<PAGE>
As filed with the Securities and Exchange Commission on April 27, 1998
SCHEDULE 14A INFORMATION
Proxy Statement Pursuant to Section 14(a)
of the Securities Exchange Act of 1934
Filed by Registrant /X/
Filed by a party other than the Registrant / /
Check the appropriate box:
/X/ Preliminary Proxy Statement
/ / Confidential, for Use of the Commission Only (as permitted by Rule
14a-6(e)(2))
/ / Definitive Proxy Statement
/ / Definitive Additional Materials
/ / Soliciting Material Pursuant to Section 240.14a-11(c) or Section
240.14a-12
Territorial Resources, Inc.
(Name of Registrant as Specified In Its Character)
-------------------------
(Name of Person(s) Filing Proxy Statement, if other than the Registrant)
Payment of Filing Fee (Check the appropriate box):
/ / No fee required
/X/ Fee computed on table below per Exchange Act Rule 14a-6(i)(1) and
0-11.
(1) Title of each class of securities to which transaction applies:
Common Stock, no par value
(2) Aggregate number of securities to which transaction applies:
1,261,691
(3) Per unit price or other underlying value of transaction computed
pursuant to Exchange Act Rule 0-11 (set forth the amount on which
the filing fee is calculated and state how it was determined):
$1.40 (Redemption price for 1,261,691 shares being cashed out as
fractional shares in Reverse Stock Split)
(4) Proposed maximum aggregate value of transaction: $1,766,367
(5) Total fee paid: $354.00
/ / Fee paid previously with preliminary materials.
/X/ Check box if any part of the fee is offset as provided by Exchange Act
Rule 0-11(a)(2) and identify the filing for which the offsetting fee
was paid previously. Identify the previous filing by registration
statement number, or the Form or Schedule and the date of its filing.
(1) Amount Previously Paid: $354.00
(2) Form, Schedule or Registration Statement No.: Rule 13e-3
Transaction Statement
(3) Filing Party: Territorial Resources, Inc.
(4) Date Filed: February 10, 1998
<PAGE>
PRELIMINARY COPY
TERRITORIAL RESOURCES, INC.
734 7th Avenue S.W.
Calgary, Alberta
Canada T2P 3P8
____________, 1998
Dear Shareholder:
You are cordially invited to attend a Special Meeting of Shareholders of
Territorial Resources, Inc. (the "Company"), to be held on _____________ , 1998
at 10:00 a.m. Calgary time, at the Company's offices, located at 734 7th Avenue
S.W., Calgary, Alberta, Canada.
At the Special Meeting, the holders of the Company's common stock, no par
value (the "Common Stock"), will be asked to approve and adopt an amendment to
the Company's Articles of Incorporation ("the Amendment") providing for (a) a
one-for-36,000 reverse stock split of the Company's Common Stock and (b) a cash
payment of $1.40 per existing share of Common Stock (the "Cash Consideration")
in lieu of the issuance of any resulting fractional shares of the Common Stock
to any shareholders who, after the reverse stock split, would otherwise own a
fractional share of Common Stock. Items (a) and (b) will be considered as one
proposal and are referred to herein as the "Reverse Stock Split."
The text of the proposed Amendment is set forth in Annex A to the
accompanying Proxy Statement. If the Reverse Stock Split is approved, the
shareholders of the Company who own less than one (1) share of Common Stock
after the Reverse Stock Split will cease to be shareholders of the Company or to
have any equity interest in the Company. Such shareholders will receive the
Cash Consideration for each share of Common Stock of which they are the owners
prior to the Reverse Stock Split (as will the owners of more than one share of
Common Stock who would also own fractional shares of Common Stock).
If the Reverse Stock Split is approved and effected, the Company will elect
to cease filing any reports with the Securities and Exchange Commission (the
"Commission"). Following the de-registration of the Common Stock under the
Securities Exchange Act of 1934, the remaining Company shareholders will vote
upon the approval of a merger (the "Merger") of the Company with a newly-formed
subsidiary of SOCO International plc, a public limited company organized in
England and Wales ("SOCO"), pursuant to a Reorganization Agreement and Plan of
Merger dated January 28, 1998 (the "Merger Agreement"). Pursuant to the Merger,
the remaining Company shareholders will receive in exchange for each of their
shares of Common Stock which were converted into whole shares of New Common
Stock a number of SOCO ordinary shares of 20 pence each ("SOCO Shares") having a
value equal to $1.40, based on the approximate market value of SOCO Shares on
the London Stock Exchange at the time of consummation of the Merger. Therefore,
all shareholders of the Company will ultimately receive either cash pursuant to
the Reverse Stock Split or SOCO Shares pursuant to the Merger of substantially
equal value in exchange for their existing shares of Common Stock.
