations with respect to the line of
credit have been personally guaranteed by Mr. Mercier. As of March 31, 1997,
the Company had drawn down approximately $166,000 from such line of credit, all
of which was repaid by the end of June 1997.
On June 20, 1996, the Board of Directors approved the granting of options
to acquire the following numbers of shares of Common Stock to the persons
identified below:
36
<PAGE>
NUMBER OF SHARES
OF COMMON STOCK
William C. Penttila 90,000
Dennis M. Buck 90,000
Daniel A. Mercier 90,000
Douglas N. Baker 33,334
Lois S. Milard 10,000
Dawna Allinson 10,000
Stephen L. Gray 10,000
-------
333,334
The options vested as to one-third immediately and one-third on the first
anniversary date and vest one-third on the second anniversary date in all cases
except Mr. Gray which vested immediately. The options are exercisable at $0.90
per share. None of such options has been exercised as of the March 31, 1997.
In connection with the Company's acquisition of a 2.5% undivided working
interest in two Thailand Concessions on June 30, 1997 (see Item 1 "Description
of Business - Business of Territorial - Gulf of Thailand"), the Company paid to
Jimmy M. McCarroll, a director of the Company, $210,000 in cash and issued to
Mr. McCarroll an aggregate of 550,000 shares of Common Stock of Territorial. At
the time of such acquisition, the Company and Mr. McCarroll entered into an
Escrow Agreement pursuant to which, among other things, 300,000 of such shares
of Common Stock are to be held in escrow and are to be released in increments of
100,000 shares to Mr. McCarroll upon the occurrence of certain conditions
relating to the progress and results of operations of the Thailand Concessions.
In the event that any such condition is not fulfilled as provided in the Escrow
Agreement, the shares subject to such condition will be returned to the Company.
So long as such shares are held pursuant to the terms of the Escrow Agreement,
Mr. McCarroll has the right to vote such shares.
The transactions with the Company discussed herein were all approved by its
Board of Directors with any interested Director abstaining from, or otherwise
not participating in, voting with respect to such transactions.
No director or officer of the Company, nominee for election as a director,
or any associate of any such director, officer or nominee, was indebted to the
Company or its subsidiary at any time since the beginning of the Company's last
fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) THE FOLLOWING DOCUMENTS ARE FILED AS A PART OF THIS REPORT:
1. FINANCIAL STATEMENTS.
The financial statements of Territorial Resources, Inc. and the related
report of independent accountants are provided at Page F-1 of this
Report
37
<PAGE>
2. FINANCIAL STATEMENT SCHEDULES.
The schedules for which provision is made in the applicable accounting
regulations of the Securities and Exchange Commission are omitted (other
than the Financial Data Schedule, which is included herein as Exhibit
27.1) because they are not applicable or not required.
3. EXHIBITS.
3 (i) Articles of Incorporation, as amended to the date of this Report
(filed as Exhibit 3(i) to the Company's Current Report on
Form 8-K dated May 13, 1997).
3(ii) Bylaws, as amended to the date of this Report.*
10.1 Plan and Agreement of Reorganization, dated as of March 12,
1996, by and among William C. Penttila, Dennis M. Buck, Michael
C. Nemec, Thomas B. Patrick and the Company (filed as Exhibit
2.0 to the Company's Current Report on Form 8-K dated March 29,
1996).
10.2 Option Agreement, dated March 1, 1996, by and between Asia
Energy Ltd. and the Company (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated March 29, 1996).
10.3 Letter of Engagement, dated March 12, 1997, between Territorial
Resources, Inc. and McDermid St. Lawrence Securities Ltd.*
10.4 Shareholders' Exchange Agreement between Territorial Resources,
Inc. and SOCO International plc, dated 6 May 1997 (filed as
Exhibit 10.1 to the Company's Current Report on Form 8-K dated
June 5, 1997).
10.5 Letter Agreement between Territorial Resources, Inc. and SOCO
International plc, dated 8 May 1997 (filed as Exhibit 10.2 to
the Company's Current Report on Form 8-K dated June 5, 1997).
10.6 Asset Purchase Agreement, dated as of May 30, 1997, among SOCO
Exploration (Thailand) Company Limited, SOCO Thaitex, Inc.,
Territorial Resources (Delaware), Inc. and Jimmy M. McCarroll*
10.7 Escrow Agreement, dated as of June 26, 1997, by and among Jimmy
M. McCarroll, Territorial Resources (Delaware), Inc. and
Theodore J. Lee*
___________
* Filed with this Report
38
<PAGE>
10.8 Farmout Agreement, dated as of July 10, 1997, by and among
Territorial Resources (Delaware), Inc., SOCO Exploration
(Thailand) Company Limited and SOCO Thaitex, Inc.*
10.9 Stockholder's Agreement by and among SOCO Tamtsag Mongolia,
Inc., dated November 7, 1994, and its stockholders*
22. Subsidiaries*
23.1 Consent of Donald L. Oliver, Reserve Engineer*
23.2 Consent of DL Paddock & Associates Ltd.*
23.3 Consent of GEO Engineering, Inc., Reserve Engineers*
23.4 Consent of Gaffney, Cline & Associates, Reserve Engineers*
27 Financial Data Schedule*
___________
* Filed with this Report
(b) REPORTS ON FORM 8-K.
The Company filed no reports on Form 8-K during the fourth quarter of the
fiscal year ended March 30, 1997.
39
<PAGE>
SIGNATURES
In accordance with Section 13 or 15(d) of the Exchange Act, the registrant
caused this report to be signed on behalf by the undersigned, thereunto duly
authorized.
TERRITORIAL RESOURCES, INC.
July 14, 1997 By: /s/ Daniel A. Mercier
-------------------------
Daniel A. Mercier
Chairman of the Board and
Chief Executive Officer
July 14, 1997 By: /s/ Douglas N. Baker
-------------------------
Douglas N. Baker
Principal Financial and Accounting Officer
In accordance with the Exchange Act, this report has been signed below by the
following persons on behalf of the registrant and in the capacities and on the
dates indicated.
By:/s/ Douglas N. Baker Date: July 14, 1997
----------------------------------
Douglas N. Baker, Director
By:/s/Richard A.N. Bonnycastle Date: July 14, 1997
----------------------------------
Richard A.N. Bonnycastle, Director
By:/s/Jimmy M. McCarroll Date: July 14, 1997
----------------------------------
Jimmy M. McCarroll, Director
By:/s/Daniel A. Mercier Date: July 14, 1997
----------------------------------
Daniel A. Mercier, Director
By:/s/Donald L. Oliver Date: July 14, 1997
----------------------------------
Donald L. Oliver, Director
By:/s/William C. Penttila Date: July 14, 1997
----------------------------------
William C. Penttila, Director
By:/s/Lamont C. Tolley Date: July 14, 1997
----------------------------------
Lamont C. Tolley, Director
40
<PAGE>
INDEX TO FINANCIAL STATEMENTS
AND
(UNAUDITED) SUPPLEMENTAL INFORMATION
Page
Auditor's Report (Price Waterhouse) F-2
Auditor's Report (Hein + Associates, LLP) F-3
Consolidated Balance Sheet dated March 31, 1997 F-4
Consolidated Statement of Operations for the Years Ended
March 31, 1997 and 1996 F-6
Consolidated Statement of Changes in Stockholders' Equity
for the Years Ended March 31, 1997 and 1996 F-7
Consolidated Statement of Cash Flows for the Years Ended
March 31, 1997 and 1996 F-8
Notes to Consolidated Financial Statements F-10
Supplemental Information - Disclosures of Oil and Gas Producing
Activities (Unaudited) F-16
F-1
<PAGE>
June 23, 1997, except for Note 11
which is as of June 30, 1997
AUDITOR'S REPORT
To the Board of Directors and Stockholders
Territorial Resources, Inc.
We have audited the consolidated balance sheet of Territorial Resources, Inc. as
at March 31, 1997 and the consolidated statements of operations, changes in
stockholders' equity and cash flows for the year then ended. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance whether the financial statements are free of material misstatement.
An audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements. An audit also includes assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audit provides a reasonable basis for our opinion.
In our opinion, these consolidated financial statements present fairly, in all
material respects, the financial position of the Company as at March 31, 1997
and the results of its operations and its cash flows for the year then ended in
accordance with generally accepted accounting principles.
The consolidated statements of operations, changes in stockholders' equity and
cash flows for the year ended March 31, 1996 were audited by other auditors who
issued an unqualified report dated June 17, 1996.
/s/ Price Waterhouse
- --------------------
Chartered Accountants
Calgary, Alberta
F-2
<PAGE>
INDEPENDENT AUDITOR'S REPORT
Board of Directors and Stockholders
Territorial Resources, Inc.
We have audited the accompanying consolidated statements of operations, changes
in stockholders' equity and cash flows of Territorial Resources, Inc. and
subsidiary for the year ended March 31, 1996. These financial statements are
the responsibility of the Company's management. Our responsibility is to
express an opinion on these financial statements based on our audit.
We conducted our audit in accordance with generally accepted auditing standards.
Those standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the results of operations and cash flows of
Territorial Resources, Inc. for the year ended March 31, 1996, in conformity
with generally accepted accounting principles.
The Company's primary asset is an investment in SOCO Tamtsag Mongolia, Inc.
which is a company engaged in oil and gas exploration in Mongolia. SOCO Tamtsag
Mongolia, Inc. has not yet discovered any proved reserves in Mongolia (see also
discussion of Mandatory Loan Obligations in Note 10).
/s/ Hein + Associates, LLP
HEIN + ASSOCIATES, LLP
Houston, Texas
June 17, 1996
F-3
<PAGE>
TERRITORIAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEET
ASSETS
(in thousands of US dollars, except share amounts)
<TABLE>
<CAPTION>
March 31,
1997
-----------
<S> <C>
CURRENT ASSETS:
Cash $ 6
Accounts receivable:
Oil and gas 7
Other 2
Prepaid expenses 32
-----------
Total Current Assets 47
-----------
NOTE RECEIVABLE (Note 4) 9
-----------
INVESTMENT IN SOCO TAMTSAG MONGOLIA, INC. (Note 2) 2,820
-----------
PROPERTY AND EQUIPMENT, at cost:
Oil and gas properties, full cost method 7,814
Less: Accumulated depreciation, depletion, impairment and amortization (7,797)
-----------
17
-----------
TOTAL ASSETS $ 2,893
===========
</TABLE>
See accompanying notes to consolidated financial statements.
F-4
<PAGE>
TERRITORIAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEET -- CONTINUED
LIABILITIES AND STOCKHOLDERS' EQUITY
(in thousands of US dollars, except share amounts)
March 31,
1997
-----------
CURRENT LIABILITIES:
Accounts payable $ 92
Bank loan (Note 12) 166
Due to affiliated party (Note 12) 224
-----------
TOTAL CURRENT LIABILITIES 482
-----------
COMMITMENTS AND CONTINGENCIES
(Notes 9 and 10)
TOTAL LIABILITIES 482
-----------
STOCKHOLDERS' EQUITY (Notes 3 and 7):
Common stock 28
Additional paid-in capital 6,125
Accumulated deficit (3,725)
Treasury stock (17)
-----------
TOTAL STOCKHOLDERS' EQUITY 2,411
-----------
TOTAL LIABILITIES AND
STOCKHOLDERS' EQUITY $ 2,893
===========
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TERRITORIAL RESOURCES, INC.
CONSOLIDATED STATEMENT OF OPERATIONS
(in thousands of US dollars, except per share amounts)
YEARS ENDED MARCH 31
------------------------
1997 1996
---------- -----------
REVENUES:
Oil and gas sales $ 21 $ 39
Interest and other income 1 2
--------- ---------
22 41
--------- ---------
COSTS AND EXPENSES:
Oil and gas production 1 7
Depreciation, depletion and amortization 5 26
Foreign exchange loss 3 --
General and administrative 206 64
Interest 5 --
--------- ---------
220 97
--------- ---------
Net Income (Loss) $ (198) $ (56)
========= =========
Net Income (Loss) Per Share $ (.007) $ (.003)
========= =========
WEIGHTED AVERAGE SHARES OUTSTANDING
(thousands) 27,767 20,591
========= =========
See accompanying notes to consolidated financial statements
F-6
<PAGE>
TERRITORIAL RESOURCES INC.
CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
(in thousands of US dollars, except share amounts)
<TABLE>
<CAPTION>
COMMON STOCK STOCK SUBSCRIPTIONS ADDITIONAL TREASURY
------------------- ------------------- PAID-IN ACCUMULATED STOCK
SHARES AMOUNT SHARES AMOUNT CAPITAL DEFICIT AMOUNT
------ ------ ------ ------ ------- ------- ------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at
March 31, 1995 11,791,112 12 8,785,000 9 3,853 (3,471) (17)
========== == ========== == ===== ====== ===
Stock issued for
stock subscriptions 8,785,000 9 (8,785,000) (9) - - -
Debt Shares issued
to acquire TRI
Mongolia 5,450,000 5 - - 1,545 - -
Shares issued
as compensation to
officer, director and
other third parties 43,000 - - - 3 - -
Shares cancelled
as proceeds for
Account Receivable (3,000) - - - - - -
Net loss - - - - - (56) -
---------- -- ---------- -- ----- ------ ---
Balance at
March 31, 1996 26,066,112 26 - - 5,399 (3,527) (17)
========== == ========== == ===== ====== ===
Shares issued for
cash and shares
of SOTAMO 1,918,750 2 - - 513 - -
Shares issued
for cash 142,500 - - - 43 - -
Shares issued for
termination of
warrants 100,000 - - - - - -
Shares issued for
exercise of
warrants 25,000 - - - 2 - -
Adjustment (8) - - - - - -
Net loss - - - - (198) -
---------- -- ---------- -- ----- ------ ---
Balance at
March 31, 1997 28,252,354 28 - - (3,725) (17)
========== == ========== == ===== ====== ===
Preferred shares
issued for cash 112,500 168
---------- -----
Balance at
March 31, 1997 112,500 6,125
========== =====
</TABLE>
See accompanying notes to consolidated financial statements.
F-7
<PAGE>
TERRITORIAL RESOURCES, INC.
CONSOLIDATED STATEMENT OF CASH FLOWS
(in thousands of US dollars)
YEARS ENDED MARCH 31
-----------------------
1997 1996
---------- --------
CASH FLOW FROM OPERATING ACTIVITIES:
Net income (loss) $ (198) $ (56)
ADJUSTMENTS TO RECONCILE NET LOSS TO CASH
USED BY OPERATIONS:
Depreciation, depletion and amortization 5 26
CHANGES IN OPERATING ASSET AND LIABILITIES:
Accounts receivable 1 14
Other current assets (32) -
Accounts payable 77 (4)
Accrued liabilities and other (49) (3)
---------- --------
Cash used by operating activities (196) (23)
---------- --------
CASH FLOWS FROM INVESTMENT ACTIVITIES:
Additions to investment in SOCO Tamtsag
Mongolia, Inc. (1,076) (38)
Proceeds from the sale of option to acquire - 20
SOCO Tamtsag Mongolia, Inc. stock
Additions to property and equipment (18) -
Proceeds from sales of property 138 30
---------- --------
Cash provided by (used by) investment
activities (956) 12
---------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Notes receivable 1 -
Advances from stockholders and affiliates 224 -
Short term bank loan 166 -
Issuance of preferred stock 168 -
Issuance of common stock 560 -
---------- --------
Cash provided by (used by)
financing activities 1,119 -
---------- --------
Increase (decrease) in cash (33) (11)
Cash, beginning of year 39 50
---------- --------
Cash, end of year $ 6 $ 39
========== ========
F-8
<PAGE>
YEARS ENDED MARCH 31
-----------------------
1997 1996
---------- --------
SUPPLEMENTAL CASH FLOW INFORMATION:
Acquisition of interest in SOCO Tamtsag
Mongolia, Inc. in exchange for common stock - 1,550
Collection of account receivable in exchange
for cancellation of common stock - 2
Note receivable received upon sale of oil and
gas properties - 10
========== ========
F-9
<PAGE>
TERRITORIAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(IN US DOLLARS)
1. BUSINESS
Territorial Resources, Inc., formerly Egret Energy Corporation, (the
Corporation) is engaged in international oil and gas exploration, primarily
in Mongolia. Through its 13 percent ownership in SOCO Tamtsag Mongolia,
Inc., the Corporation is presently indirectly active in Mongolia. Such
activity may encompass development and possibly production as well as
exploration. In addition, the Corporation owns working interests, minerals
and/or overriding royalty interests primarily in the United States.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
INVESTMENT IN SOCO TAMTSAG MONGOLIA, INC. ("SOTAMO")
The Corporation accounts for its investment in SOTAMO under the cost method
of accounting as its investment represents a minority, non-controlling
interest of approximately 13 percent (119 shares) of the outstanding common
stock of SOTAMO. All costs related to this investment are capitalized.
Pursuant to the terms of the SOTAMO stockholders' agreement, stockholders
are required to pay cash calls for their proportionate share of SOTAMO
expenditures. The Corporation's investment in SOTAMO is periodically
reviewed for impairment in value.
MARCH 31
--------------------------
1997 1996
------------ ------------
Balance, beginning of year $ 1,744,000 $ 128,000
Shares of SOTAMO acquired for common stock - 1,550,000
Share of expenditures incurred by SOTAMO 1,076,000 66,000
------------ ------------
$ 2,820,000 $ 1,744,000
============ ============
OIL AND GAS OPERATIONS
The Corporation accounts for its oil and gas exploration and development
activities under the full cost method of accounting. Under this method,
all productive and nonproductive exploration and development costs incurred
in finding oil and gas reserves are accumulated and capitalized in cost
centers. The Corporation has two cost centers (the continental United
States and Canada prior to 1997) for its oil and gas activities. In 1997
the Corporation disposed of its Canadian properties and initiated direct
activities in Mongolia. No gain or loss is recognized on the sale or
disposition of a property, except in extraordinary circumstances. Net oil
and gas properties were $17,000, at March 31, 1997. Substantially all of
the Corporation's oil and gas properties at March 31, 1997 are classified
as proved developed reserves except properties in Mongolia which represent
100% of the net book value at March 31, 1997 and are in a preliminary stage
of development.
LIMITATION ON CAPITALIZED COSTS
Capitalized costs of productive and nonproductive properties in a cost
center are limited to the present value of after tax future net revenues
(discounted at 10%) from estimated proved oil and gas reserves and the
lower-of-cost or fair market value of unproved properties.
F-10
<PAGE>
DEPRECIATION, DEPLETION AND AMORTIZATION
Depreciation, depletion and amortization (DD&A) of the cost of oil and gas
properties is provided on the unit-of-production method based on proved oil
and gas reserves. Gas is converted to equivalent barrels on a basis of six
MCF of gas to one barrel of oil.
INCOME TAXES
The Corporation accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109, Accounting for Income Tax. Under
this method, deferred income taxes are recognized for the tax consequences
of temporary differences by applying enacted statutory tax rates applicable
to future years to differences between the financial statement and tax
bases of its existing assets and liabilities. Income tax expense or
benefit represents the current tax payable or refundable for the period
plus or minus the tax effect of the net change in the deferred tax assets
and liabilities.
NET LOSS PER SHARE OF COMMON STOCK
Net loss per share of common stock was computed based on the weighted
average number of common shares outstanding. Primary and fully-diluted net
loss per share were substantially the same for both years presented. Stock
warrants were outstanding for all of fiscal 1996 and 1997. These warrants
were antidilutive and were therefore not considered in determining the
weighted average number of common shares outstanding.
3. QUASI-REORGANIZATION
On June 13, 1986, the Board of Directors resolved that a quasi-
reorganization be implemented as of March 31, 1986, for financial reporting
purposes. Accordingly, the Corporation transferred the deficit
($5,121,000) in retained earnings as of March 31, 1986, to additional paid-
in capital.
4. NOTE RECEIVABLE
The note receivable represents an amount due from the sale of an oil and
gas property. The note is to be repaid from a percentage of net production
revenue generated by the property for a fixed time period, and is secured
by the property.
5. INCOME TAXES
At March 31, 1997, the Corporation had net operating loss carry forwards
(NOL'S) of approximately $6,000,000 available to offset future taxable
income. The carry forwards expire beginning in 1996. The NOL's are
generally limited as to usage to approximately $32,000 per year. As of
March 31, 1997, approximately $300,000 of the NOL was not restricted. The
Corporation also has a tax credit carry forward of $55,000. The usage of
this credit is also limited.
As of March 31, 1997, the Corporation's deferred tax assets exceed its
deferred tax liabilities. A valuation allowance for the entire amount of
the excess was provided at March 31, 1997.
F-11
<PAGE>
6. REVENUES - SIGNIFICANT CUSTOMERS
Customers that have accounted for more than 10% of the Corporation's oil
and gas sales during the past two years are as follows:
MARCH 31
-------------------
1997 1996
-------- ---------
Norcen Energy Resources $ 3,000 $ 14,000
Snyder Oil Corporation $ 5,000 $ 6,000
Merit Energy Company $ 3,000
AFG Energy, Inc. $ 6,000
7. STOCKHOLDERS' EQUITY
AUTHORIZED
1,437,500 preferred shares, non-voting, non-cumulative, convertible, $0.10
per value
ISSUED
28,252,354 common shares
(5,456) treasury stock
----------
24,246,898
==========
112,500 preferred stock
==========
On March 29, 1996, the Corporation acquired an additional 12% interest in
SOTAMO in exchange for the issuance of 5,450,000 shares of the
Corporation's Common Stock. A value of $1,550,198 was placed on the
additional investment in SOTAMO, which was based on the net book value per
share of the Corporation's original investment in SOTAMO, plus the related
Mandatory Loan Obligations made through March 31, 1996, multiplied by the
additional shares acquired. As part of the acquisition, 975,000 of the
Warrants were cancelled. At March 31, 1996, warrants to acquire 1,025,000
shares of common stock remained outstanding.
On March 31, 1996, the Corporation entered into an Option Agreement (the
"Option") with its largest shareholder, Asia Energy Ltd. ("AEL"). The
Option, which was revised by letter dated April 27, 1996, gives AEL the
right to buy up to 29 of the 119 shares of SOTAMO owned by the Corporation
at a per share price of $50,000. The Option expires July 31, 1996, unless
otherwise extended. AEL paid the Corporation of $20,000 in consideration
for the granting of the Option. On May 9, 1996, AEL purchased five SOTAMO
shares from the Corporation for $250,000 cash, which has been paid in full.
F-12
<PAGE>
During fiscal 1996, the Corporation compensated its corporate secretary, a
director and two professionals for services rendered to the Corporation by
the issuance of 43,000 shares of its common stock. A cost of $2,687 was
recorded for the services, based on the estimated fair value of the shares.
During fiscal 1996, the Corporation collected an account receivable due
from a shareholder for $2,000 in exchange for the cancellation of 3,000
shares, which were valued at $187.
On July 19, 1996 the Corporation issued to Asia Energy Ltd. (an affiliate)
1,918,750 shares of common stock in exchange for $267,000 in cash, five
shares of SOTAMO, the elimination of a payable to Asia Energy Ltd. of
$25,000 and the cancellation of an option agreement to purchase shares of
SOTAMO from the Corporation.
On June 20, 1996 100,000 shares of the common stock of the Corporation were
issued in exchange for the termination of 1,000,000 of the warrants.
On November 18, 1996, the Corporation issued 25,000 shares upon the
exercise of 25,000 Warrants. Following this transaction no warrants remain
outstanding.
In October, 1996 the Corporation issued 142,500 shares of common stock and
112,500 shares of preferred stock for an aggregate consideration of
$211,000 cash. The preferred shares were converted on April 1, 1997 into
562,500 shares of common stock.
8. STOCK OPTIONS
On June 20, 1996, the Board of Directors approved the granting of options
to acquire common shares to the following executives and employees:
William C. Penttila 270,000
Dennis M. Buck 270,000
Daniel A. Mercier 270,000
Douglas N. Baker 100,000
Lois S. Milard 30,000
D. Allinson 30,000
Stephen L. Gray 30,000
-----------
1,000,000
===========
The options vest as to one-third immediately, one-third on the first
anniversary date and one-third on the second anniversary date in all cases
except Mr. Gray which vest immediately. The options are exercisable at
$0.30 per share.
The Corporation has elected to continue to account for stock options issued
to employees in accordance with APB opinion 25, "Accounting for Stock
Issued to Employees". During the year ended March 31, 1997, all options
issued to directors, who are also employees, officers and employees were
granted at an exercise price which equalled or exceeded the market price
per share at date of grant, accordingly, no compensation was recorded.
Effective for the year ended March 31, 1997, the Corporation was required
to adopt the disclosure portion of FASB Statement 123, "Accounting for
Stock-Based Compensation". This statement requires the Corporation to
provide pro forma information regarding net loss applicable to common
stockholders and loss per share as if compensation cost for the
Corporation's stock options granted had been determined in accordance with
the fair value based method prescribed in FASB Statement 123.
The Corporation estimates that the fair value of each stock option at the
grant date, accounted for under the provisions of FASB Statement 123, does
not have a material impact on reported net loss and net loss per share for
the year ended March 31, 1997.
F-13
<PAGE>
9. CONTINGENCIES
TRI Mongolia Inc. ("TRM"), a subsidiary of Territorial, is a named
defendant in an action styled, Leo Metcalf, III vs. Amgol, Inc., SOCO
International Inc., EAIT, CP&G Co., et al, cause no. 94-29503, in the
113th Judicial District Court of Harris County, Texas (the "Metcalf
Lawsuit"). The plaintiff in the Metcalf Lawsuit, a former director of
Amgol, Inc., has requested certain amounts be awarded to him based on
alleged damages suffered as a result of transactions entered into by Amgol
without his approval and without Amgol contemporaneously acquiring and
paying for certain interests the plaintiff claims to have owned. TRM has
been named as a defendant, according to the lawsuit, as a result of its
ownership interest in SOTAMO (which was owned by TRM's predecessor in
interest at the time the alleged damages were suffered).
Each of the shareholders from whom Territorial acquired TRM have granted
certain limited indemnification rights in favour of Territorial in the
event TRM or Territorial is held liable under the Metcalf Lawsuit. Such
shareholders have also pledged certain of the shares of Territorial common
stock received by them in connection with such acquisition, in order to
secure such indemnification obligations.
On June 24, 1996, SOCO International, Inc., a codefendant in this lawsuit,
obtained a summary judgment confirming that SOCO was not liable for damages
allegedly suffered by the plaintiff as a result of SOCO's ownership in
SOTAMO.
On September 9, 1996, TRM also obtained a summary judgment confirming that
TRM was not liable for the alleged damages. The plaintiff has appealed the
summary judgement.
Although it is impossible at this time to predict the outcome of the appeal
(which is likely to be heard in 1997), the Corporation believes TRM is not
liable, in whole or in part, for the claims made in the Metcalf Lawsuit and
that the Metcalf Lawsuit will not have a material adverse effect on the
Corporation's assets or financial condition. The Corporation intends to
vigorously pursue the defense of the Metcalf Lawsuit.
There are presently no other legal actions to which the Corporation is a
party.
10. COMMITMENT
In connection with its investment in SOTAMO, the Corporation has had, and
expects to continue to have, Mandatory Loan Obligations. Should the
Corporation be unable to meet its Mandatory Loan Obligations, the
Corporation will be subject to the default provisions of those loan
obligations, which could lead to the Corporation forfeiting its ownership
interest in SOTAMO.
At March 31, 1997, the estimated minimum commitments for the next twelve
months amounted to $650,000. The net proceeds from the proposed issue of
common stock referred to in Note 11 will be applied to these estimated
commitments.
F-14
<PAGE>
11. SUBSEQUENT EVENTS
On April 30, 1997, the shareholders approved a common stock share
consolidation of one new share for each three existing common shares and
increased the authorized common share capital to 200,000,000 shares.
The Corporation entered into an Agency Agreement dated March 12, 1997 with
McDermid St. Lawrence Securities Ltd. to sell, on a best efforts basis,
1,500,000 units consisting of 1,500,000 shares of the Corporation at a
price of $1.00 per share and 1,500,000 common share purchase warrants
entitling the holder to purchase for each three warrants an additional
common share of the Corporation at a price of $1.50 per share for a period
of 12 months following the anticipated closing. The Agents will be paid a
commission of $0.08 per common share and will receive an option to purchase
up to 150,000 units of the offering of common shares and common share
purchase warrants for up to one year from the issue date at the issue
price.
On May 29, 1997 the Corporation exchanged 72 shares of SOTAMO (representing
60% of its holdings) for common shares of SOCO International plc ("SOCO
plc"). SOCO plc is a company incorporated in England and listed on the
London Stock Exchange. Coincident with the exchange, the Corporation sold
20% of the SOCO plc shares for proceeds of $926,000. Territorial now holds
873,250 common shares of SOCO plc which had a fair market value of $3.7
million based on the closing share price on May 29, 1997 for SOCO plc
shares.
On June 30, 1997, the Corporation acquired a 2.5% interest in two offshore
Thailand exploration blocks, containing approximately 2.5 million acres,
from a director of the Corporation in consideration for $210,000 and the
issuance of 550,000 common shares of the Corporation.
12. RELATED PARTY TRANSACTIONS
During 1997 Territorial obtained advances from two directors of $224,000.
The loans are due on demand and bear interest at Canadian bank prime rate
(4.75% at March 31, 1997). The amount due to one director was repaid
during the year from additional funds advanced by the other director.
Subsequent to March 31, 1997, all of the loans were repaid.
At March 31, 1997 accrued interest payable on the advances amounted to
$3,000. Interest paid during the year was $1,000.
A director has also guaranteed the bank loan of $166,000 at March 31, 1997.
The loan is secured by a General Security Agreement as well as the
director's guarantee and bears interest at Canadian bank prime rate plus
1%.
F-15
<PAGE>
SUPPLEMENTAL INFORMATION - DISCLOSURES OF OIL AND GAS
PRODUCING ACTIVITIES - UNAUDITED
Costs Incurred in Oil and Gas Producing Activities
Years Ended March 31,
---------------------------
1997 1996 1995
---- ---- ----
Acquisition of proved properties -- $ $100,000
-- -- --
Acquisition of unproved properties 13,044 -- --
Exploration costs -- 8,978 4,918
Development costs ------- -------- --------
$ 8,978 $104,918 $ 13,044
======= ======== ========
RESERVE QUANTITIES
The following tables present estimates of the Company's proved oil and gas
reserves. The Company emphasizes that reserve estimates are inherently
imprecise and that estimates of new discoveries are more imprecise than those of
producing oil and gas properties. Accordingly, the estimates are expected to
change as future information becomes available. The estimates for March 31,
1994, 1995 and 1996 are based primarily upon a report prepared by a director of
the Company, Mr. Donald L. Oliver, who is also the Company's former President.
Estimates for 1996 only were based in part on a separate report prepared by D.
L. Paddock & Associates, Ltd., an independent engineering firm. The Company did
not have material quantities of proved reserves at March 31, 1997.
Oil (Bbls) Gas (Mcfs)
---------- ----------
Reserves - March 31, 1994 56,229 218,868
------- --------
Purchase of minerals in place - 202,311
Property sales (53,580) (91,850)
Revisions to previous estimates 1,819 10,961
Production (877) (33,403)
------- --------
Reserves - March 31, 1995 3,591 306,887
======= ========
Property sales (613) (41,627)
Revisions to previous estimates 57 66,245
Production (1,017) (25,868)
------- --------
Reserves - March 31, 1996 2,018 305,637
======= ========
Property sales -- (375,000)
Revisions to previous estimates (1,468) (17,427)
Production (550) (13,210)
------- --------
Reserves - March 31, 1997 -- --
======= ========
F-16
<PAGE>
STANDARDIZED MEASURE OF DISCOUNTED FUTURE NET CASH FLOWS
The following table presents the standardized measure of discounted future net
cash flows relating to proved oil and gas reserves, in accordance with the
Financial Accounting Standards Board Statement No. 69:
Years Ended March 31, *
-------------------------
1996 1995
------------ -----------
Future cash inflows $254,593 $ 441,686
Future production costs (12,971) (100,067)
Future development costs -- --
-------- ---------
241,622 341,619
Future income taxes -- --
-------- ---------
Future net cash flows 241,622 341,619
10% annual discount for estimated
timing of cash flows (79,130) (132,962)
-------- ---------
Standardized measure of discounted
future net cash flows $162,492 $ 208,657
======== =========
- ----------
* The Company had no material quantities of proved reserves at March 31, 1997.
CHANGES IN STANDARDIZED MEASURE
The following are the principal sources of changes in the standardized measure
of discounted future net cash flows for each of the three years ended March 31:
Years Ended March 31,
----------------------------------
1997 1996 1995
---------- ---------- ----------
Standardized measure of discounted
future net cash flows (Beginning) $ 162,492 $208,657 $ 357,641
Sales of oil and gas, net of
production costs (20,000) (32,000) (53,000)
Net changes in prices and
production costs -- (29,554) (89,000)
Revisions of previous quantity estimate (4,492) 23,081 53,000
Accretion of discount -- 20,865 35,764
Purchases of reserves in place -- -- 97,046
Sales of reserves in place (138,000) (33,101) (267,593)
Net change in income taxes -- -- 32,684
Other -- 4,544 42,115
--------- -------- ---------
Standardized measure of discounted
future net cash flows (Ending) $ -- $162,492 $ 208,657
========= ======== =========
F-17
<PAGE>
INDEX TO EXHIBITS
- -----------------
3 (i) Articles of Incorporation, as amended to the date of this
Report (filed as Exhibit 3(i) to the Company's Current
Report on Form 8-K dated May 13, 1997).
3(ii) Bylaws, as amended to the date of this Report.*
10.1 Plan and Agreement of Reorganization, dated as of March 12,
1996, by and among William C. Penttila, Dennis M. Buck,
Michael C. Nemec, Thomas B. Patrick and the Company (filed
as Exhibit 2.0 to the Company's Current Report on Form 8-K
dated March 29, 1996).
10.2 Option Agreement, dated March 1, 1996, by and between Asia
Energy Ltd. and the Company (filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K dated March 29, 1996).
10.3 Letter of Engagement, dated March 12, 1997, between
Territorial Resources, Inc. and McDermid St. Lawrence
Securities Ltd.*
10.4 Shareholders' Exchange Agreement between Territorial
Resources, Inc. and SOCO International plc, dated 6 May 1997
(filed as Exhibit 10.1 to the Company's Current Report on
Form 8-K dated June 5, 1997).
10.5 Letter Agreement between Territorial Resources, Inc. and
SOCO International plc, dated 8 May 1997 (filed as Exhibit
10.2 to the Company's Current Report on Form 8-K dated June
5, 1997).
10.6 Asset Purchase Agreement, dated as of May 30, 1997, among
SOCO Exploration (Thailand) Company Limited, SOCO Thaitex,
Inc., Territorial Resources (Delaware), Inc. and Jimmy M.
McCarroll*
10.7 Escrow Agreement, dated as of June 26, 1997, by and among
Jimmy M. McCarroll, Territorial Resources (Delaware), Inc.
and Theodore J. Lee*
10.8 Farmout Agreement, dated as of July 10, 1997, by and among
Territorial Resources (Delaware), Inc., SOCO Exploration
(Thailand) Company Limited and SOCO Thaitex, Inc.*
___________
* Filed with this Report
1
<PAGE>
10.9 Stockholder's Agreement by and among SOCO Tamtsag Mongolia,
Inc., dated November 7, 1994, and its stockholders*
22. Subsidiaries*
23.1 Consent of Donald L. Oliver, Reserve Engineer*
23.2 Consent of DL Paddock & Associates Ltd.*
23.3 Consent of GEO Engineering, Inc., Reserve Engineers*
23.4 Consent of Gaffney, Cline & Associates, Reserve Engineers*
27 Financial Data Schedule*
___________
* Filed with this Report
2
<PAGE>
EXHIBIT 3(II)
BYLAWS
OF
TERRITORIAL RESOURCES, INC.
ARTICLE I
Principal Office and Corporate Seal
Section 1. The principal office and place of business of the corporation
in the State of Colorado shall be at 10341 Rowlock Way, Parker, Colorado 80134.
Other offices and places of business may be. established from time to time by
resolution of the board of directors or as the business of the corporation may
require.
Section 2. The seal of the corporation shall have inscribed thereon the
name of the corporation and shall be in such form as may be approved by the
board of directors, which shall have power to alter the same at pleasure. The
corporation may use the seal by causing it, or a facsimile thereof, to be
impressed or affixed or in any other manner reproduced.
ARTICLE II
Shares and Transfer Thereof
Section 1 - Certificates. The shares of this corporation shall be
represented by certificates signed by the president or a vice president and the
secretary or an assistant secretary of the corporation, and may be sealed with
the seal of the corporation or a facsimile thereof. The signatures of the
president or vice president and the secretary or assistant secretary upon a
certificate may be facsimiles if the certificate is countersigned by a transfer
agent, or registered by a registrar, other than the corporation itself or an
employee of the corporation. In case any officer who has signed a certificate
shall have ceased to be such officer before such certificate is issued, it may
be issued by the corporation with the same effect as if he were such officer at
the date of its issue.
Section 2 - New Certificates. No new Certificates evidencing shares
shall be issued unless and until the old certificate or certificates, in lieu of
which the new certificate is issued, shall be surrendered for cancellation,
except as provided in Section 3 of this Article II.
Section 3 - Loss or Destruction. In case of loss or destruction of any
certificate of shares, another certificate may be issued in its place upon
satisfactory proof of such loss or destruction and, at the discretion of the
corporation, upon giving to the corporation a satisfactory bond of indemnity
issued by a corporate surety in an amount and for a period satisfactory to the
board of directors.
1
<PAGE>
Section 4 - Transfer Agent. Unless otherwise specified by the board of
directors by resolution, the secretary of the corporation shall act as transfer
agent of the certificates representing the shares of stock of the corporation.
He shall maintain a stock transfer book, the stubs in which shall set forth
among other things, the names and addresses of the holders of all issued shares
of the corporation, the number of shares held by each, the certificate numbers
representing such shares, the date of issue of the certificates representing
such shares, and whether or not such shares originate from original issue or
from transfer. Subject to Section 5, the names and addresses of the shareholders
as they appear on the stubs of the stock transfer book shall be conclusive
evidence as to who are the shareholders of record and as such entitled to
receive notice of the meetings of shareholders; to vote at such meetings; to
examine the list of the shareholders entitled to vote at meetings; to receive
dividends; and to own, enjoy and exercise any other property or rights deriving
from such shares against the corporation. Each shareholder shall be responsible
for notifying the secretary in writing of any change in his name or address and
failure so to do will relieve the corporation, its directors, officers and
agents, from liability for failure to direct notices or other documents, or pay
over or transfer dividends or other property or rights, to a name or address
other than the name and address appearing on the stub of the stock transfer
book.
Section 5 - Close of Transfer Book and Record Date. For the purpose of
determining shareholders entitled to notice of or to vote at any meeting of
shareholders, or any adjournment thereof, or entitled to receive payment of any
dividend, or in order to make a determination of shareholders for any other
proper purpose, the board of directors may provide that the stock transfer books
shall be closed for a stated period, but not to exceed in any case fifty days.
If the stock transfer books shall be closed for the purpose of determining
shareholders entitled to notice of, or td vote at a meeting of shareholders,
such books shall be closed for at least ten days immediately preceding such
meeting. In lieu of closing the stock transfer books, the board of directors
may fix in advance a date as the record date for any such determination of
shareholders, such date in any case to be not more than fifty days and, in case
of a meeting of shareholders, not less than ten days prior to the date on which
the particular action requiring such determination of shareholders is to be
taken. If the board of directors does not order the stock transfer books
closed, or fix in advance a record date, as above provided then the record date
for the determination of shareholders entitled to notice of, or to vote at any
meeting of shareholders, or any adjournment thereof, or entitled to receive
payment of any dividend, or for the determination of shareholders for any proper
purpose shall be thirty days prior to the date on which the particular action
requiring such determination of shareholders is to be taken.
ARTICLE III
Shareholders and Meetings Thereof
Section 1 - Shareholders of Record. Only shareholders of record on the books of
the corporation shall be entitled to be treated by the corporation as holders in
fact of the shares. standing in their respective names, and the corporation
shall not be bound to recognize any
2
<PAGE>
equitable or other claim to, or interest in, any shares on the part of any other
person, firm or corporation, whether or not it shall have express or other
notice thereof, except as expressly provided by the laws of Colorado
Section 2 - Meetings. Meetings of shareholders shall be held at the
principal office of the corporation, or at such other place as specified from
time to time by the board of directors. If the board of directors shall specify
another location such change in location shall be recorded on the notice calling
such meeting.
Section 3 - Annual Meeting. In the absence of a resolution of the board of
directors providing otherwise, the annual meeting of shareholders of the
corporation. for the election of directors, and for the transaction of such
other business as may properly come before the meeting, shall be held on the 2nd
Tuesday of the 2nd month in each year, if the same be not a legal holiday, and
if a legal holiday, then on the next succeeding business day, at 9:00 o'clock
a.m.
Section 4 - Special Meetings. Special meetings of shareholders may be
called by the president, the board of directors, the holders of not less than
one-tenth of all the shares entitled to vote at the meeting, or legal counsel of
the corporation as last designated by resolution of the board of directors.
Section 5 - Notice. Written notice stating the place, day and hour of the
meeting and, in case of a special meeting, the purpose or purposes for which the
meeting is called, shall be delivered not less than ten days nor more than fifty
days before the date of the meeting, either personally or by mail, by or at the
direction of the president, the secretary, or the officer or person calling the
meeting to each shareholder of record entitled to vote at such meeting; except
that, if the authorized shares are to be increased, at least thirty days' notice
shall be given.
Notice to shareholders of record, if mailed, shall be deemed given as to
any shareholder of record, when deposited in the United States mail, addressed
to the shareholder at his address as it appears on the stock transfer books of
the corporation, with postage thereon prepaid, but if three successive letters
mailed to the last-known address of any shareholder of record are returned as
undeliverable, no further notices to such shareholder shall be necessary, until
another address for such shareholder is made known to the corporation.
Section 6 - Shareholder Record. The officer or agent having charge of the
stock transfer books for shares of this corporation shall make, at least ten
days before each meeting of shareholders, a complete record of the shareholders
entitled to vote at such meeting or any adjournment thereof, arranged in
alphabetical order, with the address of and the number of shares held by each,
which record, for a period of ten days before such meeting, shall be kept on
file at the principal office of the corporation, whether within or outside
Colorado, and shall be subject to inspection by any shareholder for any purpose
germane to the meeting at any time during usual business hours. Such record
shall also be produced and kept open at the
3
<PAGE>
time and place of the meeting and shall be subject to the inspection of any
shareholder for any purpose germane to the meeting during the whole time of the
meeting. The original stock transfer books shall be prima fade evidence as to
who are the shareholders entitled to examine such record or transfer books or to
vote at any meeting of shareholders.
Section 7 - Quorum and Adjournment. At any meeting of the shareholders the
presence, in person or by proxy of the holders of more than a majority of the
shares outstanding and entitled to vote shall constitute a quorum. In the
absence of a quorum, the meeting may be adjourned by any officer entitled to
preside at, or act as secretary of such meeting, or by a majority in interest of
those shareholders present in person or by proxy.
Section 8 - Voting. A shareholder may vote either in person or by proxy
executed in writing by the shareholder or by his duly authorized attorney in
fact. No proxy shall be valid after eleven months from the date of its
execution, unless otherwise provided in the proxy.
At all meetings of the shareholders, a quorum being present, all matters
shall be decided by a simple majority vote of the then eligible shares, except
as otherwise provided by statute, by the Articles of Incorporation of the
corporation, or by these Bylaws. The vote on any matter need not be by ballot
unless required by statute or requested by a shareholder, in person or by proxy,
who is entitled to vote at the meeting.
Section 9 - Conduct of Meetings. Each meeting of the shareholders shall be
presided over by the president, or if the president shall not be present, by the
vice president. If both the president and vice president are absent, a chairman
shall be chosen by a majority in voting interest of those shareholders present
or represented by proxy. The secretary of the corporation shall act as
secretary of each meeting of the shareholders. If he shall not be present the
chairman of the meeting shall appoint a secretary.
ARTICLE IV
Directors, Powers and Meetings
Section 1 - Board of Directors. The business and affairs of the corporation
shall be managed by a board of five directors who need not be shareholders of
the corporation or residents of the State of Colorado and who shall be elected
at the annual meeting of shareholders or some adjournment thereof. Directors
shall hold office until the next succeeding annual meeting of shareholders and
until their successors shall have been elected and shall qualify. The board of
directors may increase or decrease, to not less than three, the number of
directors by resolution.
Section 2 - Regular Meetings. The annual meeting of the board of directors
shall be held at the. same place as, and immediately after, the annual meeting
of shareholders, and no notice shall be required in connection therewith. The
annual meeting of the board of directors shall be for the purpose of electing
officers and the transaction of such other business as may
4
<PAGE>
come before the meeting. Regular meetings of the board of directors may be held
without notice as determined by resolution adopted by the board.
Section 3 - Special Meetings. Special meetings of the board of directors
or any committee designated by said board may be called at any time by the
president or by any director, and may be held within or outside the State of
Colorado at such time and place as the notice or waiver thereof may specify.
Notice of such meetings shall be mailed or telegraphed to the last known address
of each director at least five days, or shall be given to a director in person
or by telephone at least forty-eight hours, prior to the date or time fixed for
the meeting. Special meetings of the board of directors may be held at any
time that all directors are present in person, and presence of any director at a
meeting shall constitute waiver of notice of such meeting except as otherwise
provided by law. Unless specifically required by law, the Articles of
Incorporation or these Bylaws, neither the business to be transacted at, nor the
purpose of, any meeting of the board of directors or any committee designated by
said board need be specified in the notice or waiver of notice of such meeting.
Section 4 - Special Attendance. Except as may be otherwise provided by the
Articles of Incorporation or Bylaws, members of the board of directors or any
committee designated by such board may participate in a meeting of the board or
committee by means of conference telephone or similar communications equipment
by which all persons participating in the meeting can hear each other at the
same time. Such participation shall constitute presence in person at the
meeting.
Attendance of a director at a meeting shall constitute a waiver of notice
of such meeting except where a director attends a meeting for the express
purpose of objecting to the transaction of business because the meeting is not
lawfully called or convened.
Section 5 - Quorum and Voting. A quorum at all meetings of the board of
directors shall consist of a majority of the number of directors then holding
office, but a smaller number may adjourn from time to time without further
notice, until a quorum is secured. The act of the majority of the directors
present at a meeting at which a quorum is present shall be the act of the board
of directors, unless the act of a greater number is required by the laws of the
State of Colorado or by the Articles of Incorporation or these Bylaws.
Section 6 - Organization. The president of the corporation, or in his
absence, the vice president, shall preside at each meeting of the board of
directors. The secretary, or in his absence, any person appointed by the
chairman of the meeting, shall act as secretary of the meeting.
Section 7 - Presumption of Assent. A director of the corporation who is
present at a meeting of the board of directors at which action on any corporate
matter is taken shall be presumed to have assented to the action taken unless
his dissent shall be entered in the minutes of the meeting or unless he shall
file his written dissent to such action with the person acting as the secretary
of the meeting before the adjournment thereof or shall forward such dissent by
5
<PAGE>
registered mail to the secretary of the corporation immediately after the
adjournment of the meeting. Such right to dissent shall not apply to a director
who voted in favor of such action.
Section 8 - Vacancies. Any vacancy occurring in the board of directors may
be filled by the affirmative vote of a majority of the remaining directors
though less than a quorum of the board of directors. A director elected to fill
a vacancy shall be elected for the unexpired term of his predecessor in office,
and shall hold such office until his successor is duly elected and shall
qualify. Any directorship to be filled by reason of an increase in the number of
directors shall be filled by the affirmative vote of a majority of the directors
then in office or by an election at an annual meeting, or at a special meeting
of shareholders called for that purpose. A director chosen to fill a position
resulting from an increase in the number of directors shall hold office until
the next annual meeting of shareholders and until his successor shall have been
elected and shall qualify.
Section 9 - Compensation. Directors may receive such compensation and
reimbursement for expenses as may be established by appropriate resolution of
the board of directors and in addition thereto, shall receive reasonable
traveling expense, if any is required, for attendance at such meetings. A
director may serve the corporation in a capacity other than that of a director
and receive compensation for the services rendered in that capacity.
Section 10 - Executive Committees. The board of directors, by resolution
adopted by a majority of the number of directors may designate from among its
members an executive committee, and one or more other committees each of which,
to the extent provided in the resolution shall have all of the authority of the
board of directors; but no such committee shall have the authority of the board
of directors in reference to amending the Articles of Incorporation adopting a
plan of merger or consolidation, recommending to the shareholders the sale,
lease, exchange or other disposition of all or substantially all of the property
and assets of the corporation otherwise than in the usual and regular course of
its business, recommending to the shareholders a voluntary dissolution of the
corporation or a revocation thereof or amending the Bylaws of the corporation.
The designation of such committees and the delegation thereto of authority shall
not operate to relieve the board of directors, or any member thereof, of any
responsibility imposed by law.
Section 11 - Removal of Directors. The shareholders may, at a meeting
called for the express purpose of removing directors, by a majority vote of the
shares entitled to vote at an election of directors, remove the entire board of
directors or any lesser number, with or without cause.
Section 12 - Resignations. A director of the corporation may resign at any
time by giving written notice to the board of directors, president or secretary
of the corporation. The resignation shall take effect upon the date of receipt
of such notice, or at any later period of time specified therein. The
acceptance of such resignation shall not be necessary to make it effective,
unless the resignation requires it to be effective as such.
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Section 13 - General Powers. The business and affairs of the corporation
shall be managed by the board of directors which may exercise all such powers of
the corporation and do all such lawful acts and things as are not by statute or
by the Articles of Incorporation or by these Bylaws directed or required to be
exercised or done by the shareholders. The directors shall pass upon any and
all bills or claims of officers for salaries or other compensation and, if
deemed advisable, shall contract with officers, employees, directors, attorneys,
accountants, and other persons to render services to the corporation.
ARTICLE V
Waiver of Notice
Notwithstanding any notices required by law or these Bylaws to be given to
any shareholder or director of the corporation, a waiver thereof in writing
signed by the person entitled to such notice, whether before, at, or after the
time stated therein shall be the equivalent to the giving of such notice.
ARTICLE VI
Action Without a Meeting
Any action required to be taken at a meeting of the directors, executive
committee, or other committee of the directors, or shareholders of this
corporation, or any action which may be taken at a meeting of directors,
executive committee, or other committee of the directors, or shareholders, may
be taken without a meeting if a consent in writing, setting forth the action so
taken shall be signed by all of the directors, executive or other committee
members or shareholders entitled to vote with respect to the subject matter
thereof.
Such consent shall have the same force and effect as a unanimous vote of
the directors, executive committee or other committee members or shareholders,
as the case may be and may be stated as such in any articles or document filed
with the Secretary of State of Colorado.
ARTICLE VII
Officers
Section 1 - Term and Compensation. The elective officers of the
corporation shall consist of at least a president, a secretary and a treasurer
each of whom shall be eighteen years or older and who shall be elected by the
board of directors at its annual meeting. Unless removed in accordance with
procedures established by law and these Bylaws, the said officers shall serve
until the next succeeding annual meeting of the board of directors and until
their respective successors are elected and shall qualify. Any two offices, but
not more than two, may be held by the same person at the same time, except that
one person may not
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simultaneously hold the offices of president and secretary. The board may elect
or appoint such other officers and agents as it may deem advisable, who shall
hold office during the pleasure of the board. All officers shall be paid such
compensation as may be directed by the board.
Section 2 - Powers. The officers of the corporation shall exercise and
perform the respective powers, duties and functions as are stated below, and as
may be assigned to them by the board of directors.
(a) The president shall be the chief executive officer of the
corporation and shall, subject to the control of the board of directors,
have general supervision, direction and control of the business and
officers of the corporation. He shall preside at all meetings of the
shareholders and of the board of directors. The president or a vice
president, unless some other person is specifically authorized by the board
of directors, shall sign all stock certificates, bonds, deeds, mortgages,
leases and contracts of the corporation. The president shall perform all
the duties commonly incident to his office and such other duties as the
board of directors shall designate.
(b) In the absence or disability of the president, the vice president
or vice presidents, if any, in order of their rank as fixed by the board of
directors, and if not ranked, the vice presidents in the order designated
by the board of directors, shall perform all the duties of the president,
and when so acting shall have all the powers of, and be subject to all the
restrictions on the president. Each vice president shall have such other
powers and perform such other duties as may from time to time be assigned
to him by the president.
(c) The secretary shall keep accurate minutes of all meetings of the
shareholders and the board of directors. He shall keep, or cause to be
kept a record of the shareholders of the corporation and shall be
responsible for the giving of notice of meetings of the shareholders or the
board of directors. The secretary shall be custodian of the records and of
the seal of the corporation and shall attest the affixing of the seal of
the corporation when so authorized. The secretary or assistant secretary
shall sign all stock certificates. The secretary shall perform all duties
commonly incident to his office and such other duties as may from time to
time be assigned to him by the president.
(d) An assistant secretary may, at the request of the secretary, or
in the absence or disability of the secretary, perform all of the duties of
the secretary. He shall perform such other duties as may be assigned to him
by the president or by the secretary.
(e) The treasurer, subject to the order of the board of directors,
shall have the care and custody of the money, funds, valuable papers and
documents of the corporation. He shall keep accurate books of accounts of
the corporation's
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transactions, which shall be the property of the corporation, and shall
render financial reports and statements of condition of the corporation
when so requested by the board of directors or president. The treasurer
shall. perform all duties commonly incident to his office and such other
duties as may from time to time be assigned to him by the president. In the
absence or disability of the president and vice president or vice
presidents, the treasurer shall perform the duties of the president.
(f) An assistant treasurer may, at the request of the treasurer, or in
the absence or disability of the treasurer, perform all of the duties of
the treasurer. He shall perform such other duties as may be assigned to him
by the president or by the treasurer.
Section 3 - Compensation. All officers of the corporation may receive
salaries or other compensation if so ordered and fixed by the board of
directors. The board. shall have authority to fix salaries in advance for
stated periods or render the same retroactive as the board may deem advisable.
Section 4 - Delegation of Duties. In the event of absence or inability of
any officer to act, the board of directors may delegate the powers or duties of
such officer to any other officer, director or person whom it may select.
Section 5 - Removal. Any officer or agent may be removed by the board of
directors or by the executive committee, if any, whenever in its judgment the
best interest of the corporation will be served thereby, but; such removal shall
be without prejudice to the contract rights, if any, of the person so removed.
Election or appointment of an officer or agent shall not, of itself, create
contract rights.
ARTICLE VIII
Finance
Section 1 - Reserve Funds. The board of directors, in its uncontrolled
discretion, may set aside from time to time, out of the net profits or earned
surplus of the corporation, such sum or sums as it deems expedient as a reserve
fund to meet contingencies, for equalizing dividends, for maintaining any
property of the corporation, and for any other purpose.
Section 2 - Banking. The moneys of the corporation shall be deposited in
the name of the corporation in such bank or banks or trust company or trust
companies, as the board of directors shall designate, and may be drawn out only
on checks signed in the name of the corporation by such person or persons as
the board of directors by appropriate resolution may direct. Notes and
commercial paper, when authorized by the board, shall be signed in the name of
the corporation by such officer or officers or agent or agents as shall
thereunto be authorized from time to time.
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Section 3 - Fiscal Year. The fiscal year of the corporation shall
be determined by resolution of the board of directors.
ARTICLE IX
Dividends
Subject to the provisions of the Articles of Incorporation and the laws of
the State of Colorado, the board of directors may declare dividends whenever,
and in such amounts, as in the board's opinion the condition of the affairs of
the corporation shall render such advisable.
ARTICLE X
Contracts, Loans and Checks
Section 1 - Execution of Contracts. Except as otherwise provided by statute
or by these Bylaws, the board of directors may authorize any officer or agent of
the corporation to enter into any contract, or execute and deliver any
instrument in the name of, and on behalf of the corporation. Such authority may
be general or confined to specific instances and, unless so authorized, no
officer, agent or employee shall have any power to bind the corporation for any
purpose, except as may be necessary to enable the corporation to carry on its
normal and ordinary course of business.
Section 2 - Loans. No loans shall be contracted on behalf of the
corporation and no negotiable paper shall be issued in its name unless
authorized by the board of directors. When so authorized, any officer or agent
of the corporation may effect loans and advances at any time for the corporation
from any bank, trust company or institution, firm, corporation or individual.
An agent so authorized may make and deliver promissory notes or other evidence
of indebtedness of the corporation and may mortgage, pledge, hypothecate or
transfer any real or personal property held by the corporation as security for
the payment of such loans. Such authority, in the board of directors
discretion, may be general or confined to specific instances.
Section 3 - Checks. Checks, notes, drafts and demands for money issued in
the name of the corporation shall be signed by such person or persons as
designated by the board of directors and in the manner the board of directors
prescribes.
ARTICLE XI
Amendments
Subject to repeal or change by action of the shareholders, these Bylaws may be
altered, amended or repealed at the annual meeting of the board of directors or
at any special meeting of the board called for that purpose.
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ARTICLE XII
Gender
Whenever in these Bylaws the masculine gender is used, it shall be deemed
to include the feminine gender.
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EXHIBIT 10.3
March 12, 1997
Territorial Resources Inc.
Suite 1345
734 - 7th Avenue S.W.
Calgary, Alberta T2P 3P8
Attention: Dan Mercier
RE: LETTER OF ENGAGEMENT FOR PUBLIC OFFERING
McDermid St. Lawrence Securities Ltd. ("McDermid") understands that
Territorial Resource, Inc. (the "Corporation") is contemplating a public
offering of its securities. McDermid further understands that the Corporation
will issue 1,500,000 unites (the "Units") at $1.00 per Unit, each Unit to be
comprise of one common share ("Share") of the Corporation and one warrant
("Warrant"), each whole Warrant will entitle the holder thereof to purchase one
Share for $1.50 until one year from the closing, pursuant to a prospectus in
accordance with the terms in Appendix A (the "Financing"). It is also
understood that the Corporation wishes to retain McDermid as exclusive agent for
the Financing.
This letter sets out the terms and conditions of the engagement (the
"Engagement Letter") between the Corporation and McDermid in respect of the
Financing.
1. SERVICES
On the terms and conditions set forth in this Engagement Letter.
a) EXCLUSIVE AGENT: McDermid is appointed as exclusive agent for the
Corporation from the date hereof to the completion of the Financing to
solicit subscriptions for the sale of the Units on a reasonable best
efforts basis;
b) SHARE ISSUANCES: Except as contemplated pursuant to this Engagement
Letter, the Corporation will not issue nor announce the issuance of
any shares or other securities of the Corporation (excepting stock
options or Shares issued upon the exercise of stock options issued
under a Stock Option Plan in accordance with the rules of the
applicable stock exchange) prior to the closing of the Financing, or
for a period of six months following the completion of the Financing,
without the prior written consent of McDermid;
<PAGE>
c) SELLING GROUP: McDermid reserves the right to form a selling group
of securities dealers to assist in the sale of the Units on a
reasonable best efforts basis;
d) AGENCY AGREEMENT: The Corporation and McDermid will enter into a
formal agency agreement as soon as practicable and in any event not
later than the date of the filing of the (final) prospectus (the
"Agency Agreement"). The Agency Agreement shall be the customary form
of Agency Agreement for an equity issue of this nature and shall
contain the usual representations and warranties, conditions,
indemnity clauses and "market out" clauses;
e) PRIORITY OF AGENCY AGREEMENT: The provisions of this Engagement
Letter, with respect to the Financing, shall be superseded in its
entirety by the execution of the Agency Agreement;
f) CLEARANCE BY PROSPECTUS: The Units and the Shares and Warrants
comprising the Units to be issued and delivered pursuant to the
Financing will be qualified by way of a prospectus to be filed by the
Corporation in the Province of Alberta;
g) CLOSING: Closing of the Financing shall take place as soon as
possible but in any event, no later than April 30th, 1997, unless
specifically extended in writing by the parties hereto;
h) LISTING: The Shares and Warrants comprising the Units and the
Agent's Option (as defined below) shall be listed for trading on The
Alberta Stock Exchange.
2. COMPENSATION
At the closing of the Financing, in consideration for the services provided
by McDermid, the Corporation agrees to pay (or issue) to McDermid:
a) MARKETING COMMISSION: a marketing commission at the rate of 8% of
the gross proceeds of the Financing;
b) AGENT'S OPTION: an agent's option to be qualified by way of
prospectus (the "Agent's Option") for the purchase of that number of
Units equal to (10%) of the Units subscribed for under the Financing,
exercisable at $1.00 per Unit, for a period of twenty-four (24) months
from the closing of the Financing; and
c) EXPENSES: all reasonable expenses, of or incidental to the issue of
Units, incurred by McDermid, including the legal fees and
disbursements of counsel, travel expenses, and all other third party
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expenses plus goods and services tax (the "Expenses"). The
Corporation shall provide a retainer in the amount of $10,000.00
towards the Expenses at the time of execution of this Engagement
Letter and the Corporation shall pay the balance of all outstanding
Expenses in excess of the retainer at the closing of the Financing.
The provisions of this Section 2(c) shall survive the completion of
professional services rendered under this Engagement Letter or any
termination of this Engagement Letter.
3. DUE DILIGENCE AND TERMINATION
a) DUE DILIGENCE: McDermid's obligation to complete the Financing will
be subject to the satisfactory completion of its due diligence of the
Corporation, and the Corporation agrees to provide McDermid with
access to such information and persons as McDermid may reasonably
request in order to complete its due diligence;
b) TERMINATION: McDermid may at any time prior to the closing of the
Financing, by Notice in writing to the Corporation, withdraw from the
Financing if;
i) the financial statements of the Corporation to be included in the
preliminary prospectus or prospectus reveal a material adverse change
in the financial condition of the Corporation from that as is
understanding as at the date hereof;
ii) a material adverse change occurs or is likely to occur in the
business, affairs or capital of the Corporation;
iii) there is a material change in the share ownership of the
Corporation;
iv) the state of financial markets becomes such that, in the opinion of
McDermid it would be impractical or not profitable to offer or to
continue to offer the Units for sale to the public; or
v) all regulatory approvals are not obtained on a timely basis or any
securities commission has issued or proposes to issue an order to
prevent or restrict trading in the Units, Shares or Warrants;
c) TERMINATION: The Corporation may at any time prior to the closing of
the Financing, by notice in writing to McDermid terminate the
Financing by reimbursing McDermid for out of pocket legal expenses
incurred plus a termination fee of $25,000.
4. TERM
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Unless otherwise terminated by McDermid, this Engagement Letter shall
continue in force for a period from the date of execution of this Engagement
Letter until APRIL 30, 1997, unless specifically extended in writing by the
parties hereto.
5. INDEMNITY
It is hereby agreed that the Corporation will indemnify and hold harmless
McDermid and its directors, officers, employees and sub-agents (each being
"Indemnified Parties") from and against any and all losses, costs, claims,
damages and expenses or liabilities to which such Indemnified Parties become
subject or which such Indemnified parties suffer to the extent related to,
caused by or arising out of performance by the Indemnified parties of the
services contemplated by this Engagement Letter, including without limitation,
any expenses incurred in connection with the investigation of, preparation for
or defence of any pending or threatened claim or any action or proceeding
arising therefrom. Notwithstanding the foregoing, the Indemnified parties shall
not be indemnified hereunder to the extend that any liability results from the
gross negligence of, or wilful misconduct of any Indemnified Parties. The
Forgoing provisions shall survive the completion of professional services
rendered under the Engagement Letter or any termination of this Engagement
Letter.
6. MATERIAL CHANGE
In the event of a material change in the business affairs of the
Corporation, McDermid agrees to renegotiate the terms of the warrant exercise.
7. FUTURE FINANCINGS
The Corporation grants to McDermid a right of first refusal to act as agent
or underwriter in those jurisdictions in which McDermid is authorized to act on
future financings (Public or Private) for a period of twelve (12) months from
the date of closing of this issue. On notification of such future financing,
McDermid shall indicate the willingness to exercise this right of first refusal
within ten (10) business days. In the event that McDermid does not elect to
accept any agency or underwriter relationship for that financing, the
Corporation is free to negotiate with any other securities firm or agent for
that issue. This right of first refusal does not apply to private placement
financings whereby the placees are relying on the applicable close friends or
business associates for the promoter exemption.
8. GOVERNING LAW
The agreement confirmed by this Engagement Letter is to be governed by and
construed in accordance with the laws of the Province of Alberta.
This offer to act as agent in respect of the Financing is open for
acceptance by the Company until 4:00 p.m. (Calgary, time), March 12, 1997,
unless otherwise withdrawn or extended by McDermid.
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If the foregoing is acceptable, please indicate the agreement of the Corporation
to the above terms and conditions by signing both copies of this Engagement
Letter in the space provided below and returning one fully executed copy to us.
Sincerely yours,
MCDERMID ST. LAWRENCE SECURITIES LTD.
Per: /s/ Ian S. Brown
Ian S. Brown
ACCEPTED AND AGREED TO this
12 day of March, 1997.
TERRITORIAL RESOURCES INC.
Per: /s/ Dan Mercier
Dan Mercier
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APPENDIX A - TERM SHEET
$1,500,000 Public Offering of
TERRITORIAL RESOURCES INC.
March 12, 1997
ISSUER: Territorial Resources Inc. (the "Corporation")
ISSUE: Units issued from treasury, each unit to be comprised of
one common share and one warrant, each whole warrant will
entitle the holder thereof to purchase one Share for $1.50
until one year from the closing.
Gross Proceeds: $1,500,000.
Size: 1,500,000 units.
Price to Public: $1.00 per unit
Exclusive Agent: McDermid St. Lawrence Securities Ltd. ("McDermid")
Agent's Commission: 8% on the gross proceeds of the Financing.
Agent's Option: The Agent shall be granted at closing a non-transferable
agent's option entitling McDermid to acquire that number
of Units equal to 10% of the Units sold pursuant to the
Financing, at an exercise price $1.00 exercisable for up
to twenty-four (24) months from the closing date.
Type of Transaction: Reasonable "best efforts" agency basis, subject to a
formal agency agreement.
Jurisdiction: Offered in Canada to residents of Alberta.
Expenses: The Corporation will pay all out-of-pocket expenses
including agent's legal counsel fees and disbursements
plus goods and services tax.
Right of First Refusal: McDermid shall have the right of first refusal to act
as agent or underwriter for twelve (12) months from the
close of the issue with respect to all types or forms of
financings, except for private placements, whereby the
placees are relying on the applicable close friends or
using associates of the promoter exemption.
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EXHIBIT 10.6
ASSET PURCHASE AGREEMENT
THIS ASSET PURCHASE AGREEMENT (this "Agreement") is made and entered into
as of May 30, 1997, among SOCO EXPLORATION (THAILAND) COMPANY LIMITED, a
juristic person organized and existing under the laws of Thailand ("SOCO
Exploration"), SOCO THAITEX, INC., a Delaware corporation ("SOCO Thaitex"),
TERRITORIAL RESOURCES (DELAWARE), INC., a Delaware corporation ("Territorial
Delaware"); and JIMMY M. MCCARROLL, a resident of Harris County, Texas
("McCarroll"). SOCO Exploration and SOCO Thaitex are sometimes together
referred to herein as "SOCO."
RECITALS
A. SOCO Exploration owns a 100% working interest in the Gulf of Thailand
Exploration Block No. B8/38 pursuant a Petroleum Concession No. 3/2539/50
awarded by the Ministry of Industry of the Government of Thailand (the "Block
B8/38 Concession"), subject to an obligation to assign to Malaysia Mining
Corporation Berhad, a corporation organized under the laws of Malaysia ("MMC"),
a 50% undivided working interest in the Block B8/38 Concession under certain
conditions pursuant to a Farmout Agreement, dated 6 December 1996 (the "MMC
Farmout Agreement"), by and among SOCO Exploration, SOCO Thaitex and MMC. SOCO
Thaitex owns a 100% working interest the Gulf of Thailand Exploration Block No.
B4/32 pursuant to a Petroleum Concession No. 7/2534/42 awarded by the Ministry
of Industry of the Government of Thailand (the "Block B4/32 Concession"),
subject to an obligation to assign to MMC a 50% undivided working interest in
the Block B4/32 Concession under certain conditions pursuant to the MMC Farmout
Agreement. The Block B8/38 Concession and the Block B4/32 Concession are
collectively referred to as the "Concessions."
B. As a result of the performance of certain obligations and the conversion of
certain rights, McCarroll is entitled to receive certain rights and interests
(the "McCarroll Interests") in and to the Concessions including a 2.5% undivided
working interest in each of the Block B8/38 Concession (the "McCarroll Block
B8/38 Interest") and the Block B4/32 Concession (the "McCarroll Block B4/32
Interest"). The assignment of the McCarroll Interests to McCarroll has not been
evidenced in writing, nor has such assignment been approved by the Ministry of
Industry of the Government of Thailand (the "Ministry of Industry").
C. McCarroll desires to sell, assign, transfer and convey to Territorial
Delaware his rights to receive the McCarroll Interests, and Territorial Delaware
desires to purchase the McCarroll Interests from McCarroll, on the terms and
conditions set out in this Agreement.
D. SOCO has consented to the sale, assignment, transfer and conveyance from
McCarroll to Territorial of the right to receive the McCarroll Interests. The
parties hereto desire to cause the assignment of the McCarroll Interests to be
made directly from the current record owner thereof (either SOCO Exploration or
SOCO Thaitex, as applicable) to Territorial Delaware in order to ease the
administrative burden of the required transfers and for other business purposes.
In addition, the parties hereto desire to enter into certain additional
agreements.
<PAGE>
NOW, THEREFORE, for good and valuable consideration, the receipt and
sufficiency of which are hereby acknowledged, the parties hereto hereby agree as
follows:
ARTICLE I
ASSET PURCHASE AND SALE
On the terms and subject to the conditions of this Agreement:
1.1 MCCARROLL/TERRITORIAL DELAWARE TRANSACTIONS. At the Closing (as
defined below), McCarroll shall sell, assign, transfer and deliver to
Territorial Delaware all of his right, title and interest in and to the
McCarroll Interests, and Territorial Delaware shall purchase from McCarroll all
of such McCarroll Interests. In exchange therefore, at the Closing, and subject
to the provisions of the Escrow Agreement (as defined below):
(a) Cash Portion of the Purchase Price. Territorial Delaware shall pay or
cause to be paid to or on behalf of McCarroll an aggregate amount of cash equal
to (US)$210,000 (the "Cash Portion of the Purchase Price");
(b) Territorial Shares. Territorial Delaware shall cause to be issued in
the name of McCarroll 550,000 shares (the "Territorial Shares") of common stock,
no par value per share, of Territorial Resources, Inc., a Delaware corporation
("Territorial Resources"); and
(c) Assumed Liabilities. Territorial Delaware shall pay, perform or cause
to be paid or performed all obligations and liabilities arising with respect to
periods immediately after the Closing under the Concession Agreement with
respect to the McCarroll Interests. Except as provided in the preceding
sentence, Territorial Delaware shall not assume or be deemed to have assumed and
shall not be responsible for any obligation or liability of McCarroll or any
other party, direct or indirect, known or unknown, choate or inchoate, absolute
or contingent, including without limitation any and all obligations regarding
any foreign, Federal, state or local income, sales, use, franchise or other tax
liabilities, and McCarroll shall indemnify and hold Territorial Delaware
harmless from all such liabilities and costs incurred by Territorial Delaware
and arising out of or attributable to any such liabilities, all in accordance
with Article VI hereof.
1.2 SOCO/MCCARROLL TRANSACTIONS. At the Closing, SOCO Exploration shall
sell, assign, transfer and deliver to Territorial Delaware, as the assignee of
McCarroll, the McCarroll Block B8/38 Interest, and SOCO Thaitex shall sell,
assign, transfer and deliver to Territorial Delaware, as the assignee of
McCarroll, the McCarroll Block B4/32 Interest. Each of SOCO Exploration and
SOCO Thaitex agree and confirm that the consideration to be received by it in
exchange for the sale, assignment, transfer and delivery of the respective
McCarroll Interest by such party pursuant to this Agreement has been received in
full on or before the date hereof.
1.3 NATURE OF THE MCCARROLL INTERESTS. Among other things, the working
interests to be received by Territorial Delaware are subject to the following:
(a) with respect to the
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2.5% working interest in the Block B8/38 Concession, such working interest shall
be a carried interest to the casing point on the first well on Block B8/38
(provided, however, that as the owner of such working interest, Territorial
Delaware shall be required to fund 2.5% of the aggregate expenditures in excess
of (US)$3,000,000 incurred to the casing point with respect to such well), and
such working interest shall require Territorial Delaware, as the owner thereof,
to fund 2.5% of all expenditures incurred at and after the casing point,
including the costs of running and cementing casing and completing the well; and
(b) as the owner of either of the 2.5% working interests so to be conveyed to
Territorial Delaware pursuant to this Agreement, Territorial Delaware shall have
no obligation to pay any portion of the $250,000 signing bonus (the "Signing
Bonus") paid to the Thailand Department of Mineral Resources under the Block
B8/38 Concession.
ARTICLE II
THE CLOSING
2.1 CLOSING DATE, TIME AND PLACE. The closing ("Closing") of the
transactions contemplated by Article I hereof shall take place on June 16, 1997,
or at such other date not later than June 30, 1997, that is mutually agreed by
the parties hereto (the "Closing Date"). Such Closing shall take place at 10:00
a.m., at the offices of Theodore J. Lee, Attorney at Law, counsel to Territorial
Delaware, 3104 Edloe Street, Suite 204, Houston, Texas 77027, or such other
location is mutually agreed by the parties hereto.
2.2 CLOSING TRANSACTIONS. At the Closing:
(a) McCarroll Assignments. McCarroll shall execute and deliver to
Territorial Delaware two Assignments, in form and substance satisfactory to
McCarroll and Territorial Delaware (together, the "McCarroll Assignments"),
pursuant to which, among other things, he shall have assigned to Territorial
Delaware his right, title and interest in and to the McCarroll Interests;
(b) SOCO Exploration Assignment. SOCO Exploration and Territorial Delaware
shall execute and deliver to each other an Assignment, substantially in the form
of Exhibit A-1 (the "SOCO Exploration Assignment") attached hereto and made a
part hereof, pursuant to which, among other things, SOCO Exploration shall have
assigned to Territorial Delaware the McCarroll Block B8/38 Interest;
(c) SOCO Thaitex Assignment. SOCO Thaitex and Territorial Delaware shall
execute and deliver to each other an Assignment, substantially in the form of
Exhibit A-2 (the "SOCO Thaitex Assignment;" together with the SOCO Exploration
Assignment, the "SOCO Assignments") pursuant to which, among other things, SOCO
Thaitex shall have assigned to Territorial Delaware the McCarroll Block B4/32
Interest;
(d) Escrow Agreement. McCarroll, Territorial Delaware and an escrow agent
(the "Escrow Agent") acceptable to them shall execute and deliver to each other
an Escrow Agreement in form and substance satisfactory to McCarroll and
Territorial Delaware (the "Escrow Agreement"); and
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(e) Payment of the Purchase Price.
(i) Cash Portion of the Purchase Price. Territorial Delaware shall pay or
cause to be paid in cash to McCarroll the Cash Portion of the Purchase Price
((US)$210,000) by wire transfer to such account as McCarroll shall have
indicated pursuant to written wire transfer instructions delivered to
Territorial Delaware not less than two (2) business days prior to the Closing
Date.
(ii) Territorial Shares. Territorial Delaware shall cause to be issued in
the name of McCarroll four (4) certificates (the "Certificates") representing in
the aggregate the 550,000 Territorial Shares, three (3) of which Certificates
(the "Escrowed Certificates") shall each represent 100,000 Territorial Shares,
all of which Escrowed Certificates shall be delivered at the Closing to the
Escrow Agent, pursuant to the terms and provisions of the Escrow Agreement. The
remaining Certificate shall represent the remaining 250,000 Territorial Shares
and shall be delivered to McCarroll at the Closing.
ARTICLE III
REPRESENTATIONS AND WARRANTIES
3.1 TERRITORIAL DELAWARE'S REPRESENTATIONS AND WARRANTIES. Territorial
Delaware represents and warrants to McCarroll and to SOCO Exploration that:
(a) Territorial Delaware is duly organized, validly existing and in good
standing under the laws of the State of Delaware, and is duly authorized and
qualified under such laws to conduct its business as currently conducted by it.
Territorial Delaware has all licenses, permits and authorizations necessary to
carry on its current business and conduct its current operations. Territorial
Delaware has full power and authority to execute and deliver this Agreement and
to perform its obligations hereunder. This Agreement has been duly executed and
delivered by Territorial Delaware and constitutes the valid and legally binding
obligation of Territorial Delaware, enforceable against it in accordance with
its terms. Upon the execution and delivery thereof at the Closing, the Escrow
Agreement and each of the SOCO Assignments will be duly executed and delivered
by it, and will constitute the valid and legally binding obligation of
Territorial Delaware, enforceable against it in accordance with its respective
terms.
(b) No other notices to, filings with, or authorizations, consents or
approvals from any other governmental agency or authority or any other party are
required in order to pay the purchase price for the McCarroll Interests
(including without limitation, to issue the Territorial Shares) and otherwise
perform its obligations under the Escrow Agreement or the SOCO Assignments,
other than any of the same that have been received on or before the date hereof.
(c) Upon the issuance thereof, all of the Territorial Shares will be duly
authorized, fully paid and non-assessable, and will represent in the aggregate
550,000 shares of common stock, no par value per share, of Territorial.
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(d) Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, by Territorial Delaware
will (a) violate any applicable law, rule, regulation, or order to which it is
subject or any provision of its charter or bylaws, nor will such transactions
violate any applicable law, rule, regulation or order to which Territorial
Resources is subject or any provision of its charter or bylaws or (ii) conflict
with, result in a breach of, constitute a default under, create in any party the
right to terminate, modify or change, or require any notice under any agreement,
contract, lease, license, instrument or other agreement to which it or
Territorial Resources is a party, by which either of them is bound or to which
any of their respective assets is subject.
(e) There are no lawsuits, actions, hearings, investigations, charges,
complaints, demands, claims or administrative or arbitration proceedings
pending, or to the best knowledge of Territorial Delaware, threatened against it
or any of its assets.
(f) None of the information supplied or to be supplied by Territorial
Delaware, insofar as it relates to Territorial Delaware, the Territorial Shares,
Territorial Resource or the transactions to be consummated at the Closing,
contains any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which there are made, not
misleading.
3.2 SOCO'S REPRESENTATIONS AND WARRANTIES. Each of SOCO Exploration and
SOCO Thaitex represent and warrant, jointly and severally, to Territorial
Delaware as of the date hereof that:
(a) SOCO Exploration is duly organized, validly existing and in good
standing under the laws of Thailand, and is duly authorized and qualified under
the laws of Thailand to conduct its business with respect to the B8/38
Concession. SOCO Thaitex is duly organized, validly existing and in good
standing under the laws of the State of Delaware in the United States of
America, and is duly authorized and qualified under the laws of Thailand to
conduct its business with respect to the B4/32 Concession. Each of SOCO
Exploration and SOCO Thaitex has all licenses, permits and authorizations
necessary to carry on its current business and conduct its current operations.
Each of SOCO Exploration and SOCO Thaitex has full power and authority to
execute and deliver this Agreement and to perform its obligations hereunder.
This Agreement has been duly executed and delivered by each of SOCO Exploration
and SOCO Thaitex and constitutes the valid and legally binding obligation of
such party, enforceable against it in accordance with its terms. Upon the
execution and delivery thereof at the Closing, each of the SOCO Assignments will
be duly executed and delivered by the SOCO party executing the same and will
constitute the valid and legally binding obligation of such party, enforceable
against it in accordance with its terms.
(b) Except for the consent of the Ministry of Industry or other
representative of the Government of Thailand to the SOCO Assignments (the
"Government Consents"), no other notices to, filings with, or authorizations,
consents or approvals from any other governmental agency or authority or any
other party required in order to effectively assign the McCarroll Interests to
Territorial Delaware.
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(c) Upon the execution and delivery of the SOCO Assignments and subject to
the receipt of the Government Consent with respect thereto, Territorial Delaware
will own an undivided 2.5% working interest in the Block B8/38 Concession and an
undivided 2.5% working interest in the Block B4/32 Concession, free and clear of
any liens, security interests, liens, claims, burdens, or other encumbrances
("Encumbrances"), other than those created pursuant to the terms of the
respective Concessions and those created by the MMC Farmout Agreement (provided,
however, that neither such 2.5% working interest shall be subject to reduction
as a result of the provisions of the MMC Farmout Agreement). Without limiting
the generality of the foregoing, such 2.5% working interests are and shall be
free of all burdens, liabilities and obligations, if any, created pursuant to or
referred to in (i) the letter agreement dated September 6, 1994, between SOCO
International, Inc., et. al., and Freeport-McMoran Thaitex Co., et. al. (the
"Freeport-McMoran Letter Agreement", and (ii) the letter agreement date
September 6, 1994, between SOCO International, Inc. and CLK Company (the "CLK
Letter Agreement").
(d) Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, by SOCO Exploration or
SOCO Thaitex will (a) violate any applicable law, rule, regulation, or order to
which such party is subject or any provision of the charter or bylaws of such
party or (ii) conflict with, result in a breach of, constitute a default under,
create in any party the right to terminate, modify or change, or require any
notice under any agreement, contract, lease, license, instrument or other
agreement to which it is a party, by which it is bound or to which any of its
assets is subject.
(e) SOCO Exploration and/or SOCO Thaitex has provided to Territorial
Delaware (i) a true, complete and correct copy of the written instrument by
which the Block B8/38 Concession was granted (which consists solely of that
certain Petroleum Concession No. 3/2539/50 awarded to SOCO Exploration by the
Ministry of Industry, dated October 24, 1996, and no other amendments,
supplements or modifications thereto) (the "B8/38 Concession Agreement"), and
(ii) a true, complete and correct copy of the written instrument by which the
Block B4/32 Concession was granted (which consists solely of that certain
Petroleum Concession No. 7/2534/42 awarded to THAITEX PETROLEUM COMPANY LIMITED
by the Ministry of Industry, dated September 11, 1991, as the same was amended
and supplemented by that certain Supplementary Petroleum Concession (No. 1) to
Petroleum Concession No. 7/2534/42 dated September 4, 1995 (as so amended and
supplemented, the "B4/32 Concession Agreement"), and no other amendments,
supplements or modifications thereto). The rights granted to the Concessionaire
under each such Concession Agreement have not been further amended,
supplemented, modified, diminished or withdrawn, and to the best knowledge of
SOCO Exploration and SOCO Thaitex, no such diminution or withdrawal, in whole or
in part, has been threatened or is contemplated.
(f) Each of the Concession Agreements, and the Concession granted
thereunder, is legal, valid, binding and enforceable, and is in full force and
effect; neither party to either such Concession Agreement is in breach or
default thereunder; and no event has occurred that with notice or lapse of time
would constitute a breach or default under, or permit termination or
modification of, such Concession Agreement. SOCO Exploration owns 100% of the
working interests in the Block B8/38 Concession, free and clear of any
Encumbrance, other
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than as provided in the B8/38 Concession Agreement and the MMC Farmout
Agreement. SOCO Thaitex owns 100% of the working interests in the Block B4/32
Concession, free and clear of any Encumbrance, other than as provided in the
B4/32 Concession Agreement, the MMC Farmout Agreement, the Freeport-McMoran
Letter Agreement and the CLK Letter Agreement. The Block B4/32 Concession is in
the last year of the Second Obligation Period, as defined in Clause 4 of the
B4/32 Concession Agreement, and the only remaining work to be done during such
Second Obligation Period is the drilling of one well.
(g) Each of SOCO Exploration and SOCO Thaitex has complied with all
applicable laws, rules, regulations, and orders of the Government of Thailand
and all agencies and instrumentalities thereof (including without limitation,
any of the same pertaining to protection of the environment, health or safety),
and no action, suit, proceeding, hearing, investigation, charge, complaint,
demand, notice or claim has been filed or commenced against it alleging any
failure to so comply.
(h) There are no lawsuits, actions, hearings, investigations, charges,
complaints, demands, claims or administrative or arbitration proceedings
pending, or to the best knowledge of SOCO Exploration and SOCO Thaitex,
threatened against either of them or any of their respective assets (including
without limitation the Concessions).
(i) Subject to the provisions of Section 1.3 of this Agreement, upon the
execution and delivery of the SOCO Exploration Assignment (and subject to the
receipt of the Governmental Consent with respect thereto), and except as
otherwise provided in this Agreement, Territorial Delaware will have such right,
title or interest that (i) entitles it to receive, based on its ownership
interest in the B8/38 Concession, 2.5% of the proceeds from the sale of
production from each well located in Block B8/38 throughout the term of the
Concession granted in the B8/38 Concession Agreement relating to such Block,
together with at least a like interest in all production from any additional
wells drilled in such Block B8/38 after the date hereof and during the term of
such Concession, and (ii) obligates Territorial Delaware to bear a like
percentage of the costs and expenses relating to the operations in or the
maintenance and other costs of each well located in such Block, as such costs
and expenses are set out in the B8/38 Concession Agreement relating to such
Block, in an amount which is not greater than 2.5% for such well or for such
other costs and expenses set out in the B8/38 Concession Agreement, without
increases throughout the term of such Concession unless otherwise agreed to by
Territorial Delaware. Similarly, subject to the provisions of Section 1.3 of
this Agreement, upon the execution and delivery of the SOCO Thaitex Assignment
(and subject to the receipt of the Governmental Consent with respect thereto)
and except as otherwise provided in this Agreement, Territorial Delaware will
have such right, title or interest that (iii) entitles it to receive, based on
its ownership interest in the B4/32 Concession, 2.5% of the proceeds from the
sale of production from each well located in Block B4/32 throughout the term of
the Concession granted in the B4/32 Concession Agreement relating to such Block,
together with at least a like interest in all production from any additional
wells drilled in such Block B4/32 after the date hereof and during the term of
such Concession, and (iv) obligates Territorial Delaware to bear a like
percentage of the costs and expenses relating to the operations in or the
maintenance and other costs of each well located in such Block, as such costs
and expenses are set out in the B4/32 Concession Agreement relating to such
Block, in an amount which is not greater than 2.5% for such well or for such
other costs and expenses
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set out in the B4/32 Concession Agreement, without increases throughout the term
of such Concession unless otherwise agreed to by Territorial Delaware.
(j) There is no currently outstanding obligation, debt or other liability
relating to either of the McCarroll Interests that has not been paid or
performed on or before the date hereof, and all obligations, debts or other
liabilities relating to either of the McCarroll Interests relating to periods on
or prior to the date hereof have been paid or performed in full. There has not
occurred any event, fact or circumstance, whether or not with the lapse of time
or the giving of notice, would constitute a breach or default by McCarroll with
respect to either of the McCarroll Interests.
(k) None of the information supplied or to be supplied by either SOCO
Exploration or SOCO Thaitex, insofar as it relates to either such party, the
McCarroll Interests, the Concessions or the transactions to be consummated at
the Closing, contains any untrue statement of a material fact or omits to state
any material fact required to be stated therein or necessary in order to make
the statements therein, in light of the circumstances under which there are
made, not misleading.
3.3 MCCARROLL'S REPRESENTATIONS AND WARRANTIES. McCarroll represents and
warrants to Territorial Delaware as of the date hereof that:
(a) All of the matters set out in Section 3.2 (c), (e), (i) and (j) hereof
are true, correct and complete as of the date hereof.
(b) McCarroll has full power and authority to execute and deliver this
Agreement and to perform his obligations hereunder. This Agreement has been
duly executed and delivered by McCarroll and constitutes his valid and legally
binding obligation, enforceable against him in accordance with its terms. Upon
the execution and delivery thereof at the Closing, each of the McCarroll
Assignments and the Escrow Agreement will be duly executed and delivered by him
and will constitute his valid and legally binding obligation, enforceable
against him in accordance with its terms.
(c) Neither the execution and delivery of this Agreement, nor the
consummation of the transactions contemplated hereby, by McCarroll will (i)
violate any applicable law, rule, regulation, or order to which he is subject or
(ii) conflict with, result in a breach of, constitute a default under, create in
any party the right to terminate, modify or change, or require any notice under
any agreement, contract, lease, license, instrument or other agreement to which
he is a party, by which he is bound or to which any of his assets is subject.
(d) McCarroll owns all of the right, title and interest in and to the right
to receive the McCarroll Interests, free and clear of any Encumbrance.
(e) There are no lawsuits, actions, hearings, investigations, charges,
complaints, demands, claims or administrative or arbitration proceedings
pending, or to the best knowledge of McCarroll, threatened against him or any of
his assets.
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(f) The Territorial Shares are being acquired solely for McCarroll and not
for any other person or party, and solely for investment purposes, and not with
a view to resale or redistribute any of the same to any other party or person.
McCarroll acknowledges that the Territorial Shares have not been registered
under the Securities Act of 1933, as amended (the "1933 Act"), or under
applicable state securities laws (together with the 1933 Act, "Securities
Laws"), that the right to transfer the Territorial Shares to be received in
connection with the Closing will be restricted by such Securities Laws, and
that, in addition to any other limitations with respect thereto, neither such
shares nor any interest therein shall be sold, transferred or otherwise disposed
of without registration under applicable Securities Laws or an exemption
therefrom. McCarroll acknowledges that the Territorial Shares to be received in
connection with the Closing are not being registered under the Securities Laws
in reliance upon exemptions from applicable Securities Laws that are predicated,
in part, on the representations, warranties and agreements of such McCarroll
contained herein. McCarroll must bear the economic risk of an investment in
such Territorial Shares for an indefinite period of time because such
Territorial Shares have not been registered under applicable Securities Laws and
therefore cannot be sold unless they are subsequently registered under such
Securities Laws or an exemption from such registration is available, and that
such shares must be held indefinitely unless the transfer thereof is so
registered or such an exemption exists with respect thereto. McCarroll is an
"accredited investor," as that term is defined in Regulation D promulgated under
the 1933 Act and is capable of evaluating the merits and risks, and has
evaluated the merits and risks, of the prospective acquisition of Territorial
Shares, and has the capacity to protect his interests in connection with the
such acquisition. McCarroll acknowledges, that a legend will be placed on the
Certificates evidencing the Territorial Shares substantially to the effect that,
among other things, the shares evidenced thereby have not been registered under
the 1933 Act and may not be sold, transferred, pledged, hypothecated or
otherwise disposed of in the absence of (i) an effective registration statement
for such shares under the 1933 Act or (ii) an opinion of Territorial's counsel
that such registration is not required. Notwithstanding the foregoing,
McCarroll understands that Territorial will not unreasonably withhold or delay
receipt and review of the opinion of counsel referred to in the preceding
sentence, and in the event its counsel is unable to promptly provide such an
opinion, Territorial will accept such an opinion of another qualified counsel
selected by McCarroll and reasonably satisfactory to Territorial.
(g) None of the information supplied or to be supplied by McCarroll, and to
his knowledge none of the information supplied or to be supplied by either SOCO
Exploration or SOCO Thaitex, insofar as it relates to McCarroll, the McCarroll
Interests, the Concessions or the transactions to be consummated at the Closing,
contains any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which there are made, not
misleading.
ARTICLE IV
COVENANTS
4.1 GOVERNMENTAL APPROVALS. Following the Closing, SOCO will use its
commercially reasonable efforts (and McCarroll and Territorial Delaware will
assist in
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connection therewith) to cause the Government of Thailand or its appropriate
subdivision, ministry or instrumentality to grant a written Government Consent
approving of Territorial Delaware as the owner of the McCarroll Interests. After
the Closing, and until such time as such Government Consent is received with
respect to the working interest being assigned to Territorial Delaware relating
to the Block B8/38 Concession, SOCO Exploration agrees to hold the interest so
conveyed to Territorial Delaware in trust, solely for the benefit of Territorial
Delaware, and to the maximum extent permissible, to cause Territorial Delaware
to receive all of the benefits, rights, privileges and treatment that it would
be entitled to receive as though such Government Consent had been received.
Similarly, after the Closing, and until such time as such Government Consent is
received with respect to the working interest being assigned to Territorial
Delaware relating to the Block B4/32 Concession, SOCO Thaitex agrees to hold the
interest so conveyed to Territorial Delaware in trust, solely for the benefit of
Territorial Delaware, and to the maximum extent permissible, to cause
Territorial Delaware to receive all of the benefits, rights, privileges and
treatment that it would be entitled to receive as though such Government Consent
had been received. Each such SOCO party shall cooperate with Territorial
Delaware at its request to take any other action, and execute any other written
instrument, reasonably requested by Territorial Delaware in connection with the
obligations of such SOCO party set out in this Section.
4.2 OPERATOR. As soon as reasonably practicable after the date the
Government Consent referred to in Section 4.1 hereof is received, each of
Territorial Delaware and the applicable SOCO party shall enter into a joint
operating agreement relating to the relevant Concession, in form and substance
mutually agreed to by such parties.
4.3 INFORMATION. Subject to the restrictions imposed by any applicable
law, each of SOCO Exploration and SOCO Thaitex agrees to permit representatives
of Territorial Delaware to have full access at all reasonable times to all
premises, properties, personnel, books, records, contracts and documents
pertaining to the Concessions.
4.4 FURTHER ASSURANCES. From time to time hereafter and without further
consideration, each of the parties hereto shall execute and deliver such
additional or further instruments of conveyance, assignment, assumption and
transfer, and take such actions, as any other party hereto may reasonably
request in order to more effectively convey and transfer to such other party the
assets, rights or other property to be sold or conveyed to such other party
hereunder or as shall be reasonably necessary or appropriate in connection with
the carrying out of such other party's obligations hereunder or the purposes of
this Agreement. In connection therewith, among other things, each of SOCO
Exploration, SOCO Thaitex and McCarroll agrees to use such party's best efforts
to cause the McCarroll Interests to be effectively assigned, conveyed,
transferred and delivered to Territorial Delaware. McCarroll further agrees to
use his best efforts to cause all his business with respect to those contracts
and agreements to which he is a party that relate to the McCarroll Interests (or
through which McCarroll earned such McCarroll Interests) to be conducted in such
a manner so as to preserve and protect the McCarroll Interests for the benefit
of Territorial Delaware. In the event McCarroll does not conduct his business
as provided in the preceding sentence, McCarroll hereby grants to Territorial
Delaware the right to fulfill any obligation he may not have timely or
completely performed, at the reasonable cost and expense of McCarroll. In
connection with
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his obligations under this Section, McCarroll agree to consult with Territorial
Delaware in a timely and complete manner in connection with any matter that may
arise with respect to any such contract and agreement, if such matter may affect
the obligations of McCarroll under this Section.
ARTICLE V
CONDITIONS TO THE CLOSING; TERMINATION
5.1 CONDITIONS. It shall be a condition to the obligations of each party
hereto to consummate the transactions contemplated to occur at the Closing that:
(a) each of the representations and warranties of the other parties hereto
shall be true, complete and correct as of the Closing Date as if such
representations and warranties were made as of such Closing Date, and no fact or
circumstance shall have come to the attention of any party hereto that is not
disclosed in this Agreement that could reasonably be expected to have a material
adverse effect on the rights and benefit to be received by such party as
contemplated by this Agreement; (b) each of the covenants to be fulfilled by any
other party hereto prior to the Closing shall have been fulfilled as of the
Closing, or waived by the party entitled to benefit therefrom; and (c) the
Closing shall have occurred not later than June 30, 1997, unless such date is
extended by the written agreement of all of the parties hereto.
5.2 TERMINATION. This Agreement may be terminated and the transactions
contemplated hereto may be abandoned at any time prior to the Closing: (a) by
the written agreement of all of the parties hereto; and (b) by any party hereto
in the event the Closing shall not have occurred on or before June 30, 1997,
unless such date is extended by the written agreement of all of the parties
hereto. Notice of an election to terminate this Agreement shall be made in
writing and provided to each of the non-terminating parties to this Agreement.
ARTICLE VI
INDEMNIFICATION
6.1 INDEMNIFICATION BY MCCARROLL. McCarroll agrees to indemnify, defend
and hold harmless Territorial Delaware and its affiliates, officers, directors,
employees, contractors and agents (collectively, Territorial Delaware and such
other parties are being referred to as the "Territorial Delaware-Related
Parties") against and from any and all taxes, penalties, interest, claims,
suits, causes of action (recognized now or at any later time), liabilities,
responsibilities, damages, losses, costs, assessments and expenses, including
without limitation reasonable attorney's fees and other expenses of defending
any actions or claims, amounts of judgments and amounts paid in settlement
(collectively, all of the foregoing being referred to herein as "Costs")
incurred by, asserted against or imposed upon any of the Territorial Delaware-
Related Parties arising out of or attributable to:
(a) any breach of any representation, warranty, covenant or agreement made
by McCarroll herein or in any schedule, exhibit, certificate, document or
agreement furnished by McCarroll in connection herewith (including without
limitation any of the documents to be executed and delivered at the Closing);
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(b) any nonfulfillment of any agreement or covenant hereunder or entered
into in connection herewith by McCarroll; or
(c) any claim, whether known or unknown, arising out of, or by virtue of,
or based upon McCarroll's ownership of the McCarroll Interests (or McCarroll's
failure to fulfill any obligation in connection therewith) prior to the Closing.
6.2 INDEMNIFICATION BY TERRITORIAL DELAWARE. Territorial Delaware agrees
to indemnify, defend and hold harmless, McCarroll against and from any and all
Costs incurred by, asserted against or imposed upon McCarroll arising out of or
attributable to:
(a) any breach of any representation, warranty, covenant or agreement made
by Territorial Delaware herein or in any schedule, exhibit, certificate,
document or agreement furnished by Territorial Delaware in connection herewith
or relating hereto (including without limitation any of the documents to be
executed and delivered at the Closing);
(b) any nonfulfillment of any agreement hereunder or entered into in
connection herewith by Territorial Delaware; or
(c) any claim, whether known or unknown, arising out of, or by virtue of,
or based upon Territorial Delaware's ownership of the McCarroll Interests (or
its failure to fulfill any obligation in connection therewith) after the
Closing;
provided, however, that if any such Costs are incurred under clause (b) or (c)
above primarily as a result of McCarroll's failure to fulfill any of his
obligations, then Territorial Delaware not shall have any liability or
obligation under the provisions of this Section with respect thereto.
6.3 CERTAIN INDEMNIFICATION-RELATED MATTERS. Any party entitled to
indemnification under the provisions of this Article shall: (a) give prompt
notice to the indemnifying party of any claim with respect to which such
indemnified party seeks indemnification (provided, however, that the failure to
timely provide such notice shall not affect an indemnified party's rights under
this Article unless such failure shall have prejudiced or adversely affected any
indemnifying party's rights with respect to such claim) and (b) unless in such
indemnified party's reasonable judgment a conflict of interest between such
indemnified and indemnifying parties may exist with respect to such claim or
such indemnifying party fails or refuses to timely select and engage counsel
reasonably satisfactory to the indemnifying party, permit such indemnifying
party to assume the defense of such claim with counsel reasonably satisfactory
to the indemnified party. If such defense is assumed, the indemnifying party
will not be subject to any liability for any settlement made without its consent
(but such consent will not be unreasonably withheld). An indemnifying party who
is not entitled, or elects not, to assume the defense of a claim will not be
obligated to pay the fees and expenses of more than one counsel for all parties
indemnified by such indemnifying party with respect to such claim, unless in the
reasonable judgment of any indemnified party a conflict of interest may exist
between such indemnified party and any other of such indemnified parties with
respect to such claim, in which case such indemnifying party shall pay the fees
and expenses of a sufficient number of counsel so that such conflicts are
resolved.
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6.4 RIGHT OF OFFSET. Territorial Delaware shall have the right,
exerciseable at any time and from time to time at its option until termination
of such right as provided in this Section, to set off and charge against any or
all "Territorial Resources Securities," as defined below, owned by McCarroll or
in which he has an interest, any and all "McCarroll Obligations," as defined
below, such right exerciseable upon written notice to McCarroll delivered not
less than 30 days prior to the date of such proposed set off. During such 30-
day period, Territorial agrees to use reasonable efforts to cooperate, at the
request and expense of McCarroll, in connection with any attempt by McCarroll to
cure the unfulfilled obligation(s) of McCarroll relating to such set off. As
used herein:
(a) the term, "Territorial Resources Securities" means and includes only
the following: (i) any of the Territorial Shares or Related Property (as
defined in the Escrow Agreement) then held in the Escrow Agreement and (ii) any
other options, warrants, convertible securities or other rights granting
McCarroll thereof the right to receive shares of capital stock of Territorial
Resources upon the exercise, conversion or exchange thereof; provided, however,
that any of the same held of record by the wife of McCarroll shall not
constitute "Territorial Resources Securities;" and
(b) the term, "McCarroll Obligations" means and includes any and all
obligations under this Agreement, including without limitation the indemnity
obligations of McCarroll;
provided, however, that any exercise of the set off and charging rights of
Territorial Delaware pursuant to this Section 6.4 shall terminate on the earlier
to occur of (i) completion of drilling and testing of the first well on Block
B8/38 under the B8/38 Concession Agreement or (ii) completion of drilling of a
second well on either Block B8/38 or Block B4/32 under the applicable Concession
Agreement. The rights and remedies granted to Territorial Delaware in this
Section 6.4 are in addition to any other rights and remedies it may have under
this Agreement, at law or in equity.
ARTICLE VII
MISCELLANEOUS
7.1 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The respective
representations and warranties of the parties hereto shall not be deemed waived
or otherwise affected by any investigation made by any other party hereto. Each
representation and warranty shall continue for a period of three (3) years after
the Closing Date. The provisions of this Section shall have no effect upon any
other obligation of the parties, whether to be performed before or after the
Closing.
7.2 AMENDMENT AND MODIFICATION. This Agreement may not be amended except
by an instrument in writing signed by all of the parties hereto.
7.3 NOTICES. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally
or mailed, certified or registered mail with
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postage prepaid, or sent by telex, telegram or telecopier, as follows (or at
such other address or facsimile number for a party as shall be specified by like
notice):
if to McCarroll, at: If to Buyer, at:
Jimmy M. McCarroll Territorial Resources (Delaware), Inc.
McCarroll Energy, Inc. c/o Territorial Resources, Inc.
1030 Townplace 734 7th Avenue S.W., Suite 1345
Houston, Texas 77057-1942 Canada T2P 3P8
(Fax No.) 713.785.8245 (Fax No.) 403.233.7354
Attn: Daniel A. Mercier
if to SOCO Exploration or SOCO Thaitex, at: [insert name of party to
receive notice]
c/o SOCO International, Inc.
777 Main Street, Suite 2500
Fort Worth, Texas 76102
(Fax No.) 817.882.5970
Attn: Edward T. Story, Jr.
7.4 EXPENSES. Except as otherwise expressly provided in this Agreement,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the party incurring such costs
and expenses whether or not the transactions contemplated hereby are
consummated.
7.5 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, including all exhibits
hereto, (a) constitutes the entire agreement among the parties with respect to
its subject matter and supersedes all prior agreements and understandings, both
written and oral, between the parties hereto, their affiliates or any of them
with respect to such subject matter and (b) shall not be assigned by operation
of law or otherwise without the express prior written consent of the other party
hereto. Notwithstanding the foregoing, this Agreement shall not supersede any
agreement regarding the farmout by the SOCO parties to Territorial Resources or
its affiliates of an additional 5% undivided working interest in each of the
Concessions, nor shall it supersede any agreement between Territorial Resources
or its affiliates and McCarroll regarding any option in favor of McCarroll to
acquire additional Territorial Shares in exchange for certain services to be
performed by him.
7.6 BINDING EFFECT; BENEFIT. Subject to the provisions of Section 7.5
hereof, this Agreement shall inure to the benefit of and be binding upon the
parties and their respective successors and assigns. Nothing in this Agreement
is intended to confer on any person other than the parties to this Agreement or
their respective successors and assigns any rights, remedies, obligations or
liabilities under or by reason of this Agreement.
7.7 HEADINGS. The descriptive headings of the articles, sections,
subsections, exhibits and schedules of this Agreement are inserted for
convenience only, do not constitute a part of this Agreement and shall not
affect in any way the meaning or interpretation of this Agreement.
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7.8 COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be executed in
counterparts, each of which shall be deemed to be an original, and all of which
together shall be deemed to be one and the same instrument. Execution of this
Agreement or any exhibit hereto may be evidenced by a signature delivered by or
on behalf of such party via facsimile, which facsimile signature shall be
confirmed by telephone, and once so confirmed, shall constitute an effective
signature of the party on whose behalf such facsimile signature is provided.
7.9 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to the laws
that might otherwise govern under principles of conflicts of laws applicable
thereto.
7.10 SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void, unenforceable or against its regulatory policy, the
remainder of this Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, each of the parties have caused this Agreement to be
duly executed by or on behalf of such party, all as of the date first written
above.
TERRITORIAL RESOURCES (DELAWARE), INC.
By:______________________________________
Name:_________________________________
As Its Authorized:____________________
JIMMY M. MCCARROLL
_________________________________________
SOCO EXPLORATION (THAILAND) COMPANY LIMITED
By:______________________________________
Name:_________________________________
As Its Authorized:____________________
SOCO THAITEX, INC.
By:______________________________________
Name:_________________________________
As Its Authorized:____________________
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EXHIBIT 10.7
ESCROW AGREEMENT
THIS ESCROW AGREEMENT (the "Agreement") is made and entered into as of June
30, 1997, by and between JIMMY M. MCCARROLL, a resident of Harris County, Texas
("McCarroll"), TERRITORIAL RESOURCES (DELAWARE), INC., a corporation organized
under the laws of the State of Delaware in the United States of America
("Territorial Delaware"), and THEODORE J. LEE, solely in his capacity as escrow
agent (the "Escrow Agent") hereunder.
RECITALS
SOCO Exploration (Thailand) Company Limited, a juristic person organized
and exiting under the laws of Thailand, SOCO Thaitex, Inc., a Delaware
corporation (together, the "SOCO Parties"), McCarroll and Territorial Delaware
have entered into that certain Asset Purchase Agreement, dated as of May 30,1997
(as amended from time to time, the "Asset Purchase Agreement"), pursuant to
which among other things McCarroll agreed to sell to Territorial Delaware, and
Territorial Delaware agreed to purchase from McCarroll, his rights to receive
certain working interests in two concessions granted by the Ministry of Industry
of Thailand that relate to the exploitation of two blocks in the Gulf of
Thailand. Capitalized terms used and not otherwise defined herein have the
meanings given them in the Asset Purchase Agreement, a copy of which is attached
hereto as Exhibit A and made a part hereof.
Article II of the Asset Purchase Agreement contemplates that, at the
Closing of the transactions thereunder, among other things three (3) Escrowed
Certificates, each of which is to represent 100,000 Territorial Shares (for an
aggregate of 300,000 Territorial Shares), will be issued in the name of
McCarroll, and all of which are to be delivered at the Closing to the Escrow
Agent pursuant to the terms and provisions of an Escrow Agreement. This
Agreement is the Escrow Agreement referred to in the Asset Purchase Agreement.
FOR GOOD AND VALUABLE CONSIDERATION, the receipt and sufficiency of which
are hereby acknowledged, the parties hereto hereby agree as follows:
1. ITEMS PLACED INTO ESCROW. Contemporaneously with the execution hereof,
Territorial Delaware has caused to be issued, among other things, the three (3)
Escrowed Certificates in the name of McCarroll, representing in the aggregate
300,000 Territorial Shares (the "Escrowed Shares"), all of which Escrowed
Certificates have been exhibited to McCarroll on or before the date hereof.
Each of the Escrowed Certificates is delivered to the Escrow Agent in accordance
with the Asset Purchase Agreement and this Agreement. In addition, McCarroll is
delivering to the Escrow Agent three (3) separate written stock powers (the
"Stock Powers") duly signed in blank by him, with signature guaranteed, each
relating to a separate Escrowed Certificates, and together, relating to total of
the Territorial Shares evidenced by the Escrowed Certificates. The Escrow Agent
hereby acknowledges receipt of the Escrowed Certificates and the Stock Powers
and agrees to hold and deliver them in accordance with this Agreement.
<PAGE>
2. VOTING RIGHTS AND DISTRIBUTIONS WITH RESPECT TO ESCROWED SHARES. The
record owner of the Escrowed Shares shall be entitled to exercise all voting
rights with respect to all Escrowed Shares that are not released from escrow in
accordance with Section 3 hereof. All securities issued in exchange for the
Escrowed Shares (together with separate stock powers duly signed in blank, with
signatures guaranteed), if any, and all distributions and dividends (excluding
dividends in cash or property, other than stock dividends) made with respect to
the Escrowed Shares ("Related Property"), if any, shall be delivered forthwith
to the Escrow Agent, shall be held and delivered by the Escrow Agent together
with the Escrowed Shares in accordance with the terms of this Agreement and
shall constitute a part of the Escrowed Shares. All dividends in cash and
property, other than stock dividends made with respect to the Escrowed Shares,
shall be delivered to the record owner of the Escrowed Shares.
In the event of any merger, consolidation or other extraordinary
transaction (each an "Extraordinary Transaction") involving Territorial
Resources as a result of which all outstanding shares of common stock of
Territorial Resources are to be sold, exchanged for or converted into other
consideration, then (a) McCarroll shall have the right to determine whether or
not to exercise dissenters' rights of appraisal or other similar rights, if any
are then available, with respect to the Escrowed Shares and (b) any
consideration, whether consisting of other securities, cash or other assets, or
a combination of any of the foregoing, resulting from such Extraordinary
Transaction (and/or the exercise of any dissenters' rights of appraisal or
similar rights) shall constitute Escrowed Shares and Related Property, shall be
delivered to the Escrow Agent and shall be held by the Escrow Agent as Escrowed
Shares and Related Property. Any action to be taken with respect to the
conversion or exchange of Escrowed Shares and/or Related Property in connection
with such Extraordinary Transaction shall be taken by the Escrow Agent only upon
his receipt of written instructions delivered by McCarroll and reasonably
acceptable to Territorial Delaware. Any portion of such consideration
consisting of cash shall be invested and reinvested by the Escrow Agent only
pursuant to specific written instructions jointly executed by McCarroll and
Territorial Delaware.
3. RELEASE OF THE ESCROWED SHARES. The Escrow Agent shall maintain the
Escrowed Shares and any Related Property in escrow until the occurrence of any
of the following events, at which time (unless the parties agree otherwise) the
Escrowed Shares and the Related Property then held by him with respect to such
Escrowed Shares shall be disbursed by the Escrow Agent in the following manner:
(a) One Escrowed Certificate representing 100,000 Escrowed Shares (together
with all Related Property relating to such 100,000 Escrowed Shares in the
possession of the Escrow Agent) shall be released from escrow and delivered:
(i) to McCarroll within 30 days of the Escrow Agent's receipt of a
McCarroll Notice (as defined below) to the effect that a "Successful Test"
of a well on either Block B8/38 or Block B4/32 has been completed within
three (3) years of the date of this Agreement, and that he is therefore
entitled to receive such 100,000 Escrowed Shares and Related Property. A
"Successful Test" shall be defined as a test
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<PAGE>
occurring within three years of the date of this Agreement in which the
average production rate from the well during a continuous 48-hour period
exceeds 500 barrels per day at well head flowing conditions which are
consistent with good oil field practice. Upon the completion in full of the
condition described in the this clause (i), Territorial Delaware shall have
no further right, title or interest in or to any such 100,000 Escrowed
Shares or Related Property; or
(ii) to Territorial Delaware within 30 days of the Escrow Agent's
receipt of a Territorial Delaware Notice to the effect that the condition
described in clause (i) of this Section 3(a) (the completion of a
Successful Test of a well on either Block B8/38 or Block B4/32 within three
(3) years of the date of this Agreement) has not occurred, and that
Territorial Delaware is therefore entitled to receive such 100,000 Escrowed
Shares and Related Property. McCarroll shall have no further right, title
or interest in or to any such 100,000 Escrowed Shares or Related Property
in such event.
(b) One Escrowed Certificate representing 100,000 Escrowed Shares (together
with all Related Property relating to such 100,000 Escrowed Shares in the
possession of the Escrow Agent) shall be released from escrow and delivered:
(i) to McCarroll within 30 days of the Escrow Agent's receipt of a
McCarroll Notice (as defined below) to the effect that the drilling and
testing of another well (in addition to the well described in Section 3(a)
above) located on either Block B8/38 or Block B4/32 has been completed, and
that both (A) all of the other work required to be completed in order to
fulfill the work commitments through the end of the second year of the
First Obligation Period, as defined in the Block B8/38 Concession
Agreement, including any extensions of such second year (the "End of the
B8/38 Second Year"), has in fact been completed and (B) all of the other
work required to be completed in order to fulfill the work commitments
under the Block B4/32 Concession Agreement through the period ending at the
End of the B8/38 Second Year has been completed; provided, however, that if
Territorial Delaware elects not to complete the work described in this
clause (B) or not to fulfill its proportionate obligations with respect to
such work, then the requirement set forth in clause (B) shall be deemed to
have been fulfilled); and provided further that there shall be no
requirement for a Successful Test on this second well prior to release of
such 100,000 Escrowed Shares and Related Property in accordance with the
provisions of this clause (i). Such McCarroll Notice shall also state that
McCarroll is entitled to receive such 100,000 Escrowed Shares and Related
Property as a result of the completion in full of the condition described
in the preceding sentence. Upon the completion in full of the condition
described in the this clause (i), Territorial Delaware shall have no
further right, title or interest in or to any such 100,000 Escrowed Shares
or Related Property; or
(ii) to Territorial Delaware within 30 days of the Escrow Agent's receipt
of a Territorial Delaware Notice to the effect that the condition described
in clause (i) of this Section 3(b) (the drilling and testing of a second
well in accordance with the terms and conditions of such clause (i)) within
four (4) years of the date of this Agreement)
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has not occurred, and that Territorial Delaware is therefore entitled to
receive such 100,000 Escrowed Shares and Related Property. McCarroll shall
have no further right, title or interest in or to any such 100,000 Escrowed
Shares or Related Property in such event.
(c) One Escrowed Certificate representing 100,000 Escrowed Shares (together
with all Related Property relating to such 100,000 Escrowed Shares in the
possession of the Escrow Agent) shall be released from escrow and delivered:
(i) to McCarroll within 30 days of the Escrow Agent's receipt of a
McCarroll Notice (as defined below) to the effect that Commercial
Production, during a continuous 30- day period, of one or more wells on
either Block B8/38 or Block B4/32 has commenced, and that McCarroll is
therefore entitled to receive such 100,000 Escrowed Shares and Related
Property. As used herein, the term "Commercial Production" shall be
defined as production of either crude oil at an average daily rate of 1,000
barrels or natural gas at an average daily rate of 10 million cubic feet
(10 MMCF); or
(ii) to Territorial Delaware within 30 days of the Escrow agent's receipt
of a Territorial Delaware Notice to the effect that the condition described
in clause (i) of this Section 3(c) has not been fulfilled in full for any
reason within five (5) years of the date of this Agreement, and that
Territorial Delaware is therefore entitled to receive such 100,000 Escrowed
Shares and Related Property. McCarroll shall have no further right, title
or interest in or to any such 100,000 Escrowed Shares or Related Property
in such event.
4. MCCARROLL NOTICE AND RELATED MATTERS.
(a) Upon the occurrence of the condition described in clause (i) of
Sections 3(a), (b) or (c), McCarroll shall deliver written notice (the
"McCarroll Notice") to the Escrow Agent and to Territorial Delaware which
McCarroll Notice shall include the statements required in such clause (i).
Following receipt of such McCarroll Notice, in the event Territorial Delaware
determines in good faith that such condition has not occurred, then it shall
promptly (and in no event later than 15 days after its receipt of such McCarroll
Notice) notify the Escrow Agent and McCarroll in writing (a "Territorial
Delaware Notice") of such determination, whereupon McCarroll and Territorial
Delaware agree to meet and attempt to settle any disagreements with respect
thereto in accordance with the arbitration and other provisions of Section 6(c)
hereof.
(b) Upon the failure of the condition described in clause (i) of Sections
3(a), (b) or (c), Territorial Delaware shall deliver a Territorial Delaware
Notice to the Escrow Agent and to McCarroll which Territorial Delaware Notice
shall include the statements required in the related clause (ii). Following
receipt of such Territorial Delaware Notice, in the event McCarroll determines
in good faith that the same is incorrect or he otherwise disagrees in good faith
with the statements therein, then he shall promptly (and in no event later than
15 days after his receipt of such Territorial Delaware Notice) deliver a
McCarroll Notice to the Escrow
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Agent and Territorial Delaware of such determination or disagreement, whereupon
McCarroll and Territorial Delaware agree to meet and attempt to settle any
disagreements or disputes with respect thereto in accordance with the
arbitration and other provisions of Section 6(c) hereof.
(c) Notwithstanding the provisions of Section 3 hereof, in the event the
Escrow Agent has received contradicting or disputed instructions in a McCarroll
Notice and a Territorial Delaware Notice relating to the same Escrowed Shares
and Related Property, or he is otherwise made aware of any dispute with respect
to the release of any Escrowed Shares and Related Property, the Escrow Agent
shall continue to hold the Escrowed Shares and any Related Property relating to
such dispute in accordance with the other provisions of this Agreement, and
shall only release any of the same in accordance with the instruction of the
arbitrators as contemplated by Section 6(c) hereof or upon the joint written
instruction of both parties hereto, whichever he receives first.
5. CERTAIN MATTERS RELATING TO ESCROW AGENT.
(a) The Escrow Agent shall not be entitled to a fee in connection with his
holding the Escrowed Shares and any Related Property hereunder; provided,
however, that (i) in the event any party hereto requests the Escrow Agent, in
his capacity as escrow agent, take any action other than simply holding the
Escrowed Shares and any Related Property in connection herewith, the Escrow
Agent shall be entitled to a fee of $150 per hour for each hour of actual time
spent by him in connection with such request, which fee shall be paid by
Territorial Delaware; (ii) if any Escrowed Shares and Related Property continue
to be held by the Escrow Agent pursuant to this Agreement on or after August 1,
2003, then he shall be entitled to an additional fee for his services under this
Agreement equal to $250 per month during such period beyond August 1, 2003,
which fee shall be paid by Territorial Delaware; and (iii) the Escrow Agent
shall be entitled to joint and several compensation from the other parties
hereto for all out-of-pocket and other costs and expenses he shall incur
(including without limitation any costs and expenses incurred in connection with
his consulting with counsel as provided in the last sentence of Section 5(b),
below) with respect to the performance of his obligations under this Agreement,
some or all of which may be required, at the request of the Escrow Agent, to be
paid in advance.
(b) The Escrow Agent shall have no responsibility in his capacity as Escrow
Agent hereunder to any party hereto, except as specifically provided herein or
as he shall otherwise agree in writing, and shall not be responsible for
anything done or omitted to be done by him, except for his own gross negligence
or willful default. No action shall be commenced against the Escrow Agent, in
his capacity as the escrow agent hereunder, at law, in equity or otherwise as a
result of any action taken or thing done by the Escrow Agent pursuant to this
Agreement, or for any disbursement made as authorized herein, except in the
event of his own gross negligence or willful default. The Escrow Agent, in his
capacity as escrow agent, may consult with counsel of his own choice and shall
have full and complete authorization and protection for any action taken or
suffered by him hereunder in good faith and in accordance with the opinion of
such counsel.
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<PAGE>
(c) The Escrow Agent undertakes to perform only such duties as are
expressly set forth herein. The Escrow Agent may rely and shall be protected in
acting or refraining from acting upon any written notice, instruction or request
furnished to him hereunder and believed by him to be genuine and to have been
signed or presented by the proper party or parties. From time to time, the
Escrow Agent may request, and the other parties hereto hereby agree to provide
promptly to him, such further notices, instructions or assurances as he may
reasonably determine in order to, and prior to, his performance of any duty or
obligation hereunder.
(d) The Escrow Agent may resign and be discharged from his duties or
obligations hereunder by giving notice to the other parties hereto in writing of
such resignation specifying a date no earlier than fifteen (15) days from the
date of such notice when such resignation shall take effect. Upon their mutual
written consent, Territorial Delaware and McCarroll may immediately remove the
Escrow Agent at any time and substitute another party agreed to by them as
Escrow Agent. Upon any such removal, the Escrow Agent shall promptly deliver
any Escrowed Shares and Related Property then in his possession to the party or
parties as directed jointly by Territorial Delaware and McCarroll. Thereafter,
and without further action, such removed Escrow Agent shall be discharged of all
liability hereunder. The Escrow Agent shall have no obligation to cause
interest to accrue or be paid on any funds constituting Related Property
delivered to him in accordance with the provisions of this Agreement, absent his
written agreement to the contrary, except as provided in the last sentence of
Section 2 hereof.
(e) The other parties hereto hereby agree jointly and severally to
indemnify, defend and hold harmless the Escrow Agent, in his capacity as escrow
agent hereunder, from and against any loss, liability, cost or expense
(including all legal expenses described herein) incurred without gross
negligence or bad faith on his part, arising out of or in connection with his
preparing, negotiating or entering into this Agreement and carrying out his
duties and rights hereunder, including the costs and expenses of defending
himself against any claim or liability in the premises.
(f) Each of McCarroll and Territorial Delaware acknowledges that Theodore
J. Lee has also acted as legal counsel to Territorial Delaware in connection
with the negotiation, preparation, execution and delivery of the Asset Purchase
Agreement and this Agreement, has acted and/or may in the future act as legal
counsel to either of the parties hereto or their affiliates, and is acting as
the Escrow Agent at the request of both of the other parties to this Agreement.
Each of McCarroll and Territorial, for such party and for all of such party's
affiliates, to the maximum extent permitted by law, hereby waives all claims of
conflict of interest or otherwise that may arise or exist as a result of
Theodore J. Lee also acting as the Escrow Agent pursuant to this Escrow
Agreement.
6. MISCELLANEOUS.
(a) This Agreement shall become effective as of the date hereof, and shall
continue in force until the final disbursement of all Escrowed Shares and
Related Property held by the Escrow Agent hereunder, or until terminated by an
instrument in writing signed by the parties hereto, whichever occurs first.
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(b) All notices, requests, demands, waivers and other communications
required or permitted to be given under this Agreement shall be in writing and
shall be deemed to have been duly given if delivered personally or mailed,
certified or registered mail with postage prepaid, or sent by telex, telegram or
telecopier, as follows (or at such other address or facsimile number for a party
as shall be specified by like notice):
if to McCarroll, at: If to Territorial Delaware, at:
Jimmy M. McCarroll Territorial Resources (Delaware), Inc.
McCarroll Energy, Inc. c/o Territorial Resources, Inc.
1030 Townplace 734 7th Avenue S.W., Suite 1345
Houston, Texas 77057-1942 Canada T2P 3P8
(Fax No.) 713.785.8245 (Fax No.) 403.233.7354
Attn: Daniel A. Mercier
if to the Escrow Agent, at:
Theodore J. Lee, Attorney at Law
3104 Edloe, Suite 204
Houston, Texas 77027
(Fax No.) 713.623.0990
(c) If any dispute or claim between or among the parties hereto arising out
of this Agreement, or the rights and duties of the parties arising out of this
Agreement, has not been resolved by mutual agreement on or before the 30th day
following the first notice of the subject matter of the dispute or claim from
one party to another, then any party to such dispute may refer the dispute to
arbitration under the following provisions: to refer a dispute to arbitration,
a disputing party must provide notice to the other parties hereto stating (i) a
general description of the dispute and (ii) that the dispute is being submitted
to arbitration pursuant to this clause. Each party to such dispute shall then
appoint one arbitrator. The two arbitrators so appointed shall endeavor to
promptly appoint a third arbitrator. If the two arbitrators have not designated
the third arbitrator by the 15th day following appointment of the second
arbitrator, or if a second arbitrator has not been designated by the 15th day
following the designation of the first, either party to such dispute may request
the American Arbitration Association to designate the remaining arbitrator(s).
If any arbitrator resigns, becomes incapacitated or otherwise refuses or fails
to serve or to continue to serve as an arbitrator, then whoever is entitled to
designate that arbitrator shall designate a successor. The arbitration shall be
conducted in Houston, Texas, or such other place as the parties to such dispute
may agree, using the Commercial Arbitration Rules of the American Arbitration
Association. The decisions of the arbitrators shall be final and binding on the
parties to such dispute and are not subject to appeal. The decisions of the
arbitrators may be enforced in any court of competent jurisdiction, and the
parties hereto authorize any such court to enter judgment on the arbitrators'
decisions. EACH PARTY AGREES THAT ARBITRATION UNDER THIS CLAUSE IS THE
EXCLUSIVE METHOD FOR RESOLVING ANY DISPUTE ARISING UNDER THIS AGREEMENT AND THAT
IT WILL NOT COMMENCE AN ACTION OR PROCEEDING BASED ON A DISPUTE, EXCEPT TO
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ENFORCE THE ARBITRATORS' DECISIONS AS PROVIDED IN THIS CLAUSE OR TO COMPEL THE
OTHER PARTY TO PARTICIPATE IN ARBITRATION UNDER THIS CLAUSE.
(d) Except as otherwise expressly provided in this Agreement, all costs and
expenses incurred in connection with this Agreement and the transactions
contemplated hereby shall be paid by the party incurring such costs and expenses
whether or not the transactions contemplated hereby are consummated; provided,
however, that except as otherwise expressly provided herein, all costs and
expenses of the Escrow Agent shall be paid jointly and severally by McCarroll
and Territorial Delaware.
(e) This Agreement, including all exhibits hereto, (i) constitutes the
entire agreement among the parties with respect to its subject matter and
supersedes all prior agreements and understandings, both written and oral,
between or among the parties hereto, their affiliates or any of them with
respect to such subject matter and (ii) shall not be assigned by operation of
law or otherwise without the express prior written consent of the other parties
hereto, except as otherwise provided herein.
(f) Subject to the provisions of Section 6(e), this Agreement shall inure
to the benefit of and be binding upon the parties and their respective
successors and assigns. Nothing in this Agreement is intended to confer on any
person other than the parties to this Agreement or their respective successors
and assigns any rights, remedies, obligations or liabilities under or by reason
of this Agreement.
(g) The descriptive headings of the articles, sections, subsections,
exhibits and schedules of this Agreement are inserted for convenience only, do
not constitute a part of this Agreement and shall not affect in any way the
meaning or interpretation of this Agreement.
(h) This Agreement may be executed in counterparts, each of which shall be
deemed to be an original, and all of which together shall be deemed to be one
and the same instrument. Execution of this Agreement may be evidenced by a
signature delivered by or on behalf of such party via facsimile, which facsimile
signature shall be confirmed by telephone, and once so confirmed, shall
constitute an effective signature of the party on whose behalf such facsimile
signature is provided.
(i) This Agreement shall be governed by and construed in accordance with
the laws of the State of Delaware, without regard to the laws that might
otherwise govern under principles of conflicts of laws applicable thereto.
(j) If any term, provision, covenant or restriction of this Agreement is
held by a court of competent jurisdiction or other authority to be invalid,
void, unenforceable or against
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its regulatory policy, the remainder of this Agreement shall remain in full
force and effect and shall in no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, each of the parties have caused this Agreement to be
duly executed by or on behalf of such party, all as of the date first written
above.
"Territorial Delaware" TERRITORIAL RESOURCES (DELAWARE), INC.
By:_______________________________________
Name:_____________________________________
As Its Authorized:________________________
"McCarroll" JIMMY M. MCCARROLL
___________________________________________
"Escrow Agent" THEODORE J. LEE, in his capacity
as Escrow Agent
___________________________________________
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EXHIBIT 10.8
FARMOUT AGREEMENT
THIS FARMOUT AGREEMENT ("Agreement") is made and entered into as of July
10, 1997, by and among SOCO EXPLORATION (THAILAND) COMPANY LIMITED, a juristic
person organized and existing under the laws of Thailand ("SOCO Exploration"),
SOCO THAITEX, INC., a corporation organized under the laws of the State of
Delaware ("SOCO Thaitex"), and TERRITORIAL RESOURCES (DELAWARE), INC., a
corporation organized under the laws of the State of Delaware ("Territorial").
SOCO Exploration and SOCO Thaitex are sometimes together referred to herein as
"SOCO," each party hereto is sometimes referred to herein as a "Party," and
collectively the parties hereto are sometimes referred to as the "Parties."
RECITALS
A. SOCO Exploration owns a 50% working interest in the Gulf of Thailand
Exploration Block No. B8/38 pursuant a Petroleum Concession No. 3/2539/50
awarded by the Ministry of Industry of the Government of Thailand (the "Block
B8/38 Concession"), subject to SOCO Exploration's conveying a 2.5% working
interest therein pursuant to the Asset Purchase Agreement (as defined below).
SOCO Thaitex owns a 50% working interest the Gulf of Thailand Exploration Block
No. B4/32 pursuant to a Petroleum Concession No. 7/2534/42 awarded by the
Ministry of Industry of the Government of Thailand (the "Block B4/32
Concession"), subject to SOCO Thaitex's conveying a 2.5% working interest
therein pursuant to the Asset Purchase Agreement. The Block B8/38 Concession
and the Block B4/32 Concession are collectively referred to as the
"Concessions."
B. SOCO desires to sell, assign, transfer and convey to Territorial, and
Territorial desires to purchase from SOCO, an undivided 5% working interest in
each of the Concessions on the terms and conditions set out in this Agreement.
C. The Parties and Jimmy M. McCarroll have entered into a certain Asset
Purchase Agreement dated as of May 30, 1997 (the "Asset Purchase Agreement"),
pursuant to which among other things Territorial was granted the right to
acquire a 2.5% working interest in each of the Concessions (sometimes referred
to herein as the "Additional 2.5% Working Interests"), which 2.5% working
interests are in addition to the 5% working interests that are the subject of
this Agreement. The Parties also desire to amend certain of the provisions of
the Asset Purchase Agreement only as expressly set forth below, and only as they
relate to the rights and obligations of the Parties hereto among themselves.
NOW, THEREFORE, for and in consideration of the premises, and the covenants
and obligations hereinafter set forth, and for other good and valuable
consideration, the receipt and sufficiency of which are hereby acknowledged, the
Parties have agreed, and do hereby evidence their agreement, to the following:
<PAGE>
ARTICLE 1
FARMOUT
1.1 ASSIGNMENT. SOCO Exploration hereby sells, assigns, transfers and
delivers to Territorial an undivided 5% working interest in the Block B8/38
Concession, and SOCO Thaitex hereby sells, assigns, transfers and delivers to
Territorial an undivided 5% working interest in the Block B4/32 Concession, in
each case, free and clear of any liens, security interests, claims,
encumbrances, burdens, liabilities or obligations, other than those created
pursuant to this Agreement and the terms of the Concession as to which that
working interest relates; provided, however, that the obligation to permit Thai
citizens to buy up to 10% of the Concessionaire under the Block B4/32 Concession
in the event of commercial production contained in Clause 6(3) of the Block
B4/32 Concession shall be borne solely by SOCO Thiatex (and shall not impair or
adversely affect the interests of Territorial in the Block B4/32 Concession),
and SOCO Thaitex shall indemnify, defend and hold harmless Territorial from and
against any obligation or liability incurred as a result thereof or in
connection therewith. Without limiting the generality of the foregoing, those
5% working interests (and SOCO confirms and covenants that the 2.5% Additional
Working Interests) are and shall be free of all liens, security interests,
claims, encumbrances, burdens, liabilities and obligations, if any, created
pursuant to or referred to in (i) the letter agreement dated September 6, 1994,
between SOCO International, Inc., et al., and Freeport-McMoran Thaitex Co., et
al. (as the same may have been or may in the future be amended or modified, the
"Freeport-McMoran Letter Agreement"), (ii) the letter agreement dated September
6, 1994, between SOCO International, Inc. and CLK Company (as the same may have
been or may in the future be amended or modified, the "CLK Letter Agreement"),
and (iii) the Farmout Agreement, dated June 9, 1997, between SOCO and MMC
Exploration & Production (Thailand) Ltd. ("MMC") or one or more of its
affiliates (as the same may have been or may in the future be amended or
modified, the "MMC Farmout Agreement"); and all those burdens, liabilities and
obligations, if any, created pursuant to, or referred to in, the Freeport-
McMoran Letter Agreement, the CLK Letter Agreement and the MMC Farmout Agreement
shall be, as between SOCO and Territorial, borne solely by the relevant SOCO
entity. The Parties hereby agree that, as among themselves, to the extent of
any inconsistency between the provisions of this Section 1.1 and the provisions
of the Asset Purchase Agreement, as the same relate to liens, claims, burdens or
other encumbrances with respect to the 2.5% Additional Working Interests created
or existing as result of the Freeport-McMoran Letter Agreement, the CLK Letter
Agreement, the MMC Farmout Agreement or the obligations to permit Thai citizens
to buy up to 10% of the Concessionaire under the Block B4/32 Concession, the
provisions of this Section 1.1 shall control, and shall supersede those
inconsistent provisions in the Asset Purchase Agreement.
1.2 GOVERNMENT CONSENTS. Immediately following the execution hereof, SOCO
will use its commercially reasonable efforts to obtain consents from the
Government of Thailand and its appropriate subdivisions, ministries and
instrumentalities (collectively, the "Government") to the assignments herein
made and to the assignments of the 2.5% Additional Working Interests
(collectively, those interests are sometimes referred to as the "7.5% Working
Interests") in order to vest in Territorial under the laws, rules, orders,
edicts and regulations of Thailand, all right, title and interest therein and
thereto (those consents being referred to herein as the "Government Consents").
The Parties recognize and agree that
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securing those Government Consents may require the execution of one or more
documents and instruments in form acceptable to the Government, and, in that
event, the Parties agree to execute, acknowledge, if appropriate, and deliver
the officially approved documents and instruments to the Government, so long as
the same do not materially alter the rights and obligations of the Parties
without their prior consent, which prior consent shall not be unreasonably
withheld. Territorial will use its commercially reasonable efforts to cooperate
with SOCO in obtaining all requisite Government Consents. If the Government
Consents are not obtained on or before December 31, 1997, then Territorial shall
have the option, as to each Concession:
(a) to reassign those 7.5% Working Interests to the relevant SOCO
entity(ies);
(b) to retain those 7.5% Working Interests and to continue to request the
Government Consents; provided, however, that if the Government Consents are not
obtained on or before June 30, 1998, then Territorial may exercise either of the
options set forth in Sections 1.2(a) or 1.2(c) hereof, in addition to any other
right it may have under this Agreement, any other agreement or under applicable
law; or
(c) to permit SOCO to retain legal title to the Concessions with
Territorial retaining all rights therein, but solely as a beneficial owner of an
undivided 7.5% working interest in and to the Concessions, provided that
Territorial has met all of its monetary obligations hereunder;
provided, however, that the provisions of this Section 1.2 shall not adversely
affect the rights and privileges Territorial may have as to Jimmy M. McCarroll,
or affect Mr. McCarroll's obligations to Territorial, under the Asset Purchase
Agreement.
If Territorial elects the option set forth in Section 1.2(a) above, SOCO
shall protect, defend, indemnify and hold harmless Territorial from and against
any and all losses, costs, liabilities and expenses arising out of or related to
the interests reassigned.
As among the Parties, the provisions of this Section 1.2 shall supersede the
rights and obligations of the Parties hereto set out in Section 4.1 (relating to
Governmental Approvals) of the Asset Purchase Agreement.
1.3 OPERATIONS. As promptly as reasonably practical (and in no event
later than 30 days) after the execution of this Agreement, Territorial and each
of the relevant SOCO entities will enter into joint operating agreements (each a
"Joint Operating Agreement") providing for the designation of SOCO Exploration
as the operator of the Block B8/38 Concession, and of SOCO Thaitex as the
operator of the Block B4/32 Concession, in each case, in form and substance
substantially identical to that entered into between the SOCO entity and MMC
relating to that Block (a copy of which was delivered by the SOCO entities to
Territorial on or before the date hereof) but reflecting the interests of
Territorial in that Joint Operating Agreement. The provisions of this Section
1.3 shall supersede the rights and obligations of the Parties hereto set out in
Section 4.2 (relating to Operator matters) of the Asset Purchase Agreement.
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1.4 SHARING OF COSTS AND EXPENSES. With respect to the first well (or the
substitute well therefor, if required) drilled on the Block B8/38 Concession
pursuant to the provisions of the Joint Operating Agreement governing operations
on that Concession, Territorial shall not be obligated to pay any portion of the
costs and expenses thereof, including without limitation the costs and expenses
of mobilizing the rig to and including the costs and expenses of demobilizing
the rig, from the date hereof until the earlier of (a) the sum of $3,000,000
(including the $450,000 credit allowed to MMC) has been expended in connection
with drilling that well or (b) the first well has been drilled and logged and
the well logging tools have been recovered on the rig floor. Territorial shall
pay 12.5% of all costs and expenses of the first well (or the substitute well
thereof, if required) drilled on the Block B8/38 Concession to casing point in
excess of those set forth in the preceding sentence, and 12.5% of all costs and
expenses of the second well (or the substitute well therefor, if required),
whether that second well is drilled on the Block B8/38 Concession or the Block
B4/32 Concession, until that second well has been drilled and logged and the
well logging tools have been recovered on the rig floor.
Except with respect to the costs and expenses described above (and subject
to the sole risk provision to be included in the relevant Joint Operating
Agreement), all costs and expenses in respect of operations on the Concessions
will be borne in accordance with the provisions of the relevant Joint Operating
Agreement governing operations of the relevant Concession, which shall provide
for Territorial to pay 7.5% of all those costs and expenses, without increases
throughout the term of that Concession unless otherwise agreed to by
Territorial. As between the Parties, to the extent of any inconsistency between
the provisions of this Section 1.4, on the one hand, and the provisions of
clauses (ii) and (iv) of Section 3.2(i) of the Asset Purchase Agreement, on the
other hand, the provisions of this Section 1.4 shall control and shall supersede
the provisions of those clauses of Section 3.2(i) of the Asset Purchase
Agreement.
ARTICLE 2
REPRESENTATIONS AND WARRANTIES OF SOCO
Each of SOCO Exploration and SOCO Thaitex represents and warrants, jointly and
severally, to Territorial as of the date hereof that:
2.1 ORGANIZATION. SOCO Exploration is duly organized, validly existing
and in good standing under the laws of Thailand, and is duly authorized and
qualified under the laws of Thailand to conduct its business with respect to the
Block B8/38 Concession. SOCO Thaitex is duly organized, validly existing and in
good standing under the laws of the State of Delaware, and is duly authorized
and qualified under the laws of Thailand to conduct its business with respect to
the B4/32 Concession. Each of SOCO Exploration and SOCO Thaitex has all
licenses, permits and authorizations necessary to carry on its current business
and conduct its current operations. Each of SOCO Exploration and SOCO Thaitex
has full power and authority to execute and deliver this Agreement and to
perform its obligations hereunder. This Agreement has been duly executed and
delivered by each of SOCO Exploration and
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SOCO Thaitex and constitutes the valid and legally binding obligation of that
Party, enforceable against it in accordance with its terms.
2.2 CONSENTS. Except for the Government Consents, no other notices to,
filings with, or authorizations, consents or approvals from any other
governmental agency or authority or any other party are required in order to
effectively assign the 7.5% Working Interests to be assigned hereby to
Territorial or to perform the other obligations of SOCO hereunder.
2.3 INTERESTS CONVEYED. Subject to the receipt of the Government Consent
with respect thereto, SOCO has conveyed to Territorial an undivided 7.5% Working
Interest in the Block B8/38 Concession and an undivided 7.5% Working Interest in
the Block B4/32 Concession, free and clear of any liens, security interests,
liens, claims, burdens or other encumbrances, other than as provided in Section
1.1 hereof.
2.4 NO VIOLATIONS OF LAW, ETC. Neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, by SOCO
Exploration or SOCO Thaitex will (a) violate any applicable law, rule,
regulation, or order to which that Party is subject or any provision of the
charter or bylaws of that Party or (b) conflict with, result in a breach of,
constitute a default under, create in any party the right to terminate, modify
or change, or require any notice under any agreement, contract, lease, license,
instrument or other agreement to which it is a party, by which it is bound or to
which any of its assets is subject.
2.5 CONCESSION DOCUMENTS. SOCO Exploration and/or SOCO Thaitex has
provided to Territorial (a) a true, complete and correct copy of the written
instrument by which the Block B8/38 Concession was granted (which consists
solely of that certain Petroleum Concession No. 3/2539/50 awarded to SOCO
Exploration by the Ministry of Industry, dated October 24, 1996, and no other
amendments, supplements or modifications thereto) (which is sometimes referred
to herein as the "Block B8/38 Concession"), and (b) a true, complete and correct
copy of the written instrument by which the Block B4/32 Concession was granted
(which consists solely of that certain Petroleum Concession No. 7/2534/42
awarded to THAITEX PETROLEUM COMPANY LIMITED by the Ministry of Industry, dated
September 11, 1991, as the same was amended and supplemented by that certain
Supplementary Petroleum Concession (No. 1) to Petroleum Concession No. 7/2534/42
dated September 4, 1995 (which, as so amended and supplemented, is sometimes
referred to herein as the "Block B4/32 Concession"), and no other amendments,
supplements or modifications thereto). The rights granted to the Concessionaire
under each Concession have not been further amended, supplemented, modified,
diminished or withdrawn, and to the best knowledge of SOCO Exploration and SOCO
Thaitex, no diminution or withdrawal, in whole or in part, has been threatened
or is contemplated.
2.6 STATUS OF DOCUMENTS AND INTERESTS. Each Concession agreement, and the
Concession granted thereunder, is legal, valid, binding and enforceable, and is
in full force and effect; neither party to either Concession agreement is in
breach or default thereunder; and no event has occurred that with notice or
lapse of time would constitute a breach or default
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under, or permit termination or modification of, either Concession agreement.
SOCO Exploration owns 50% of the working interests in the Block B8/38
Concession, subject to the 7.5% working interests conveyed or to be conveyed to
Territorial pursuant to the Asset Purchase Agreement and this Agreement. SOCO
Thaitex owns 50% of the working interests in the Block B4/32 Concession, subject
to the 7.5% working interests conveyed or to be conveyed to Territorial pursuant
to the Asset Purchase Agreement and this Agreement. The Block B4/32 Concession
is in the last year of the Second Obligation Period, as defined in Clause 4 of
the B4/32 Concession, and the only remaining work to be done during the Second
Obligation Period is the drilling of one well.
2.7 COMPLIANCE WITH LAWS. Each of SOCO Exploration and SOCO Thaitex has
complied with all applicable laws, rules, regulations, and orders of the
Government of Thailand and all agencies and instrumentalities thereof (including
without limitation, any of the same pertaining to protection of the environment,
health or safety), and no action, suit, proceeding, hearing, investigation,
charge, complaint, demand, notice or claim has been filed or commenced against
it alleging any failure to so comply.
2.8 NO LAWSUITS, ETC. There are no lawsuits, actions, hearings,
investigations, charges, complaints, demands, claims or administrative or
arbitration proceedings pending, or to the best knowledge of SOCO Exploration
and SOCO Thaitex, threatened against either of them or any of their assets
(including without limitation the Concessions).
2.9 NATURE OF WORKING INTERESTS. Except as otherwise provided in this
Agreement or the Asset Purchase Agreement, SOCO has assigned to Territorial
pursuant to this Agreement and the Asset Purchase Agreement a right, title or
interest that entitles Territorial to receive (a) based on its ownership
interest in the Block B8/38 Concession, 7.5% of the proceeds from the sale of
production from each well located in Block B8/38 throughout the term of the
Block B8/38 Concession, together with at least a like interest in all production
from any additional wells drilled in Block B8/38 after the date hereof and
during the term of that Concession, and (b) based on its ownership interest in
the Block B4/32 Concession, 7.5% of the proceeds from the sale of production
from each well located in Block B4/32 throughout the term of the Block B4/32
Concession, together with at least a like interest in all production from any
additional wells drilled in Block B4/32 after the date hereof and during the
term of that Concession.
2.10 NO UNPERFORMED OBLIGATIONS. There is no currently outstanding
obligation, debt or other liability relating to any of the 7.5% Working
Interests that has not been paid or performed on or before the date hereof, and
all obligations, debts or other liabilities relating to any of the 7.5% Working
Interests relating to periods on or prior to the date hereof have been paid or
performed in full. There has not occurred any event, fact or circumstance,
whether or not with the lapse of time or the giving of notice, would constitute
a breach or default by any party with respect to any of the 7.5% Working
Interests.
2.11 NO BROKERAGE FEES. Territorial shall not be subject to any
brokerage, finders' or other similar fees incurred by any SOCO entity and each
SOCO entity shall indemnify,
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defend and hold harmless Territorial from and against any cost, expense,
liability or obligation incurred by Territorial in connection therewith.
2.12 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by either SOCO Exploration or SOCO Thaitex, insofar as it relates to
either of them, any of the 7.5% Working Interests, the Concessions or the
transactions consummated hereby or under the Asset Purchase Agreement, contains
any untrue statement of a material fact or omits to state any material fact
required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which there are made, not
misleading.
ARTICLE 3
REPRESENTATIONS AND WARRANTIES OF TERRITORIAL
Territorial represents and warrants to SOCO Exploration and to SOCO Thaitex
as of the date hereof that:
3.1 ORGANIZATION. Territorial is duly organized, validly existing and in
good standing under the laws of the State of Delaware, and is duly authorized
and qualified under those laws to conduct its business as currently conducted by
it. Territorial has all licenses, permits and authorizations necessary to carry
on its current business and conduct its current operations. Territorial has
full power and authority to execute and deliver this Agreement and to perform
its obligations hereunder. This Agreement has been duly executed and delivered
by Territorial and constitutes the valid and legally binding obligation of
Territorial, enforceable against it in accordance with its terms.
3.2 CONSENTS. No other notices to, filings with, or authorizations,
consents or approvals from any other governmental agency or authority or any
other party are required in order to enter into this Agreement and perform its
obligations hereunder.
3.3 NO VIOLATIONS OF LAW, ETC. Neither the execution and delivery of this
Agreement, nor the consummation of the transactions contemplated hereby, by
Territorial will (a) violate any applicable law, rule, regulation, or order to
which it is subject or any provision of its charter or bylaws, nor will those
transactions violate any applicable law, rule, regulation or order to which it
is subject or any provision of its charter or bylaws or (b) conflict with,
result in a breach of, constitute a default under, create in any party the right
to terminate, modify or change, or require any notice under any agreement,
contract, lease, license, instrument or other agreement to which it or
Territorial is a party, by which it is bound or to which any of its assets is
subject.
3.4 NO LAWSUITS, ETC. There are no lawsuits, actions, hearings,
investigations, charges, complaints, demands, claims or administrative or
arbitration proceedings pending, or to the best knowledge of Territorial,
threatened against it or any of its assets.
3.5 NO BROKERAGE FEES. Neither of the SOCO entities shall be subject to
any brokerage, finders' or other similar fees incurred by Territorial, and
Territorial shall
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indemnify, defend and hold harmless each SOCO entity from and against any cost,
expense, liability or obligation incurred by either SOCO entity in connection
therewith.
3.6 INFORMATION SUPPLIED. None of the information supplied or to be
supplied by Territorial, insofar as it relates to Territorial or the
transactions to be consummated hereby or under the Asset Purchase Agreement,
contains any untrue statement of a material fact or omits to state any material
fact required to be stated therein or necessary in order to make the statements
therein, in light of the circumstances under which there are made, not
misleading.
ARTICLE 4
CONFIDENTIALITY
4.1 CONFIDENTIAL INFORMATION DEFINED. Each Party acknowledges and agrees
that, on and after the date of this Agreement and continuing during the term of
this Joint Operating Agreements, it will have copies of or access to proprietary
information regarding the Concessions, all of which proprietary information is
referred to herein as "Confidential Information." The Parties acknowledge and
agree that the disclosure of Confidential Information will prove to be injurious
to the business and prospects of the Parties and, except as specifically
provided in this Article 4, each Party shall hold all of the Confidential
Information in confidence, and neither Party nor its affiliates, nor any of a
Party's or its affiliates' officers, shareholders, directors or employees, shall
disclose all or any part of the Confidential Information to any person not a
Party, without the prior written consent of the other Parties.
4.2 CERTAIN DISCLOSURES. Notwithstanding the foregoing, the provisions of
Section 4.1 hereof shall not apply to any Confidential Information which (a) was
or becomes within the public domain or available to the public (other than by a
disclosure by a Party in contravention of the terms of this Agreement), (b) a
party shall be required to disclose to any court, governmental entity, agency or
stock exchange pursuant to applicable regulations or rules of a stock exchange
or pursuant to any applicable law, rule or regulation or order of any
governmental authority, including without limitation any applicable securities-
related law, rule, regulation or order, (c) is required to be disclosed to
consultants or other professionals in connection with the performance of a duty
upon being employed or retained by a Party in respect of the evaluation,
auditing or other work performed in respect of one or both of the Concessions,
(d) a Party may be required to disclose to a bank, financial institution or
lender in connection with any proposed financing transaction, (e) a Party may
disclose to a prospective bona fide purchaser, (f) a Party may disclose to an
affiliate which is an assignee of a Party, (g) a Party may disclose to any
shareholder owning directly or indirectly five percent (5%) or more of the
voting securities of a Party or (h) a Party may disclose to any proper
arbitrator or other authority in connection with enforcing its rights or the
obligations of any other Party hereto; provided, however, that in the instance
of a disclosure under clauses (c), (d), (e), (f) or (g) of this Section, the
Party shall use its commercially reasonable efforts to obtain additional
assurances of confidentiality from the person or party to whom disclosure is
made to continue to preserve the confidentiality provisions hereof.
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4.3 PRESS RELEASES. Each Party shall consult with the other Parties
before the release of any press releases and other announcements concerning this
Agreement or the transactions contemplated hereby, and except as required by
applicable law, rule, regulation or order, or by any applicable stock exchange
rules or regulations, as determined in good faith by the Party proposing to make
a press release or other announcement, no Party shall issue any press release or
other announcement without the prior written consent of the other Parties.
ARTICLE 5
MISCELLANEOUS
5.1 INFORMATION. Subject to the restrictions imposed by any applicable
law, each of SOCO Exploration and SOCO Thaitex agrees to permit representatives
of Territorial to have full access at all reasonable times to all premises,
properties, personnel, books, records, contracts and documents pertaining to the
Concessions.
5.2 FURTHER ASSURANCES. From time to time hereafter and without further
consideration, each of the Parties shall execute and deliver any additional or
further instruments of conveyance, assignment, assumption and transfer, and take
any actions, as any other Party may reasonably request in order to more
effectively convey and transfer to the other Party the assets, rights or other
property to be sold or conveyed to the other Party hereunder or as shall be
reasonably necessary or appropriate in connection with the carrying out of the
other Party's obligations hereunder or the purposes of this Agreement.
5.3 WAIVER OF BREACH. The failure of a Party to insist upon strict
performance of any provision hereof shall not constitute a waiver of or estoppel
against asserting the right to require performance in the future, nor shall a
waiver or estoppel in any one instance constitute a wavier or estoppel with
respect to a later breach of a similar nature otherwise.
5.4 NO PARTNERSHIP CREATED. It is not the intention of the Parties to
create a partnership, association, trust or other business entity cognizable in
law as a result of this Agreement and the transactions contemplated hereby. The
duties, obligations and liabilities of the Parties are intended and declared to
be separate and individual and not joint or collective, and nothing contained in
this Agreement, or in any agreement made pursuant hereto, shall ever be
construed to create a partnership, association, trust or other business entity
cognizable in law for any purpose, or to impose a partnership duty, obligation
or liability with respect to the Parties.
5.5 SURVIVAL OF REPRESENTATIONS AND WARRANTIES. The representations and
warranties of the Parties shall not be deemed waived or otherwise affected by
any investigation made by any other Party. Each representation and warranty
shall continue for a period of three (3) years after the date hereof. The
provisions of this Section shall have no effect upon any other obligation of the
Parties, whether to be performed before or after the date hereof.
5.6 AMENDMENT AND MODIFICATION. This Agreement may not be amended except
by an instrument in writing signed by all of the Parties.
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5.7 NOTICES. All notices, requests, demands, waivers and other
communications required or permitted to be given under this Agreement shall be
in writing and shall be deemed to have been duly given if delivered personally
or mailed, certified or registered mail with postage prepaid, or sent by telex,
telegram or telecopier, as follows (or at any other address or facsimile number
for a Party as shall be specified by like notice):
If to Territorial, at
Territorial Resources (Delaware), Inc.
c/o Territorial Resources, Inc.
734 7th Avenue S.W., Suite 1345
Canada T2P 3P8
(Fax No.) 403.233.7354
Attn: Daniel A. Mercier
If to SOCO Exploration or SOCO Thaitex, at:
[insert name of SOCO entity to receive notice]
c/o SOCO International, Inc.
622 High Street
P.O. Box 399
Comfort, Texas 78013
(Fax No.) 210.995.5027
Attn: Mr. Edward T. Story
5.8 EXPENSES. Except as otherwise expressly provided in this Agreement,
all costs and expenses incurred in connection with this Agreement and the
transactions contemplated hereby shall be paid by the Party incurring those
costs and expenses whether or not the transactions contemplated hereby are
consummated.
5.9 ENTIRE AGREEMENT; ASSIGNMENT. This Agreement, including all exhibits
hereto, (a) constitutes the entire agreement among the Parties with respect to
its subject matter and supersedes all prior agreements and understandings, both
written and oral, between the Parties, their affiliates or any of them with
respect to that subject matter (provided, however, that the provisions of the
Asset Purchase Agreement shall not be superseded or otherwise affected by this
Agreement, other than as expressly provided herein) and (b) shall not be
assigned by operation of law or otherwise without the express prior written
consent of the other Party.
5.10 BINDING EFFECT; BENEFIT. Subject to the provisions of Section 5.9
hereof, this Agreement shall inure to the benefit of and be binding upon the
Parties and their successors and assigns. Nothing in this Agreement is intended
to confer on any person other than the Parties to this Agreement or their
successors and assigns any rights, remedies, obligations or liabilities under or
by reason of this Agreement.
5.11 HEADINGS. The descriptive headings of the articles, sections,
subsections, exhibits and schedules of this Agreement are inserted for
convenience only, do not constitute a
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part of this Agreement and shall not affect in any way the meaning or
interpretation of this Agreement.
5.12 COUNTERPARTS; FACSIMILE SIGNATURES. This Agreement may be executed
in counterparts, each of which shall be deemed to be an original, and all of
which together shall be deemed to be one and the same instrument. Execution of
this Agreement may be evidenced by a signature delivered by or on behalf of a
Party via facsimile, which facsimile signature shall be confirmed by telephone,
and once so confirmed, shall constitute an effective signature of the Party on
whose behalf the facsimile signature is provided.
5.13 GOVERNING LAW. This Agreement shall be governed by and construed in
accordance with the laws of the State of Delaware, without regard to the laws
that might otherwise govern under principles of conflicts of laws applicable
thereto.
5.14 SEVERABILITY. If any term, provision, covenant or restriction of
this Agreement is held by a court of competent jurisdiction or other authority
to be invalid, void, unenforceable or against its regulatory policy, the
remainder of this Agreement shall remain in full force and effect and shall in
no way be affected, impaired or invalidated.
IN WITNESS WHEREOF, each of the Parties has caused this Agreement to be
duly executed by it or on its behalf, all as of the date first written above.
TERRITORIAL RESOURCES (DELAWARE), INC.
By:/s/
Name:___________________________________
As Its Authorized:______________________
SOCO EXPLORATION (THAILAND) COMPANY LIMITED
By:/s/
Name:___________________________________
As Its Authorized:______________________
SOCO THAITEX, INC.
By:/s/
Name:___________________________________
As Its Authorized:______________________
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EXHIBIT 10.9
STOCKHOLDERS' AGREEMENT
THIS STOCKHOLDERS' AGREEMENT is made effective as of the 7th day of
November, 1994, by and among SOCO International, Inc., a corporation organized
under the laws of the State of Delaware ("SOCO"), PT. BIP Energimas, a
corporation organized under the laws of the Republic of Indonesia ("BIP"),
Corbin Associates Limited, a corporation organized under the laws of the
Territories of the British Virgin Islands ("Corbin"), and SOCO Tamtsag Mongolia,
Inc., a Delaware close corporation (the "Company").
RECITALS
1. Pursuant to the provisions of this Agreement, the Stockholders have
caused the organization and formation of the Company for the purpose of
consummating the transactions to be performed by the Company as set forth in
that certain Stock Purchase Agreement (the "Stock Purchase Agreement") of even
date herewith by and among the Company, SOCO, BIP, Corbin and the other Persons
named as parties therein.
2. The Stockholders desire to enter this Agreement to provide for the
management of the business and affairs of the Company and for other matters
concerning the Company about which the Stockholders desire to have a written
agreement.
ARTICLE I
DEFINITIONS
In consideration of the mutual covenants and agreements between and among
the Parties contained herein, the Parties agree as follows:
SECTION 1.1 DEFINITIONS. When used in this Agreement, the following words
and terms shall have the following respective definitions (and such definitions
shall be equally applicable to the singular and plural forms, and all
grammatical variations, of such terms):
(a) "Advance Date" has the meaning ascribed thereto in Section 6.3(c).
(b) "Advancing Stockholder Loan" has the meaning ascribed thereto in
Section 6.3(c).
(c) "Advancing Stockholder Loan Note" has the meaning ascribed thereto in
Section 6.3(c).
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(d) "Agreement" means this Stockholders' Agreement and the Exhibits.
(e) "Affiliate" means with respect to any Person, any other Person that
directly, or indirectly through one or more intermediaries, controls, or is
controlled by, or is under common control with such Person. For the purposes of
this definition of Affiliate, "control" shall mean the possession, direct or
indirect, of the power to direct or cause direction of the management or
policies of such Person and, without limitation, a Person shall be deemed to
have such power if it owns 50% or more of such other Person's equity and voting
securities.
(f) "Aggrieving Party" has the meaning ascribed thereto in Section 8.2.
(g) "Annual Budget" means a document in the form approved by the Board of
Directors.
(h) "Approved Annual Budget" has the meaning ascribed thereto in Section
4.6.
(i) "Arbitration Act" has the meaning ascribed thereto in Section 7.1.
(j) "Assumption Agreement" means a document in the form of Exhibit F.
(k) "BIP" means PT. BIP Energimas, a corporation organized under the laws
of the Republic of Indonesia.
(l) "Close Corporation Provisions" has the meaning ascribed thereto in
Section 9.1.
(m) "Closing Date" means the date that the Closing (as defined in the Stock
Purchase Agreement) occurs.
(n) "CNUOC" means China National United Oil Corporation, a joint venture
established under the laws of the People's Republic of China between China
National Petroleum Corporation and Sino Chemical Import & Export Corporation.
(o) "Code" means the Internal Revenue Code of 1986, as amended, and the
Treasury Regulations issued thereunder.
(p) "Common Stock" means the $.00l par value, common stock of the Company
as authorized by its Certificate of Incorporation.
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(q) "Company" means SOCO Tamtsag Mongolia, Inc., a Delaware close
corporation.
(r) "Company Office" has the meaning ascribed thereto in Section 3.1.
(s) "Contract Area" has the meaning ascribed thereto in the PSC.
(t) "Controversy" or "Controversies" has the meaning ascribed thereto in
Section 7.1.
(u) "Corbin" means Corbin Associates Limited, a corporation organized under
the laws of the Territories of the British Virgin Islands.
(v) "Covered Parties" has the meaning ascribed thereto in Section 7.1.
(w) "Default Rate" means the Loan Rate plus four per cent (4%).
(x) "Deferred Payment" has the meaning ascribed thereto in the Stock
Purchase Agreement.
(y) "Designating Stockholder" has the meaning ascribed thereto in Section
4.1(b).
(z) "Designation" has the meaning ascribed thereto in Section 3.5.
(aa) "Director's Proxy" means a proxy granted by a Director to another
Director or any adviser pursuant to and in accordance with Section 4.5(e).
(ab) "Director's Proxy Holder" means the Director or any adviser designated
as the person authorized, on behalf of the Director granting the Director's
Proxy, to exercise the powers and rights granted in the Director's Proxy.
(ac) "Disposition" means any sale, assignment, transfer, conveyance,
donation, contribution, granting of a direct equity interest in, distribution or
other alienation or disposition (not including a Pledge or divestiture resulting
from the exercise of remedies after default pursuant to a Pledge), of all or any
of the Shares (or right thereto).
(ad) "Eligible Investments" means one or more of the following obligations
or securities:
(i) direct obligations of, and obligations fully guaranteed by, the
United States of America, the United Kingdom or Hong Kong, or any agency or
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instrumentality of the United States of America, the United Kingdom or Hong
Kong, the obligations of which are backed by the full faith and credit of
the United States of America, the United Kingdom or Hong Kong, as the case
may be; or
(ii) demand and time deposits in, certificates of deposits of,
banker's acceptances issued by, or federal funds sold by, or any other
commercial security issued by any recognized financial institution located
in (and fully regulated by the authorities in) the United States of America,
the United Kingdom or Hong Kong.
(ae) "Expenses" means all expenses of the Company of whatever nature
incurred in connection with the conduct of its business activities.
(af) "Fiscal Year" has the meaning ascribed thereto in Section 5.4.
(ag) "Formation Date" means November 7, 1994.
(ah) "IRS" means the Internal Revenue Service.
(ai) "JOA" means the Joint Operating Agreement, if any, that the Company
and any other working interest owners may enter into with respect to a Contract
Area.
(aj) "Loan Rate" means, from time to time, a rate equal to the London
Interbank Offer Rate for maturities of 90 days, plus two per cent (2%).
(ak) "Major Decision" has the meaning ascribed thereto in Section 4.4(b).
(al) "Mandatory Loan" has the meaning ascribed thereto in Section 6.2.
(am) "Mandatory Loan Date" has the meaning ascribed thereto in Section
6.2.
(an) "Mandatory Loan Note" means a document in the form of Exhibit E.
(ao) "Mandatory Loan Notice" has the meaning ascribed thereto in Section
6.2.
(ap) "Mandatory Loan Obligation" has the meaning ascribed thereto in
Section 6.2.
(aq) "Mandatory Loan Obligation Default" has the meaning ascribed thereto
in Section 6.3.
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(ar) "Maturity Date" has the meaning ascribed thereto in Section 6.2.
(as) "MGT" means the Petroleum Authority of Mongolia
(at) "MMOC" means Medallion Mongolia Oil Company, a corporation organized
under the laws of the State of Texas.
(au) "MMOC PSC" means that certain Production Sharing Contract entered into
on the 26th day of April, 1993 by and between MGT and MMOC.
(av) "Non-defaulting Stockholders" has the meaning ascribed thereto in
Section 6.3.
(aw) "Notice" has the meaning ascribed thereto in Section 12.2.
(ax) "Party" means any, and "Parties" means all, of the Stockholders and
the Company.
(ay) "Person" means an individual, partnership, corporation, limited
liability company, business trust, joint stock company, trust, unincorporated
association, joint venture, governmental authority or other entity of whatever
nature.
(az) "Pledge" means any mortgage, pledge, hypothecation, encumbrance or
security interest of or in all or any portion of the interest of a Stockholder
in any Shares (or right thereto) which is collateral security for any obligation
or indebtedness of such Stockholder, and which may be accompanied by
constitutional, statutory or contractual powers of sale.
(ba) "Proposed Price" means an amount which:
(i) is expressed in terms of dollars per Share (which price must be
equal for each Share in the class of such Shares);
(ii) provides for payment of such amount in cash, or by issuance of
a single promissory note, or a combination of cash and a single promissory
note; and
(iii) if evidenced by a promissory note, does not provide that such
note:
(A) be made, guaranteed, endorsed or otherwise insured by anyone
other than the proposed Transferee; or
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(B) be secured by any collateral other than all or a portion of the
Shares.
(bb) "Proposed Transferor" has the meaning ascribed thereto in
Section 11.3(a).
(bc) "PSC" means collectively the MMOC PSC and the SOCO Mongolia PSC.
(bd) "Qualified Affiliate" means the sole stockholder or wholly owned
subsidiary of a Stockholder.
(be) "Relevant Time" has the meaning ascribed thereto in Section 6.3(g).
(bf) "Representative" has the meaning ascribed thereto in Section 3.5.
(bg) "Rules" has the meaning ascribed thereto in Section 7.1.
(bh) "Seismic Agreement" means a document in the form of Exhibit I.
(bi) "Shares" means:
(i) all shares of capital stock of the Company (including the Common
Stock) issued to or otherwise owned or held, legally or beneficially,
directly or indirectly, of record or otherwise, by a Stockholder;
(ii) any additional shares of capital stock of the Company which may
be issued to or otherwise owned, held or acquired by a Stockholder, whether
issued incident to any stock split, stock dividend, increase in
capitalization, recapitalization, or in any manner, and whether held legally
or beneficially, directly or indirectly, of record or otherwise, at any time
during the term of this Agreement; and
(iii) all shares of capital stock or any other voting security of any
entity issued incident to any merger, consolidation or other reorganization
or like transaction by the Company, and received or acquired with respect to
any shares of capital stock of the Company.
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(bj) "SOCO" means SOCO International, Inc., a corporation organized under
the laws of the State of Delaware.
(bk) "SOCO Mongolia" means SOCO Mongolia, Inc., a corporation organized
under the laws of the State of Delaware.
(bl) "SOCO Mongolia PSC" means that certain Production Sharing Contract
entered into on the 29th day of March, 1993 by and between MGT and SOCO
Mongolia.
(bm) "SOCO Mongolia Stock" means the common capital stock, $1.00 par value
per share, of SOCO Mongolia.
(bn) "Stock Purchase Agreement" has the meaning ascribed thereto in the
recitals.
(bo) "Stockholder" means any, and "Stockholders" means all, of the
stockholders of the Company from time to time, whether such Persons are Parties
or their permitted Transferees.
(bp) "Stockholder's Proxy" has the meaning ascribed thereto in Section 4.6.
(bq) "Stockholder's Proxy Holder" has the meaning ascribed thereto in
Section 4.6.
(br) "Story" means Edward T. Story, Jr., the President of SOCO.
(bs) "Technical and Administrative Services Agreement" means the Technical
and Administrative Services Agreement by and between the Company and SOCO, as
approved by the Board of Directors in accordance with the provisions of Section
4.4(b).
(bt) "Transfer" means a Disposition or Pledge.
(bu) "Transferee" means any Person to whom a Transfer is made, or who
acquires an interest as the result of the exercise of remedies after default
pursuant to a Pledge, or who acquires an interest by operation of law or in any
other lawful manner.
(bv) "Transferor" means any Person who makes a Transfer.
(bw) "Well Agreement" means a document in the form of Exhibit H.
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SECTION 1.2 DEFINITIONS APPEARING ELSEWHERE IN THIS AGREEMENT. The terms
used in this Agreement which are defined in (a) the introductory paragraph of
this Agreement, (b) the recitals of this Agreement and (c) the further Sections
of this Agreement shall have the respective definitions therein ascribed to
them.
SECTION 1.3 ACCOUNTING PRINCIPLES AND TERNS. The reference to generally
accepted accounting principles in this Agreement, and any other accounting terms
not specifically defined herein, shall, to the extent not inconsistent with
specific definitions herein, be construed in accordance with generally accepted
accounting principles in the United States, consistently applied, as such
principles are in effect from time to time, including, without limitation,
applicable statements, bulletins, and interpretations issued by the Financial
Accounting Standards Board and bulletins, opinions, interpretations, and
statements issued by the American Institute of Certified Public Accountants or
its committees. If, however, any changes in accounting principles from those
presently in effect are hereafter occasioned by the promulgation of rules,
regulations, pronouncements, or opinions of or required by the Financial
Accounting Standards Board or the American Institute of Certified Public
Accountants (or successors thereto or agencies with similar functions), or there
shall occur any change in the Company's fiscal or tax years and, as a result of
any such changes, there shall be a change in the meaning or effect of any terms
or conditions found in this Agreement, then the Parties agree to enter into
negotiations in order to amend such provisions so as equitably to reflect such
changes, with the desired result that the criteria for evaluating events or
conditions shall be the same after such changes as if such changes had not been
made. The accounting principles, as so changed, may be referenced in this
Agreement as "generally accepted accounting principles".
SECTION 1.4 DEFINITIONS NOT APPEARING IN THIS AGREEMENT. Any terms used in
this Agreement which are not defined herein but which are defined in the Stock
Purchase Agreement shall have the same meanings in this Agreement as provided in
such documents, unless the context otherwise requires.
ARTICLE H
ORGANIZATION OF THE COMPANY
SECTION 2.1 CERTIFICATE OF INCORPORATION. The Stockholders approve the
form of the Certificate of Incorporation for the Company which is attached to
this Agreement as Exhibit "A".
SECTION 2.2 FORMATION OF THE COMPANY. On or before the Closing Date, SOCO
has caused the Certificate of Incorporation of the Company to be filed in the
appropriate public offices of the State of Delaware, and shall take such other
actions as shall be necessary to cause the Company to be formed as a Delaware
close corporation.
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SECTION 2.3 ORGANIZATION OF THE COMPANY AND DIRECTORS' AND STOCKHOLDERS'
RESOLUTIONS. The Stockholders approve the forms of Directors' and
Stockholders' Resolutions providing for the organization of the Company in
accordance with the terms of this Agreement, copies of which are attached as
Exhibits "C" and "D", respectively. On the Closing Date, the Stockholders agree
to cause the Directors of the Company to adopt such Directors' Resolutions by
unanimous written consent, and agree to adopt the Stockholders' Resolutions by
unanimous written consent. Among other matters, such Directors' Resolutions
provide for the adoption of the Bylaws, the approval of this Agreement and the
issuance of Shares to the Stockholders as contemplated hereby.
ARTICLE III
BUSINESS OF THE COMPANY
SECTION 3.1 PLACE OF BUSINESS. The Company's place of business (the "Company
Office") shall be located in Houston, Texas, or at such other place or places as
the Board of Directors may from time to time designate.
SECTION 3.2 PURPOSES AND OBJECTIVE. The purposes of the Company are to
consummate the transactions provided for in the Stock Purchase Agreement that
are to be performed by the Company, including, without limitation, the purchase
of the SOCO Mongolia Stock and thereby acquiring SOCO Mongolia, and thereby
participating indirectly in Blocks XIX, XXI and XXII in accordance with the
provisions of the PSC; to own and hold the SOCO Mongolia Stock; and to manage
SOCO Mongolia, to exercise the rights and privileges of SOCO Mongolia as
provided in the PSC and to provide financial, management and consulting services
to SOCO Mongolia. The objective of the Company shall be to operate profitably
and for the economic benefit and in the best interest of the Stockholders.
SECTION 3.3 BUSINESS OPPORTUNITIES AS PROPERTY OF THE COMPANY. Except as
expressly provided to the contrary in the further provisions of this Section
3.3, each Stockholder agrees that any business or investment opportunity
identified by such Stockholder or any Affiliate thereof, that is within the
purposes of the Company as set forth in Section 3.2, shall be the property of
the Company; that the Company shall have the exclusive right to pursue such
opportunity; and that such opportunity shall be referred to the Company promptly
after being identified. This covenant shall be binding on the Stockholders and
their successors and assigns; provided, however, the Parties specifically
recognize and agree that each Stockholder is currently engaged in the
exploration for and the production of oil, gas and other minerals, and each
Stockholder shall have the right to continue or initiate such further
activities, individually, jointly with others, or as a part of any other joint
venture, limited or general partnership or other entity in which it is or may
become a party, in the Republic of Mongolia or in
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any other locale, except for those specific licenses or concessions in which
either the Company or SOCO Mongolia owns an interest. No provision of this
Agreement shall be construed as requiring a Stockholder to permit the Company,
SOCO Mongolia or another Stockholder to participate in any of its operations in
which such Stockholder may now or hereafter be interested.
SECTION 3.4 ADOPTION OF BYLAWS. The Stockholders hereby approve and adopt
the Bylaws in the form attached hereto as Exhibit "B" as the Bylaws of the
Company. In addition, such Bylaws are incorporated by reference herein and
shall have the force and effect of a covenant and agreement contained herein. If
the Stockholders amend or modify this Agreement, then the Stockholders agree to
amend, modify or replace the Certificate of Incorporation and/or the Bylaws as
may be necessary to describe accurately the agreement of the Stockholders
regarding the matters addressed in the Bylaws.
SECTION 3.5 STOCKHOLDERS' REPRESENTATIVES. At the request of the Managing
Director, each Stockholder shall designate in writing (the "Designation"),
those individuals, any one of which (which individual shall be referred to as
the "Representative"), is from the date thereof duly authorized to act on
behalf of and bind such Stockholder with regard to all Company matters and
affairs, including, without limitation, Major Decisions. The other Stockholders
and the Managing Director shall be entitled to rely for all purposes hereof upon
any communication or instruments in writing, issued or executed by any such
Representative of a Stockholder as being binding upon, and made on the behalf
of, that Stockholder, until receipt by the Managing Director of a new
Designation designating another Representative. Unless otherwise provided in the
Designation or unless a proxy is otherwise granted with respect to a meeting or
meetings, any such Stockholder's Representative shall be deemed to have all
rights, powers and privileges of a proxy of such Stockholder, with full power to
exercise all voting powers attributable to the Shares held by such Stockholder
and to execute written consents on the Stockholder's behalf. A Designation may
not be made irrevocable, but it shall not be deemed to be revoked merely by the
grant of a proxy. Nothing contained in this Section 3.5 shall be deemed to limit
or affect the power of Stockholders to grant proxies or the scope and terms of
such proxies. Additional provisions, not inconsistent with the foregoing,
concerning Representatives may be set forth in the Bylaws.
SECTION 3.6 STOCKHOLDER'S PROXY. A Stockholder may grant a Stockholder's
Proxy to another Stockholder or to any adviser designated in writing by a
Representative. Any such Stockholder who has granted a Stockholder's Proxy shall
be deemed present at a meeting for quorum purposes if his Stockholder's Proxy
Holder attends such meeting. A Stockholder's Proxy may be irrevocable, shall be
in writing, shall be dated and shall not confer any power on the Stockholder's
Proxy Holder to make a decision on behalf of a Stockholder to approve any Major
Decision unless the Stockholder's Proxy is specifically given to make such Major
Decision with respect to the specific event giving
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rise to such Major Decision. In addition, the Stockholder's Proxy may provide
that the Stockholder's Proxy Holder may execute written consents in the name of
and on the behalf of the Stockholder granting such Stockholder's Proxy, and any
such written consent executed by such Stockholder's Proxy Holder will be treated
as if the Stockholder granting such Stockholder's Proxy had executed such
written consent. Also, the Stockholder's Proxy may provide that delivery of
notices of Stockholders' meetings and any other notices required or permitted by
law to be given to the Stockholder granting the Stockholder's Proxy will be
sufficient if given to the Stockholder's Proxy Holder. The Stockholder granting
any Stockholder's Proxy, however, shall be responsible for all decisions made
and actions taken by the Stockholder's Proxy Holder in the exercise of such
Stockholder's Proxy to the same extent as he would be responsible if he had
participated in the decision or had taken the action himself.
SECTION 3.7 STOCKHOLDERS' VOTING. In respect of any matter to be
determined by the Stockholders, the vote required for its approval shall, unless
otherwise specified in the Certificate of Incorporation, the Bylaws or this
Agreement, be the same as if such matter was to be voted on by the Board of
Directors.
ARTICLE IV
CONTROL AND MANAGEMENT OF THE COMPANY
SECTION 4.1 BOARD OF DIRECTORS.
(a) The Stockholders agree that the Board of Directors of the Company shall
have no more than six positions (the persons from time to time elected to fill
such positions being herein referred to as "Directors" and collectively referred
to herein as the "Board of Directors"). Until the Stockholders otherwise
unanimously amend this Agreement or the Certificate of Incorporation, or this
Agreement is terminated, the Board of Directors shall not include more than six
members without the unanimous agreement of all Stockholders. Subject to the
foregoing, the size of the Board of Directors shall be established by the Board
from time to time but it shall not be more nor less than the aggregate number of
Directors the Stockholders are empowered to appoint.
(b) Each Stockholder owning 25% or more of the outstanding Shares shall
have the right and power to appoint and elect two persons to the Board of
Directors at each annual meeting of the Stockholders and to remove any person so
appointed. Each Stockholder owning less than 25% of the outstanding Shares
shall have the right and power to appoint and elect one person to the Board of
Directors at each such meeting and to remove any person so appointed. (Each
Stockholder exercising the right and power to appoint and elect person(s) to the
Board of Directors is a "Designating
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Stockholder".) If a vacancy occurs on the Board of Directors for any reason
whatsoever (other than by an increase in directorships, which shall be governed
by Article III, Section 3 of the Bylaws), then the Stockholder which shall have
appointed and caused the election of the Director whose departure has occasioned
the vacancy shall have the right to appoint and elect a replacement for such
vacating Director, which replacement shall serve for the remainder of the term
of such vacating Director. During the term of this Agreement, no Director shall
be removed from the Board of Directors without his written consent except, as
provided above, by the Stockholder that appointed him and caused his election.
Each Stockholder agrees to take such action as necessary to approve the
appointment and election of each of the Director(s) the Designating Stockholder
appoints and elects to be Director(s) as provided above, although such approval
shall not be a condition to the exercise of any right, power or privilege by the
Director(s) that the Designating Stockholder is entitled to appoint and elect
and the failure of any other Stockholder to grant such formal approval shall not
disqualify any Director so appointed and elected. Notwithstanding the foregoing,
at such time as the number of Shares held by a Designating Stockholder is
reduced to a level such that it would no longer be entitled to appoint the
person or persons then serving on the Board of Directors on behalf of such
Designating Stockholder, it hereby covenants and agrees that it shall
immediately remove any and all such persons it is not entitled to appoint.
(c) At all meetings of the Board of Directors the Director or Directors
appointed by each Designating Stockholder shall vote as a single group and such
group shall be entitled to cast one vote for each Share owned by such
Stockholder.
(d) The Managing Director shall cause minutes of the meetings of the
Stockholders and the Board of Directors to be kept and circulated to the
Stockholders and the Directors, respectively, within 21 days after a meeting.
The minutes of each meeting shall be deemed to be accepted by the Stockholders
or the Directors, as the case may be, unless a written objection is received by
the Managing Director within 20 days of a Stockholder's or Director's receipt,
as the case may be, of the draft circulated by the Managing Director.
(e) The Stockholders agree that the Board of Directors may in its
discretion appoint an Advisory Board of Directors in accordance with the
provisions of Article III, Section 7 of the Bylaws.
SECTION 4.2 MANAGING DIRECTOR; SECRETARY AND ASSISTANT SECRETARY.
(a) The Managing Director shall be Story, who is deemed to be appointed by
SOCO, which appointment shall have been ratified and approved as provided in the
Directors' Resolutions and Stockholders' Resolutions.
(b) The Managing Director shall not be removed except (i) as a Major
Decision taken pursuant to Section 4.4, (ii) pursuant to Section 4.7, or (iii)
if the
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Stockholder who appointed and elected him is in default in accordance with
Section 6.4. Appointment of a successor Managing Director in replacement of one
who has vacated such position (whether by removal as aforesaid or otherwise)
shall be a Major Decision taken pursuant to Section 4.4.
(c) The Secretary shall be appointed by the Board of Directors and the
Assistant Secretary appointed by the BIP.
SECTION 4.3 RESPONSIBILITY FOR MANAGEMENT. Subject to Section 4.4, the
Managing Director shall:
(a) be responsible for managing the Company's business and affairs;
(b) cause the Company's and SOCO Mongolia's respective business and affairs
to be conducted in a good and workmanlike manner in accordance with good
international oil and gas industry practice and in compliance with the
provisions of the PSC and this Agreement;
(c) regularly consult with the other officers concerning operations and
keep the Board of Directors currently advised of all important matters arising
in connection therewith;
(d) or his designee, be the SOCO Mongolia representative on any joint
operating committee, exploration advisory committee, operating committee or such
other committee as may be established for the Contract Area (such representation
to be in accordance with the determinations of the Board of Directors);
(e) shall use his reasonable best efforts to ensure that each Stockholder
shall:
(i) have free access at its own risk and expense to the area of
joint operations at any reasonable time, with right to follow as observer
any current operations and the right to inspect all materials, equipment and
property, and all available information pertaining to joint operations
provided that such rights are not exercised in such manner that they might
interfere with the operations conducted by the operator;
(ii) obtain reports on the operations issued by the operator;
(iii) obtain, upon request and, subject to Section 5.3(g), at its own
expense, copies of any documentation concerning joint operations, as well
as, to the extent available, samples, cores and cuttings; and
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(iv) have the right (if requested by such Stockholder) to be present
as an observer at all meetings of any joint operating committee, exploration
advisory committee, operating committee or other committee and all technical
or other sub-committees of any thereof;
(f) promptly deliver to each Stockholder a copy of each document SOCO
Mongolia or the Company receives from or sends to MGT; and
(g) at the expense of the Company, provide each Stockholder (unless
otherwise requested by such Stockholder) with a copy of all proprietary data
relating directly or indirectly to the PSC (including, without limitation, all
geological and geophysical data, well logs, test information, technical reports,
maps, models and interpretations relating to or derived from operations under
the PSC or data and information traded for PSC related data and information).
SECTION 4.4 RESPONSIBILITY FOR DAY-TO-DAY OPERATIONS AND MAJOR DECISIONS.
(a) The Managing Director shall manage the day-to-day operations of the
Company and implement the decisions of the Board of Directors, including Major
Decisions. The Managing Director is authorized, empowered and obligated to pay
all costs and expenses which are necessary or appropriate to the furtherance of
the purposes and objectives of the Company and payment of which will not
constitute a Major Decision.
(b) No Major Decision may be made and no action shall be taken with respect
to any matter that is within the scope of a Major Decision unless it has been
approved by the Directors as provided below in Section 4.5. The Major Decisions
are:
(i) approving the Annual Budget, any amendment thereto or making a
deviation of more than 10% from the aggregate expenditures authorized by an
Approved Annual Budget, as may be amended;
(ii) any commitment under the PSC by the Company and/or SOCO Mongolia,
in which the financial commitment of either the Company and/or SOCO Mongolia
therein shall exceed $150,000.00;
(iii) the obtaining of any loan or other credit facility (in
addition to loans or other credit facilities forming part of an Approved
Annual Budget or as part of a commitment described in (ii)), whether or not
secured by assets of the Company and/or SOCO Mongolia, for which the credit
of the Company and/or SOCO Mongolia will be committed in a sum greater than
$50,000.00, except for any loans made pursuant to Article VI,
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(iv) entering into by the Company and/or SOCO Mongolia of any
contract calling for the Company and/or SOCO Mongolia to provide or receive
services for a term longer than twelve (12) months (unless the Company
and/or SOCO Mongolia may cancel such contract, without penalty, on not more
than sixty (60) days notice);
(v) issuance of Shares or other securities by the Company or SOCO
Mongolia;
(vi) selection of legal counsel and the accounting and auditing firm
of the Company and/or SOCO Mongolia, and any change in such selection;
(vii) selection of depositories for the funds of the Company and/or
SOCO Mongolia;
(viii) approval of the foreign, federal and any state income tax
returns of the Company and/or SOCO Mongolia;
(ix) approval of the Technical and Administrative Services
Agreement and the rates for services to be rendered thereunder or any
renewal, termination or amendment of such agreement or any increase in such
rates;
(x) directly or indirectly entering into any contract or arrangement
between the Company and/or SOCO Mongolia and a Stockholder or an Affiliate
thereof;
(xi) removal or replacement of the Managing Director (other than as
provided in Section 4.7);
(xii) payment of any dividends or other distributions (whether in
cash or in kind) in respect of the Shares, except as otherwise provided in
Section 6.4;
(xiii) repayment of any loans made by the Stockholders to the
Company, except as otherwise provided in Section 6.4;
(xiv) determining the working capital reserve of the Company and/or
SOCO Mongolia and any revision to such amount;
(xv) determining whether SOCO Mongolia should exercise any rights
of pre-emption under a JOA;
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(xvi) any decision that SOCO Mongolia should withdraw from a JOA or
PSC, or exercise any right of relinquishment under the PSC;
(xvii) any sale or other disposal of assets of the Company and/or
SOCO Mongolia other than in the ordinary course of business;
(xviii) the payment to or reimbursement of any Stockholder for any
expenses or other liability incurred and paid on behalf of the Company;
(xix) determining SOCO Mongolia's position in respect of any of the
matters referred to in a JOA which require for their implementation the
unanimous vote of the parties to the JOA;
(xx) the selection of all exploratory well locations (but not the
conduct of operations pursuant to the Well Agreement);
(xxi) the selection of all seismic locations (but not the conduct of
operations pursuant to the Seismic Agreement);
(xxii) the selection and appointment of the members of the Boards of
Directors of SOCO Mongolia and any other subsidiaries of the Company;
(xxiii) the sale or disposition (through farm out or otherwise) of any
interest in the PSC;
(xxiv) any amendment to or modification of the PSC, except as provided
in Section 3.16 of the Stock Purchase Agreement; and
(xxv) any amendment to or modification of any material contracts of
the Company.
(c) Approval of the Annual Budget by the Board of Directors shall
constitute authorization for the Managing Director, and he shall be obligated,
to carry out and undertake on behalf of the Company and SOCO Mongolia the work
and expenditures provided for in such Approved Annual Budget and it shall not be
necessary for the Managing Director to obtain any further authority from the
Board of Directors for expenditures thereunder.
Section 4.5 QUORUM; ACTION AND VOTING.
(a) A quorum of the Board of Directors shall exist only if at least three
of the Directors are present.
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(b) A Major Decision shall require the approval of Directors holding more
than 55% of all votes entitled to be cast by all Directors (whether present or
not) at a duly called meeting at which a quorum is present. All other action to
be taken by the Board of Directors shall require the approval of Directors
holding more than 50% of all votes entitled to be cast by all Directors (whether
present or not) at such meeting.
(c) The Directors appointed and elected by each Designating Stockholder
shall vote together as a single group and the aggregate number of votes each
such Director group may cast shall be equal to one vote for each Share owned by
such Designating Stockholder.
(d) In lieu of a meeting, a unanimous written consent executed by all
Directors may be prepared and executed in accordance with the applicable
sections of the General Corporation law of Delaware, the Bylaws and, if
applicable, Section 4.5(e) of this Agreement, and any such written consent shall
have the same force and effect as a unanimous affirmative vote by the Board of
Directors taken at a meeting duly convened and held.
(e) A Director may grant a Director's Proxy to another Director or any
adviser. Any such Director who has granted a Director's Proxy shall be deemed
present at a meeting for quorum purposes if his Director's Proxy Holder attends
such meeting. A Director's Proxy may be irrevocable, shall be in writing, shall
be dated and shall not confer any power on the Director's Proxy Holder to make a
decision on behalf of a Director to approve any Major Decision unless the
Director's Proxy is specifically given to make such Major Decision with respect
to the specific event giving rise to such Major Decision. In addition, the
Director's Proxy may provide that the Director's Proxy Holder may execute
written consents in the name of and on the behalf of the Director granting such
Director's Proxy, and any such written consent executed by such Director's Proxy
Holder will be treated as if the Director granting such Director's Proxy had
executed such written consent. Also, the Director's Proxy may provide that
delivery of notices of Directors' meetings and any other notices required or
permitted by law to be given to the Director granting the Director's Proxy will
be sufficient if given to the Director's Proxy Holder. The Director granting any
Director's Proxy, however, shall be responsible for all decisions made and
actions taken by the Director's Proxy Holder in the exercise of such Director's
Proxy to the same extent as he would be responsible if he had participated in
the decision or had taken the action himself.
SECTION 4.6 APPROVAL OF ANNUAL BUDGET. By August 1 of each Fiscal Year, the
Managing Director shall prepare and deliver to the Board of Directors a proposed
Annual Budget for the business of the Company for the next Fiscal Year. When
approved pursuant to Section 4.5, such Annual Budget shall be an "Approved
Annual Budget". Annual Budgets shall be submitted for Fiscal Years in the
format, form and content approved by the Board of Directors from time to time.
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SECTION 4.7 REMOVAL OF MANAGING DIRECTOR OR ANY OTHER OFFICER. Upon the
occurrence of wilful misconduct, gross negligence or breach of duty of loyalty
that has had a continuing material and adverse effect on the Company, either the
Managing Director or any officer may be removed from his position as such of the
Company (but in any such case he shall be and remain as a Director). Such
removal shall be made only by an action taken by the unanimous agreement of the
Stockholders who did not appoint such Director. The Managing Director may also
be removed at any time without the need to show cause by an action approved by
all of the Stockholders who did not appoint such Director. If the Managing
Director is removed, and if following such removal, the Board of Directors is
unable by unanimous agreement to select a successor Managing Director of the
Company, then the entirety of the business and affairs of the Company, including
both Major Decisions and the day-to-day operations of the Company, shall be
governed and managed by the Board of Directors as a whole, with the same
requirements for a quorum and action as are set forth in Section 4.5 of this
Agreement.
SECTION 4.8 INDEMNITY OF DIRECTORS AND OFFICERS. In addition to the
indemnification provisions contained in the Bylaws, the Directors and the
officers, individually and collectively, shall be indemnified and held harmless
by the Company (but not by any Stockholder) from and against any and all claims,
demands, liabilities, costs, damages, and causes of action of any nature
whatsoever arising out of or incidental to the management of the Company affairs
by the Board of Directors and the officers in accordance with the terms of this
Agreement and in furtherance of the objectives and purposes of the Company;
provided, however, that a Director or an officer shall not be indemnified if,
upon final adjudication, it is determined that such Director or officer has
engaged in wilful misconduct, gross negligence, or breach of duty of loyalty
that has had a material adverse effect on the Company.
The indemnification authorized by this Section 4.8 shall include payment of
reasonable attorneys' fees and other expenses as incurred in connection with any
settlement or any finally adjudicated legal proceeding.
The indemnification rights contained in this Section 4.8 shall be
cumulative of, and in addition to, any and all rights, remedies, and recourse to
which the Directors and the officers shall be entitled under the Bylaws, at law,
or in equity. Indemnifications hereunder shall be made from assets of the
Company and no Stockholder shall be personally liable to any indemnitee.
ARTICLE V
BOOKS AND RECORDS AND ACCOUNTING
SECTION 5.1 ACCOUNTING METHOD. The Company shall keep proper and complete
books of account, in accordance with generally accepted accounting
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principles, on the accrual method of accounting consistently applied at all
times during its existence.
SECTION 5.2 DELIVERY OF STATEMENTS.
(a) Notwithstanding any other provision of this Agreement that may appear
to be to the contrary, the Company will promptly furnish to each Stockholder
from time to time upon request such information regarding the business and
affairs and financial condition of the Company and its subsidiaries as the
Stockholder may reasonably request.
(b) The Company will also furnish to each Stockholder promptly after
becoming available and in any event within 90 days after the close of each
Fiscal Year, the audited consolidated balance sheets of the Company and its
subsidiaries as at the end of such year, the audited consolidated statements of
reconciliation of capital accounts of the Company and its subsidiaries for such
year, and the audited consolidated statement of changes in financial position of
the Company and its subsidiaries for such year, setting forth in each case for
Fiscal Years ending after December 31, 1994 in comparative form the
corresponding figures for the preceding Fiscal Year, accompanied by the related
report of the independent public accountants of the Company which report shall
be to the effect that such statements have been prepared in accordance with
generally accepted accounting principles consistently followed throughout the
period indicated except for such changes in such principles with which the
independent public accountants shall have concurred.
(c) The Company will also furnish to each Stockholder promptly after
becoming available and in any event within 60 days after the end of each
quarterly period in each Fiscal Year, the unaudited consolidated balance sheets
of the Company and its subsidiaries as at the end of such quarter, the unaudited
consolidated statement of changes in financial position of the Company and its
subsidiaries as of such quarter, the unaudited consolidated statements of profit
and loss of the Company and its subsidiaries for such quarter and for the
quarter from the beginning of the Fiscal Year to the close of such quarter, and
the unaudited consolidated statement of reconciliation of capital accounts of
the Company and its subsidiaries for such quarter and for the period from the
beginning of the Fiscal Year to the close of such quarter, setting forth in each
case for Fiscal Years ending after December 31, 1994 in comparative form the
corresponding figures for the corresponding period of the preceding Fiscal Year.
(d) In addition, the Managing Director will also furnish each Stockholder
with a monthly management report in the form and content from time to time
approved by the Board of Directors, with such monthly management report to be
delivered not later than the 20th day of the month following the month covered
by such report.
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SECTION 5.3 RIGHT TO EXAMINE BOOKS AND RECORDS. At any time and from time
to time while the Company continues and until its complete liquidation (but only
after written notice to the Managing Director and only during normal business
hours), each Stockholder or its agent may fully examine and audit the Company's
and/or SOCO Mongolia's books, records, accounts and assets, including bank
balances, and to this end may cause such examination or audit to be made by any
certified public accountant employed by such Stockholder at such Stockholder's
expense. The Parties shall use their reasonable best efforts to coordinate any
such examination so as to minimize expense and disruption. Such examination
shall be conducted in accordance with the provisions of Section 7 of Article VI
of the Bylaws.
SECTION 5.4 FISCAL YEAR. The fiscal year ("Fiscal Year") of the Company shall
end December 31.
ARTICLE VI
FINANCING THE EXPENSES OF THE COMPANY
SECTION 6.1 APPROVED ANNUAL BUDGETS. In accordance with the provisions of
Section 4.6, the Managing Director will prepare and deliver to the Board of
Directors for its review and approval an Annual Budget for each Fiscal Year.
When an Annual Budget is approved pursuant to Section 4.5, the Stockholders
promise, covenant and agree to promptly pay all Expenses incurred pursuant to an
Approved Annual Budget in the manner set forth in Section 6.2.
SECTION 6.2 MANDATORY LOANS.
(a) Each loan made to the Company by a Stockholder pursuant to this
Section 6.2 is referred to in this Agreement as a "Mandatory Loan".
(b) If, at any time or from time to time on or after the date hereof and
prior to the conclusion of petroleum operations in a Contract Area (but not
after such date), funds are needed by the Company in order to pay or discharge
any Expenses, then upon the election of the Managing Director (as evidenced by
the Mandatory Loan Notice), the Stockholders shall be obligated (the "Mandatory
Loan Obligation") to loan to the Company, pro rata, in accordance with the ratio
from time to time of their respective Shares, that amount (a "Mandatory Loan
Amount") which is the amount necessary to pay such Expense. The Managing
Director shall send a Notice (a "Mandatory Loan Notice") to each Stockholder
identifying the Expenses which will be paid with the proceeds of such Mandatory
Loan and stating the due date for each such Expense. The Mandatory Loan for each
such Expense shall be advanced to the Company in good funds in such account as
the Managing Director may designate on or before that date (a "Mandatory Loan
Date") which is the later of (i) five (5) days prior to the due date for such
Expense as specified in the Mandatory Loan Notice or (ii) five
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(5) business days after receipt by each Stockholder of the related Mandatory
Loan Notice. No Stockholder shall ever be obligated to make a Mandatory Loan to
the Company for any purpose other than to permit the Company to pay Expenses.
(c) Upon the receipt of the funds constituting a Mandatory Loan under
this Section 6.2, the Company shall promptly record in its books the amount of
the Mandatory Loan so loaned by such Stockholder to the Company. Each Mandatory
Loan shall bear interest at the Loan Rate (or at such other rate as may be set
forth in the applicable Mandatory Loan Note referred to below) with effect from
the Mandatory Loan Date until repayment. Each Mandatory Loan shall constitute
and be a debt of the Company maturing December 31, 2009, ("Maturity Date") and
payable prior to maturity only from the funds and at the level of priority
established for payment of Mandatory Loans in Section 6.4. No Stockholder or its
Affiliates shall ever have any personal liability (joint, several or joint and
several) for repayment of all or any portion of any Mandatory Loan, whether
principal thereof or interest thereon.
(d) The Mandatory Loan Obligation of each Stockholder shall expire and
terminate on the Maturity Date; provided, however, that the occurrence of the
Maturity Date shall not discharge any Mandatory Loan Obligation Default that may
have occurred prior to the Maturity Date.
(e) At any time and from time to time any Stockholder may request the
Company to issue it with one or more Mandatory Loan Notes in respect of all of
its Mandatory Loans to that date. In the absence of any such request, the
Company shall issue such Mandatory Loans to the Stockholders no less frequently
than once a calendar quarter.
SECTION 6.3 FAILURE TO MAKE MANDATORY LOANS.
(a) In the event of a default by a Stockholder in advancing a Mandatory Loan
on or before the applicable Mandatory Loan Date (a "Mandatory Loan Obligation
Default"), upon the election of the Managing Director, the Company shall have
and may pursue, subject to the further provisions of this Section 6.3, any and
all remedies available to the Company under this Agreement, at law or in equity,
all of which remedies shall be cumulative and non-exclusive. Notwithstanding
anything to the contrary contained in this Agreement, but subject to the further
provisions of this Section 6.3, the decisions as to whether the Company will
pursue available remedies on account of a Mandatory Loan Obligation Default and
as to which remedies the Company will pursue and the manner and method of
pursuit of such remedies (including any settlement of claims against a
Stockholder on account of such Mandatory Loan Obligation Default) shall be
vested solely in the Managing Director (or the Board of Directors in the event
that the Stockholder who appointed the Managing Director is in default and
further references in this Section 6.3 to the Managing Director shall, in such
circumstances, mean the Board of Directors).
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(b) Immediately upon the occurrence of a Mandatory Loan Obligation Default,
and continuing thereafter unless and until such Mandatory Loan Obligation
Default is cured and remedied by or on behalf of such Stockholder, (i) such
Stockholder shall have no rights, powers or authority as a Stockholder under
this Agreement, except for those rights, powers or authority which pursuant to
the Delaware General Corporation law (the "ACT") or other applicable law may not
be waived, negated or relinquished by a Stockholder in a Delaware close
corporation (and such Stockholder shall be deemed to have fully waived, negated
and relinquished all rights, powers and authority otherwise available to a
Stockholder as a Stockholder hereunder to the fullest extent permitted by the
Act and other applicable law), (ii) the person or persons appointed to the Board
of Directors by such Stockholder shall not have the right, power or authority to
vote on or consent to any action taken by the Board of Directors; (iii) such
Stockholder shall remain bound and obligated to perform and observe all
provisions of this Agreement providing for performance or observance thereof by
such Stockholder; and (iv) the Company shall not pay to such Stockholder any
payments of interest or principal on outstanding Mandatory Loans or Advancing
Stockholder Loans or any distributions of dividends on its Shares.
(c) If a Mandatory Loan Obligation Default occurs, then the other
Stockholders (the "Non-defaulting Stockholders") shall have the obligation,
within three business days after the relevant Mandatory Loan Date(s), to make
advances to the Company in an aggregate amount equal to the amount of the
Mandatory Loan as to which such Mandatory Loan Obligation Default occurred, pro
rata, in accordance with the ratio from time to time of their respective Shares
(or in such other proportions as the Non-defaulting Stockholders may between
themselves determine). Any such advance by a Non-defaulting Stockholder (an
"Advancing Stockholder") shall constitute a loan (an "Advancing Stockholder
Loan") from the date made ("Advance Date") by such Advancing Stockholder to the
Company, which loan shall be evidenced by a loan note in a form reasonably
satisfactory to the Advancing Stockholder and the Managing Director (an
"Advancing Stockholder Loan Note") and be payable on the terms and provisions
contained in this Section 6.3(c) and Section 6.4. Upon the receipt of the funds
constituting an Advancing Stockholder Loan, the Company shall promptly issue an
Advancing Stockholder Loan Note to the Advancing Stockholder in the amount of
the Advancing Stockholder Loan so loaned by the Advancing Stockholder to the
Company. The making of an Advancing Stockholder Loan by an Advancing Stockholder
will not in any manner be deemed a satisfaction or cure of the Mandatory Loan
Obligation Default nor in any manner prohibit or limit any remedies available to
the Company on account of such Mandatory Loan Obligation Default.
An Advancing Stockholder Loan shall bear interest on the principal balance
thereof at the Default Rate from the Advance Date therefor through the date such
Advancing Stockholder Loan (principal and accrued interest) is fully repaid to
the Advancing Stockholder by the Company. An Advancing Stockholder Loan shall
constitute and be a debt of the Company payable by the Company only from time to
time from the funds
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and at the level of priority established for payment of Advancing Stockholder
Loans in Section 6.4, and no Stockholder or its Affiliates shall ever have any
personal liability (joint, several or joint and several) for repayment of all or
any portion of such Advancing Stockholder Loan, whether principal thereof or
interest thereon.
(d) A defaulting Stockholder shall have a period of 60 days after receipt of
Notice of default from the Managing Director within which to cure a default by
paying in full to the Company all amounts for which it is in default, plus
interest at the Default Rate (including all Advancing Stockholder Loans plus
interest thereon which arose as a result of its default). Failure to cure a
default in such manner shall result in the application of sub-paragraph (e)
below.
(e) In addition to all remedies available to the Company at law or in equity
on account of a Mandatory Loan Obligation Default, upon the election of the
Managing Director, and following the period of 60 days referred to in sub-
paragraph (d) above, the Company may elect by written notice to such Stockholder
to cancel and terminate the Shares of such Stockholder, in which event (i) the
number of Shares of such Stockholder will be reduced to zero (0), (ii) any
Mandatory Loans or Advancing Stockholder Loans (outstanding principal and
accrued and unpaid interest) previously made by such Stockholder to the Company
will be deemed canceled and discharged, (iii) the right of such Stockholder to
receive distributions and dividends and participate in Company affairs will be
terminated, and (iv) such Stockholder will cease to be a Stockholder for any
purpose under this Agreement. Cancellation and termination of the Shares and
Mandatory Loans and Advancing Stockholder Loans of such Stockholder as above
provided will not in any manner be construed as liquidated damages paid to the
Company for a Mandatory Loan Obligation Default and, upon the election of the
Managing Director, the Company will remain entitled to pursue any and all other
remedies available to the Company hereunder, or at law or in equity, with
respect to such Mandatory Loan Obligation Default.
(f) In the event of cancellation and termination of the Shares of the
Stockholder in accordance with the foregoing, such Stockholder will be obligated
to return to the Company the stock certificate evidencing its Shares and all
Mandatory Loan Notes and Advancing Stockholder Loan Notes evidencing outstanding
Mandatory Loans and Advancing Stockholder Loans (marked to indicate cancellation
and discharge) and also, upon the request of the Company, to execute such
instruments as may be necessary or appropriate to confirm such cancellation and
termination of its Shares and cancellation and discharge of any outstanding
Mandatory Loans and Advancing Stockholder Loans and Mandatory Loan Notes and
Advancing Stockholder Loan Notes. If such Stockholder fails to execute such
instruments, then the Company (acting through the Managing Director) may
execute, acknowledge and deliver such instruments for, on behalf of, and in the
stead of such Stockholder and such execution, acknowledgment and delivery by the
Company shall be for all purposes as effective against and binding upon such
Stockholder as though such execution, acknowledgment and delivery had
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been by such Stockholder. Each Stockholder does hereby irrevocably constitute
and appoint the Company as the true and lawful attorney in fact of such
Stockholder and its successors and assigns, in the name, place and stead of such
Stockholder or its successors or assigns, as the case may be, to execute,
acknowledge and deliver such instruments as may be required to be executed by or
on behalf of such Stockholder under this Section 6.3(f). It is expressly
understood, intended and agreed by each Stockholder, for itself and its
successors and assigns, that the grant of the power of attorney to the Company
pursuant to this Section 6.3(f) is coupled with an interest, is irrevocable, and
shall survive the dissolution or other liquidation or termination of such
Stockholder, its successors or assigns, as applicable, or the transfer of the
Shares of such Stockholder in the Company, or the dissolution of the Company.
(g) Notwithstanding the generality of the provisions of Section 6.3(a), if
upon the occurrence of a Mandatory Loan Obligation Default (i) the Company
exercises its right under Section 6.3(e) to cancel and terminate the Shares and
Mandatory Loans and Advancing Stockholder Loans of such Stockholder and (ii)
upon Notice to such Stockholder of such exercise, such Stockholder shall, on
demand, (A) fully comply with its obligations under such Section 6.3(f) and (B)
without limitation, deliver to the Company a written release, reasonably
satisfactory to the Company, by which such Stockholder, for itself, its
successors, legal representatives and assigns, forever releases, acquits and
relinquishes any right, title or interest whatsoever in its Shares, Mandatory
Loans and Advancing Stockholder Loans and any right or cause of action
whatsoever, at law or in equity, to contest, oppose, seek to have declared
unenforceable, set aside or rescind the right of the Company under Section
6.3(e) to cancel and terminate such Stockholder's Shares, Mandatory Loans and
Advancing Stockholder Loans, then after that time (the "Relevant Time") (i) the
Managing Director shall have no further right to elect to cause the Company to
call for Mandatory Loans with a Mandatory Loan Date falling on or after the
Relevant Time to the Company from such Stockholder under Section 6.2 and the
Maturity Date shall be deemed to have occurred in respect of all Mandatory Loans
outstanding at the Relevant Time (but the deemed occurrence of the Maturity Date
shall not discharge any Mandatory Loan Obligation Default that may have occurred
prior to the Maturity Date) and (ii) the Company shall not be entitled to
recover damages as a consequence of such Mandatory Loan Obligation Default in
excess of the sum of (A) the Mandatory Loan Amount as to which such Mandatory
Loan Obligation Default occurred, (B) prejudgment interest on such Mandatory
Loan Amount from the applicable Mandatory Loan Date at the Default Rate and (C)
all reasonable costs of collection thereof (including, without limitation, costs
of court and reasonable attorneys' fees). Nothing in this Section 6.3(g) shall
limit the right of the Company to recover damages (as limited by this Section
6.3(g), if applicable) for each Mandatory Loan Obligation Default.
(h) The Company shall have and is hereby granted by each Stockholder a
security interest in such Stockholder's Shares and in any Mandatory Loan Notes
and Advancing
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Stockholder Loan Notes issued by the Company to such Stockholder. In order to
enforce the rights of the Company under this Section 6.3, but without prejudice
to any other remedy that may be available to the Company in the event of a
Mandatory Loan Obligation Default, the Company shall have all the rights and
remedies available to a secured party under the Uniform Commercial Code as
adopted in the State of Delaware.
(i) Each Stockholder acknowledges that it is familiar with the terms of the
PSC; that the Company is dependent on each Stockholder performing its Mandatory
Loan Obligation in order to permit the Company and/or SOCO Mongolia to meet its
obligations under the PSC, to preserve and protect the Company's assets and to
enable the Company to make such expenditures and investments as shall be
necessary or appropriate to achieve its purposes and objectives; that, as a
consequence of the foregoing, a default by a Stockholder in the performance of
its Mandatory Loan Obligation could have grave consequences to the Company,
including, without limitation, the Company's and/or SOCO Mongolia's loss of its
interest in the Contract Area; and that the potential for such grave
consequences to the Company justify and make reasonable all of the remedies
available to the Company under this Section 6.3 in the event of a Mandatory Loan
Obligation Default.
SECTION 6.4 REPAYMENT OF MANDATORY LOANS AND ADVANCING STOCKHOLDER LOANS. The
Parties agree that the gross receipts of the Company for any period shall be
applied as promptly as practicable to the following (without duplication):
(a) first, to the payment of Expenses incurred in such period;
(b) then, to the establishment or restoration of such working capital
reserves as the Board of Directors may establish from time to time;
(c) then, to the repayment or prepayment of Advancing Stockholder Loans (if
any) and interest thereon owed by the Company in the order such loans were made,
pro rata, on the basis of the relative amounts (principal and accrued interest)
thereof;
(d) then, to the repayment or prepayment of Mandatory Loans (if any) and
interest thereon owed by the Company in the order such loans were made, pro
rata, on the basis of the relative amounts (principal and accrued interest)
thereof; and
(e) finally, to the Stockholders, pro rata, on the basis of their
respective Share ownership.
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ARTICLE VII
ARBITRATION
SECTION 7.1 OBLIGATION TO ARBITRATE. The Parties each agree that any
material controversy or claim (a "Controversy" or "Controversies") as between or
among the Stockholders and/or the Company (the "Covered Parties") arising out of
or relating to this Agreement, the Stock Purchase Agreement or any other
document or instrument executed pursuant to or made effective as a result of the
foregoing agreements (collectively the "Governing Agreements"), or the breach
thereof by any of the Covered Parties, shall be resolved or settled by
arbitration in accordance with and governed by the provisions of the Texas
General Arbitration Act, Articles 224 et. seq. of the Revised Civil Statutes of
Texas, as such statutes may be amended or supplemented from time to time and any
successor statutes (the "Arbitration Act"), except as the matters or scope of
the provisions of such Arbitration Act are limited or modified by the provisions
hereof. The arbitration proceedings shall be conducted according to the
Commercial Arbitration Rules of the American Arbitration Association (the
"Rules") except to the extent provided in this Agreement and except to the
extent the Arbitration Act expressly requires a procedure or provides a remedy
that cannot be modified or waived by agreement. If, for any reason, the
Arbitration Act is held to be inapplicable to any such controversy or claim, the
Federal Arbitration Act, 9 U.S.C. (S)1 et. seq., as such act may be amended or
supplemented from time to time and any successor statute, shall apply except as
limited or modified by the terms hereof; provided that the provisions of the
Texas General Arbitration Act also apply to the extent that they are not in
direct conflict with the Federal Arbitration Act. In such case, the term
"Arbitration Act" as used herein shall be deemed to consist of the Federal
Arbitration Act and such non-conflicting provisions of the Texas Arbitration
Act. No claim, demand, challenge or cause of action may be asserted, whether in
arbitration or in judicial proceedings, if the Governing Agreements require such
claim, demand or challenge to be raised within a certain period and such claims
have not been raised within such period. In addition, the arbitration provisions
hereof shall not, unless the Parties otherwise consent in writing at the time
the Controversy arises, apply with respect to an action to enforce the
obligations of a Stockholder to reimburse another Stockholder for payment of
amounts advanced on its behalf or the exercise of any remedies for a failure to
pay such reimbursable amounts or to make a Mandatory Loan or an Advancing
Stockholder Loan and the consequences of a failure to make a Mandatory Loan or
an Advancing Stockholder Loan, all as provided in Article VI.
SECTION 7.2 INITIATION OF ARBITRATION PROCEEDINGS. Any Stockholder or the
Company may initiate arbitration proceedings as provided in the Rules; for the
purposes of determining whether arbitration proceedings have been timely
instituted pursuant to the terms hereof, a Party shall be deemed to have
initiated arbitration on the day it sends notice (regardless of whether such
notice is deemed given pursuant to Section 12.2 hereof) of such initiation to
the other Party. A Party may, pending the
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appointment of arbitrator(s) seek and obtain any preliminary relief available at
law or in equity for the purpose of preserving the status quo pending the
outcome of arbitration or preserving the Company's close corporation status as
provided in Section 9.1, although the Managing Director, officers and Directors
of the Company shall continue to exercise such powers and perform such
responsibilities as are entrusted to them. Once arbitrators are appointed, such
arbitrators shall have the power to issue temporary orders and grant preliminary
relief pending the outcome of arbitration.
SECTION 7.3 SELECTION AND QUALIFICATIONS OF ARBITRATORS.
(a) The Parties may agree upon one arbitrator, but in the event that they
cannot so agree within eight business days after a Party has received notice
that arbitration proceedings have been instituted by another Party, there shall
be three arbitrators, one named in writing by each of the Stockholders within
ten business days after demand for arbitration is made (or if there are less
than three Stockholders, then one named by each Stockholder, and a third to be
chosen by the two so named within ten days after the appointment of the second
arbitrator). If any Party (or the two arbitrators) should refuse or neglect to
join in the appointment of the arbitrators, they (or the third arbitrator) shall
be appointed in accordance with the provisions of the Rules.
(b) Each arbitrator appointed hereunder shall be "neutral" within the
meaning of the Rules and shall have had arbitration experience in a minimum of
five years with respect to resolving disputes of the nature submitted in each
instance hereunder.
SECTION 7.4 PROCEDURAL RULES. To the extent not modified hereby and not
otherwise required by the Arbitration Act, the Rules shall apply to the conduct
of the arbitration, including (without limitation) the necessity of maintaining
a stenographic record, representation by counsel, order or proceedings,
rendering decisions by majority vote, inspection and investigations, matters of
evidence, closing and opening of hearings, extensions of time, time, scope and
form of award and so forth. However, hearings shall be held on consecutive days
to the extent practicable and, in any event, shall not be adjourned or postponed
for more than two consecutive week periods at any given time or from time to
time, unless the parties otherwise agree. Moreover, although the arbitrators
generally shall have such discretion with respect to discovery as is provided in
the Arbitration Act and the Rules, the Parties intend that discovery be
liberally permitted, and so the arbitrators shall provide for a schedule of
discovery prior to the hearing and issue orders for discovery upon any Party's
reasonable request.
SECTION 7.5 PROCEEDINGS. All arbitration hearings conducted hereunder shall
take place in Houston, Harris County, Texas; however, all judicial proceedings
to enforce any of the provisions hereof shall be in accordance with the
provisions of Section 12.13. Such hearings shall be at the time and place
within said city as is selected by
27
<PAGE>
the arbitrators. Notice shall be given and the hearing conducted in accordance
with, and the arbitrators shall have the powers described in, the provisions of
Articles 228, 229 and 230 of the Arbitration Act as supplemented by the Rules.
At the hearing any relevant evidence may be presented by any Party, and the
formal rules of evidence applicable to judicial proceedings shall not govern.
Evidence may be admitted or excluded in the sole discretion of the arbitrators.
SECTION 7.6 AWARD. If there is only one arbitrator, his decision shall be
binding and conclusive on the Parties. If there are three arbitrators, the
decision of any two shall be binding and conclusive. The arbitrators shall hear
and determine the matter and shall execute and acknowledge their award in
writing and deliver a copy thereof to each of the Parties by registered or
certified mail and by fax. The award of the arbitrator(s) shall be reached as
provided in the Arbitration Act and the Rules. Upon the request of a Party, the
arbitrator(s) shall set forth the reasons for his (their) decision in writing at
the time of the rendering of the award. A judgment confirming, vacating,
modifying or correcting the award of the arbitrators may be rendered by any
court having jurisdiction in accordance with the provisions of the Arbitration
Act; provided, that in addition to grounds provided for limiting, modifying or
vacating an award in the Arbitration Act, a court may limit, modify or vacate an
award if it was rendered upon the basis, in whole or in material part, upon a
clearly erroneous conclusion of law.
SECTION 7.7 COSTS AND EXPENSES. The costs and expenses of arbitration,
including the fees of the arbitrators, shall be borne by the losing Party or
Parties or in such proportions among the Parties to the Controversy as the
arbitrators shall determine according to the Rules.
SECTION 7.8 TERMINATION OF ARBITRATION PROCEEDINGS. If the arbitrators have
not delivered an award within 60 days (unless such period is extended by the
mutual agreement of the parties to the Controversy) of the initiation of the
arbitration proceedings with respect to a Controversy, the arbitration
proceeding may be terminated by any Party not predominantly (as among the
parties to the Controversy) at fault for delays that prevented the arbitration
proceedings from concluding with an award within such period, and such
determination of fault shall be made in preference to any other matter and at
the request of any Party by the arbitrators as expeditiously as possible. Upon
any such termination, the parties to the Controversy may seek such remedies as
may be available to them at law or in equity by judicial means or otherwise.
ARTICLE VIII
INTERDEPENDENCE; REMEDIES
SECTION 8.1 INTERDEPENDENCE. Corbin, BIP and SOCO each acknowledge and agree
that each of the others is and will be materially relying upon the full
performance by it
28
<PAGE>
of each of the covenants and agreements set forth in this Agreement in entering
into the covenants and agreements set forth herein and contemplated by this
Agreement and that without such covenants and agreements and the full
performance thereof by Corbin, BIP and/or SOCO, as the case may be, the other
Parties would not have entered into this Agreement. Corbin, BIP and SOCO are
intended third party beneficiaries of each other's obligations in favor of the
Company as set forth in this Agreement and, unless this Agreement provides for
the enforcement of such obligations by the Managing Director or the Board of
Directors, Corbin, BIP and SOCO agree that each of them may enforce such
obligations as if it were the direct obligee of such obligations.
SECTION 8.2 REMEDIES. The rights of each Party created hereby are acknowledged
by each of the other Parties to be unique rights, the loss of which would be
impossible fully to compensate with monetary damages. Consequently, each Party
hereto agrees that in the event of a breach or threatened breach of this
Agreement by another Party (the "Aggrieving Party"), any aggrieved party shall
be entitled to an injunction restraining the Aggrieving Party from said breach
or threatened breach, or an order or other court decree requiring specific
performance. Nothing herein shall be construed as prohibiting any Party from
pursuing any other remedies available to it for such breach or threatened
breach, including the recovery of damages, subject, however, to the provisions
of Article VII and Section 12.13 of this Agreement.
ARTICLE IX
TERMINATION
SECTION 9.1 TERMINATION OF CLOSE CORPORATION STATUS. The Company's close
corporation status shall not be terminated without the unanimous approval of the
Stockholders. Any amendment deleting or terminating the effectiveness of
Article V, Sections 1, 2 or 3 (the "Close Corporation Provisions") of the
Certificate of Incorporation shall be deemed to be a termination of such status,
and any proposal to delete or terminate such provisions shall, to be effective,
be approved by all of the Stockholders. Termination of such status shall be
deemed to be effective as of the date on which a certificate of amendment
deleting (or amending, as provided above) such Close Corporation Provisions is
filed with the Secretary of State of the State of Delaware, as provided in
Section 345 of the General Corporation law of the State of Delaware, as amended.
Prior to the termination of close corporation status in accordance with the
foregoing provisions, the Stockholders agree not to take any action that could
jeopardize the close corporation status of the Company. In addition to any other
remedies the Company and the Stockholders may have pursuant to the provisions of
the General Corporation law of the State of Delaware, the Company and the
Stockholders shall be entitled to seek the equitable remedies of injunction to
prevent a breach of such agreement and of specific performance to enforce such
agreement as provided in Section 8.2 (even prior to the initiation of
arbitration proceedings pursuant to Article VII of this Agreement).
29
<PAGE>
SECTION 9.2 DISSOLUTION. No Stockholder shall have the individual or separate
power to dissolve the Company. Any proposal to dissolve the Company must be
approved by the holders of all of the Shares.
SECTION 9.3 TERMINATION OF THIS AGREEMENT. This Agreement shall be deemed
terminated on the day that the close corporation status of the Company is
terminated as provided in Section 9.1 hereof or, if earlier to occur, the
dissolution of the Company, or if earlier to occur, if the holders of all of the
issued and outstanding Shares execute an instrument specifically terminating
this Agreement and deliver such instrument to the Company's principal office.
ARTICLE X
TRANSFERS OF SHARES OF COMMON STOCK
SECTION 10.1 NO UNPERMITTED TRANSFERS. Except pursuant to the provisions of
Article VI or this Article X, no Stockholder may make a Transfer of all or any
portion of its Shares (or right thereto). Any Transfer in violation of Article
VI or this Article X shall be null and void as against the Company and the
Stockholders, except as otherwise provided by law.
SECTION 10.2 PERMITTED TRANSFERS.
(a) Without the consent of the other Stockholders, but only after 30 days
prior Notice thereof to the other Stockholders, and subject to the further
applicable provisions of this Article X, a Stockholder may from time to time
Transfer all or any of its Shares (i) to a Qualified Affiliate of the
Stockholder, or (ii) from such Qualified Affiliate back to the Stockholder or to
another Qualified Affiliate of the Stockholder, or (iii) in connection with a
bona fide reorganization, recapitalization, acquisition, or merger of the
Stockholder.
(b) The effectiveness of any Transfer permitted in this Section 10.2 may be
conditioned, in the discretion of the Managing Director, upon receipt by the
Company of an opinion of legal counsel (the cost of which shall be borne by the
Transferor), to the effect that such transaction will not violate the Securities
Act of 1933 or any other applicable securities laws.
(c) No Stockholder shall Transfer all or any portion of its Shares pursuant
to this Article X without first delivering to the Managing Director the
agreement of the proposed Transferee that it accepts such Shares subject to the
provisions of this Agreement as evidenced by the execution and delivery of an
Assumption Agreement.
30
<PAGE>
(d) The provisions of Section 10.3 below shall apply to any proposed
Transfer other than those Transfers permitted under Sections 10.2(a) or 10.4.
(e) The effectiveness of any Transfer permitted in this Section 10.2 shall
be conditioned upon payment by the Proposed Transferor of all costs of the
Company reasonably incurred with respect to the Transfer.
SECTION 10.3 RIGHT OF FIRST REFUSAL.
(a) Except for Transfers permitted under Section 10.2(a) or 10.4 or Article
VI, no Stockholder shall make a Disposition of his Shares, unless such
Stockholder (a "Proposed Transferor") first, by Notice, offers to the other
Stockholders, pro rata, according to their relative ownership percentages
(determined without reference to the ownership percentage of the Proposed
Transferor), the right of first refusal to acquire such Shares on the same terms
that the Proposed Transferor offers or intends to offer such Shares to such
other person.
(b) Each such offer to the other Stockholders shall be in writing, shall
state the terms and conditions of the Disposition the Proposed Transferor
desires to make (including, without limitation, the number of Shares, the
closing schedule agreed upon by the Proposed Transferor with a bona fide third
party proposed Transferee, or, if there is then no proposed Transferee, a
closing schedule proposed by the Proposed Transferor (which shall provide for a
closing not sooner than 60 days or later than 90 days after the date such offer
is submitted to the other Stockholders), shall state the Proposed Price, shall
state (if known) the person or persons to whom the Disposition contemplated by
such Proposed Transferor is to be made and shall give to such other Stockholders
a period of 20 business days after receipt of such Notice within which to elect
to consummate the proposed Disposition (which must be of the entirety of the
interest offered by the Proposed Transferor) upon such terms and conditions, and
within the closing schedule agreed upon by the Proposed Transferor with a bona
fide third party proposed Transferee or, if there is no proposed Transferee, as
proposed by the Proposed Transferor in accordance with the foregoing.
(c) Each of the other Stockholders shall be deemed to have decided not to
acquire the interest under any such offer unless, within 20 business days from
the date of receipt of such offer, such other Stockholders give Notice to the
Proposed Transferor that such other Stockholders desire to acquire the entirety
of such interest. In the event that the other Stockholders do not elect to
accept the offer made as above provided then the Proposed Transferor may
consummate the proposed Disposition with any person or persons upon the terms
and conditions specified in such offer to the other Stockholders or on such
other terms and conditions as are not more favorable to such proposed Transferee
than such terms and conditions specified in such offer to the other
Stockholders.
31
<PAGE>
(d) Upon such consummation, the Proposed Transferor shall provide all other
Stockholders with copies of appropriate written evidence of the material terms
of the Disposition. If the Proposed Transferor does not consummate the
originally proposed Disposition within 90 days after the termination of the
offering period to the other Stockholders, then all rights of the other
Stockholders in this Section 10.3 shall apply as though no written notice and
offer had been given.
SECTION 10.4 PLEDGE.
(a) After September 30, 1995, each Stockholder may Pledge its Shares as
security for the payment or performance of its obligations if but only if the
instrument creating the Pledge provides that the exercise of any power of sale
or enforcement in respect of the Shares and the exercise of any right, remedy or
power conferred on the secured party shall be subject to and strictly in
accordance with the provisions of this Agreement and such Pledge ranks in
priority at law and in equity in all instances after and subject to in every
respect to the security given by each Stockholder in accordance with the
provisions of this Agreement, including without limitation the provisions of
Article VI.
(b) No Pledge purportedly made or given by a Stockholder pursuant to
Section 10.4(a) shall be effective or binding upon the Company or the other
Stockholders until the Managing Director has received a copy of an executed
instrument evidencing such Pledge and, if not evidenced thereby, an executed
instrument evidencing that the secured party accepts such Pledge subject to and
in accordance with the provisions of this Agreement.
ARTICLE XI
CONFIDENTIAL INFORMATION/PUBLIC ANNOUNCEMENTS
SECTION 11.1 CONFIDENTIAL INFORMATION.
(a) All plans, programs, maps, records, reports, scientific and technical
data and any other information provided or delivered in connection with the
business of the Company shall be treated confidentially by all Parties in the
sense that their contents or effects shall not, subject to the requirements of
the PSC and this Agreement, be disclosed by any of the Parties to any third
party without the written consent of the other Parties except:
(i) to the extent any such information is required to be furnished in
any legal proceedings under the PSC, this Agreement or the Stock Purchase
Agreement or is to be furnished because of any applicable legal or governmental
requirements;
32
<PAGE>
(ii) to the extent such information is required to be disclosed in
accordance with the rules and regulations of any stock exchange to which such
Party is subject;
(iii) to the extent any such information is required to be disclosed
by any Party to any contractor, consultant, financial institution or other third
party in connection with the business of the Company provided such third party
executes an undertaking to keep such information confidential;
(iv) to an Affiliate of any of the Parties, provided such Affiliate
executes an undertaking to keep such information confidential;
(v) to the extent any such information becomes a matter of public
knowledge without disclosure by any of the Parties.
(b) In the event that any Stockholder ceases to hold Shares, such
Stockholder shall nevertheless continue to hold all such data and information
confidential until such time as such data and information otherwise becomes
publicly available.
SECTION 11.2 ANNOUNCEMENTS.
(a) No press release or other public announcement concerning this Agreement
and/or the business of the Company shall be made by any of the Parties without
the contents thereof having been approved in advance by all of the Stockholders
except that any Party may without such approval make such announcements as may
be required pursuant to any applicable legal or governmental requirements or
pursuant to the rules and regulations of any stock exchange to which such Party
is subject.
(b) A Stockholder shall be deemed to have approved an announcement proposed
by another Party if it has not responded to such other Party within three
business days of its receipt of the text of such proposed announcement.
ARTICLE XII
MISCELLANEOUS
SECTION 12.1 BANKING; ELIGIBLE INVESTMENT; LOANS.
(a) Except as provided in Section 12.1(b), all funds of the Company shall
be deposited in such depositories as shall have been approved by the Board of
Directors as acceptable depositories for funds of the Company.
33
<PAGE>
(b) The Managing Director shall have the power to invest funds of the
Company, in the Company's name and on its behalf, in Eligible Investments.
(c) Without the prior unanimous written consent of all Stockholders, the
Company shall not make any loan or advance to any Stockholder, any Affiliate of
any Stockholder or any officer or employee thereof.
SECTION 12.2 NOTICES. Unless otherwise specified in this Agreement, all
notices, demands, requests, certificates or other communications which any of
the Parties may desire or be required to give hereunder (herein referred to
collectively as "Notices") shall be in writing and shall be given by (a)
personal delivery to the party to whom addressed, (b) first-class registered or
certified mail (return receipt requested), postage prepaid or (c) electronic
facsimile addressed to the Company and/or to the Stockholders at their
respective addresses and numbers set forth below, or at such other address and
number as may be designated by the Company or a Stockholder by like notice.
Notices sent by mail in compliance with the provisions of this Section 12.2
shall be deemed given on the fifth (5th) business day succeeding the day on
which they are placed in the mail. Notices sent by personal delivery or fax in
compliance with the provisions of this Section 12.2 shall be deemed given when
personally delivered to the addressee.
SECTION 12.3 APPLICABLE LAW. This Agreement shall be governed by and
construed according to the General Corporation law of the State of Delaware, as
amended from time to time. In addition, to the extent that matters concerning
the governance or operations of the Company are not covered by this Agreement or
the Bylaws, the provisions of the General Corporation law of the State of
Delaware, as am ended from time to time, shall govern. Moreover, to the extent
that the provisions in such documents are inconsistent with the provisions of
the General Corporation law of the State of Delaware, as amended, the provisions
of such laws shall apply to the extent that they may not legally be superseded
or supplemented by this Agreement or the Bylaws.
SECTION 12.4 SEVERABILITY. If any provision of this Agreement shall be or be
determined to be unenforceable, void or otherwise contrary to law, such
condition shall in no manner operate to render any other provision of this
Agreement unenforceable, void or contrary to law, and this Agreement shall
continue to be operative and enforceable in accordance with the remaining terms
and provisions hereof.
SECTION 12.5 SUCCESSORS AND ASSIGNS.
(a) Except as otherwise provided in this Agreement, no rights, benefits or
obligations under this Agreement may be assigned by any Party without the prior
written consent of the other Parties hereto.
34
<PAGE>
(b) This Agreement shall be binding upon the Parties and their respective
permitted successors, assigns and Transferees, and shall inure to the benefit of
the Parties and, except as otherwise provided herein, to their respective
successors, assigns and Transferees.
SECTION 12.6 ENTIRE AGREEMENT. This Agreement, the Certificate of
Incorporation and the Bylaws contain the entire agreement among the Parties (or
any of them) relating to the subject matter hereof. Amendments, variations,
modifications or changes herein may be effective and binding upon the Parties
by, and only by, setting forth the same in a document duly adopted and executed
in accordance with the terms of this Agreement by each Party, or his duly
authorized agent, and any alleged amendment, variation, modification or change
herein which is not so documented shall not be so effective as to any Party. In
the case of conflict between this Agreement and the Bylaws of the Company, then
as between the Stockholders this Agreement shall control.
SECTION 12.7 CAPTIONS. Captions and headings of articles, sections,
subsections, paragraphs or subparagraphs of this Agreement are solely for the
convenience of the Parties and are not a part of this Agreement, and shall not
be used for the interpretation or determination of the conditions of this
Agreement or any provision hereof.
SECTION 12.8 NUMBER AND GENDER. Unless the context clearly indicates
otherwise, where appropriate in this Agreement, the singular shall include the
plural and the masculine shall include the feminine and the neuter, and vice
versa, to the extent necessary to give the terms defined and used in this
Agreement their proper meanings. In this Agreement, each Stockholder has been
generally referred to as though singular in number and neuter in gender
regardless of the actual number or gender of such Stockholder.
SECTION 12.9 COUNTERPARTS. This Agreement is being signed in several
counterparts, each of which shall be deemed an original, and all of which shall
together constitute but one and the same Agreement.
SECTION 12.10 EXHIBITS. Exhibits "A", "B", "C", D", "E", "F", "G", "H", and
"I" attached hereto are hereby incorporated herein and made a part hereof for
all purposes, and references herein thereto shall be deemed to include this
reference and incorporation.
SECTION 12.11 U.S. DOLLARS. All amounts of money specified or referred to in
or contemplated by this Agreement shall mean U.S. Dollars.
SECTION 12.12 LEGENDS. All stock certificates issued by the Company will bear
legends set forth in Exhibit G.
35
<PAGE>
SECTION 12.13 SUBMISSION TO JURISDICTION. Each Party hereby irrevocably
submits to the jurisdiction of any state or federal court located in Houston,
Texas over any action, suit or proceeding (i) to enforce or defend any right
under this Agreement, or (ii) arising from any other relationship existing in
connection with this Agreement, and each Party hereby irrevocably agrees that
all claims in respect of any such action or proceeding may be heard or
determined in such state or federal court. Each Party hereby irrevocably waives,
to the fullest extent permitted by applicable law, the defense of an
inconvenient forum to the maintenance of any such action or proceeding or any
other substantive or procedural rights or remedies it may have with respect to
the maintenance of any such action or proceeding in any such forum. To the
fullest extent permitted by applicable law, each Party hereby agrees that a
final judgment, that is, a judgment as to which all rights of appeal have been
exhausted or the time for taking same has expired, in any such action or
proceeding, shall be conclusive and may be enforced in any other jurisdiction by
suit on the judgment or in any other manner provided by law. Each Party agrees
not to institute any legal actions or proceedings against the other Parties or
any Affiliate thereof or any director, officer, shareholder, employee, attorney
or agent thereof, or any property of the other Parties or any such Affiliate,
arising out of or relating to this Agreement or any other document referred to
herein or entered into in connection with this Agreement, in any court other
than as hereinabove specified in this Section 12.13.
SECTION 12.14 INDEMNIFICATION. Subject to any specific provisions in this
Agreement to the contrary, each of the Stockholders agrees to indemnify and hold
the other Stockholders harmless, to the extent of that Stockholder's percentage
ownership of Shares, from all liabilities which may arise directly or indirectly
under this Agreement.
EXECUTED to be effective as of the date first written above.
[SEPARATE SIGNATURE PAGES ARE ATTACHED.]
SOCO INTERNATIONAL, INC.,
a Delaware corporation
Address for Notices:
SOCO International, Inc. By:/s/ Edward T. Story, Jr.
1100 Louisiana Edward T. Story, Jr.
Suite 900 President
Houston, Texas 77002
Attention: Edward T. Story, Jr.
36
<PAGE>
Facsimile: (713) 528-4015
with a copy to:
Woodard, Hall & Primm, P.C.
7000 Texas Commerce Tower
Houston, Texas 77002
Attention: Mr. Ralph K. Miller, Jr.
Facsimile: (713) 221-1802
PT. BIP ENERGIMAS
an Indonesian corporation
Address for Notices:
PT. BIP Energimas By:/s/Bambang Soerjantono Soerjo
Gedung Bank Niaga Bambang Soerjantono Soerjo
Lanti 4 President Director
Jl. M.H. Thamrin No. 55
Jakarta 10350
Republic of Indonesia
Attention: Bambang Soeijantono Soeijo
Facsimile: 6221-230-1272
CORBIN ASSOCIATES LIMITED
a British Virgin Islands corporation
Address for Notices:
Corbin Associates Limited By:/s/Mark E. Horak
1301 McKinney Mark E. Horak
Houston, Texas 77010 Agent and Attorney-in-Fact
Attention: Mark E. Horak
Facsimile: (713) 651-5246
37
<PAGE>
SOCO TAMTSAG MONGOLIA, INC.,
a Delaware corporation
Address for Notices:
c/o SOCO International, Inc. By: /s/ Edward T. Story, Jr.
1100 Louisiana Edward T. Story, Jr.
Suite 900 Managing Director
Houston, Texas 77002
Attention: Edward T. Story, Jr.
Facsimile: (713) 528-4015
with a copy to:
Woodard, Hall & Primm, P.C.
7000 Texas Commerce Tower
Houston, Texas 77002
Attention: Mr. Ralph K. Miller, Jr.
Facsimile: 713-221-1802
38
<PAGE>
EXHIBIT 22
SUBSIDIARIES
1. TRI Mongolia, Inc., a Texas corporation wholly owned by Territorial.
2. Territorial Resources (Delaware), Inc., a Delaware corporation wholly owned
by Territorial.
3. Territorial Resources (Cayman) Ltd., a company formed under the laws of the
Cayman Islands wholly owned by Territorial
<PAGE>
EXHIBIT 23.1
Donald L. Oliver P.E.
10341 Rocklock Way
Parker, Colorado 80134
July 8, 1997
Territorial Resources, Inc.
734 7 Avenue SW
Suite 1345
Calgary, Alberta
Canada T2P 3P8
Gentlemen:
I have prepared oil and gas reserve estimates for Territorial Resources, Inc.,
(the "Company"), for the Company's fiscal years ended March 31, 1994, 1995, and
1996. Such estimates are included in the notes to the Financial Statements of
the Company which appear in the Company's annual report on form 10-K for the
fiscal year ended March 31, 1997.
I hereby consent to the identification in such Form 10-K of myself as the expert
which has prepared such estimates. I also hereby consent to the inclusion of
this letter as an exhibit to such Form 10-K and registration statements.
Very truly yours,
/s/ Donald L. Oliver
Donald L. Oliver
<PAGE>
EXHIBIT 23.2
July 8, 1997
INDEPENDENT PETROLEUM ENGINEERS CONSENT
---------------------------------------
The undersigned firm of Independent Petroleum Engineers, of Calgary, Alberta,
Canada, knows that it is named as having prepared a Constant Dollar evaluation
effective March 31, 1996, dated June 6, 1996, of the interests of Territorial
Resources, Inc., and hereby gives its consent to the use of its name and to the
use of the same estimates.
DL PADDOCK & ASSOCIATES, LTD.
/s/ D. L. Paddock
D. L. Paddock, P. Eng.
President
<PAGE>
Exhibit 23.3
July 9, 1997
Territorial Resources, Inc.
734 7 Avenue SW
Suite 1345
Calgary, Alberta
Canada T2P 3P8
Gentlemen:
The undersigned firm of Independent Petroleum Engineers of Houston, Texas, USA,
knows that it is named as having prepared an evaluation effective December 31,
1996 and dated May 28, 1997 for the interests of Territorial Resources, Inc. in
Mongolia. GEO Engineering, Inc. hereby gives its consent to use the said
evaluation in Territorial Resources, Inc., 10K report for the 12 months ended
March 31, 1997.
Sincerely,
GEO Engineering, Inc.
/s/ Jay O. Gallagher
Jay O. Gallagher, Director
<PAGE>
EXHIBIT 23.4
July 10, 1997
Mr. Daniel A. Mercier, Chairman
Territorial Resources, Inc.
734 - 7th Avenue S.W., Suite 1345
Calgary, Alberta
Canada T2P 3P8
RE: INDEPENDENT PETROLEUM ENGINEER'S CONSENT
Dear Mr. Mercier:
The consulting firm of Gaffney, Cline & Associates, Inc. (GCA) of Dallas,
Texas, USA, consents to Territorial Resources, Inc. using information from our
report entitled Review of Block B8/38 Offshore Thailand dated May 16, 1997, in
your 10-K report for the 12 months ended March 31, 1997. Such information must
be clearly defined and must not be used out of GCA's intended context.
Very truly yours,
GAFFNEY, CLINE & ASSOCIATES, INC.
/s/ Glenn H. Jones
Glenn H. Jones
Chief Executive Officer
North American Region
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<PERIOD-START> APR-01-1996
<PERIOD-END> MAR-31-1997
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