<PAGE>
Approval of the Reverse Stock Split requires the affirmative vote of the
holders of a majority of the Company's Common Stock. Seven directors and
officers of the Company and two former directors of the Company have agreed to
vote their shares, representing a total of approximately 65% of the outstanding
shares of Common Stock, in favor of the Reverse Stock Split. Accordingly, the
approval of the Reverse Stock Split is assured.
If the Reverse Stock Split is approved, a shareholder of the Company who
strictly complies with the requirements of Article 113 of the Colorado Business
Corporation Act (the "CBCA") may dissent from the Reverse Stock Split and, in
lieu of payment of the Cash Consideration, obtain payment in cash of the "fair
value" of such shareholder's shares of Common Stock as determined under
Article 113 of the CBCA. A shareholder who wishes to assert such dissenter's
rights must deliver to the Company a written notice at the Special Meeting
before the vote on the Reverse Stock Split of such shareholder's intent to
demand payment for such shareholder's shares of Common Stock if the Reverse
Stock Split is effectuated. A shareholder who wishes to assert such dissenter's
rights also may not vote any of the shareholder's shares of Common Stock for the
Reverse Stock Split. See "The Reverse Stock Split -- Dissenting Shareholders'
Rights" in the accompanying Proxy Statement for a statement of the rights of
dissenting shareholders and a description of the procedures required to be
followed to obtain the fair value of the shares of Common Stock. A copy of
Article 113 of the CBCA is attached as Annex B to the accompanying Proxy
Statement. Details of the Reverse Stock Split are set forth in the enclosed
Proxy Statement, which you are urged to read carefully.
Your Board of Directors unanimously believes that the Reverse Stock Split
is in the best interests of the Company and its shareholders. In arriving at
its decision to recommend the Reverse Stock Split, the Board carefully reviewed
and considered the terms and conditions of the Reverse Stock Split and the
factors described in the enclosed Proxy Statement.
If you are a holder of the Company's Common Stock, whether or not you plan
to attend the Special Meeting, please complete, sign and date the enclosed proxy
and return it in the envelope provided for that purpose. If you attend the
meeting and wish to vote in person, you may do so by withdrawing your proxy
prior to the meeting. Under Colorado law, if you abstain from voting, your
abstention will be treated as a "no" vote for purposes of determining whether
approval of the Reverse Stock Split has been obtained.
Sincerely,
Daniel A. Mercier
Chairman of the Board and Chief Executive Officer
THIS TRANSACTION HAS NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION NOR HAS THE COMMISSION PASSED UPON THE FAIRNESS OR MERITS OF
SUCH TRANSACTION NOR UPON THE ACCURACY OR ADEQUACY OF THE INFORMATION CONTAINED
IN THIS DOCUMENT. ANY REPRESENTATION TO THE CONTRARY IS UNLAWFUL.
<PAGE>
TERRITORIAL RESOURCES, INC.
734 7th Avenue S.W.
Calgary, Alberta
Canada T2P 3P8
Notice of Special Meeting of Shareholders
to be Held on ____________, 1998
TO THE SHAREHOLDERS OF TERRITORIAL RESOURCES, INC.:
Notice is hereby given that a Special Meeting of Shareholders (the "Special
Meeting") of Territorial Resources, Inc., a Colorado corporation (the
"Company"), will be held on ____________, 1998 at 10:00 a.m. Calgary time, at
the Company's offices, located at 734 7th Avenue S.W., Calgary, Alberta, Canada
for the purpose of considering and voting upon the following matters:
1. To consider and vote upon the approval and adoption of an amendment to
the Company's Articles of Incorporation ("the Amendment"),
substantially in the form attached as Annex A to the accompanying
Proxy Statement, providing for (a) a one-for-36,000 reverse stock
split of the Company's common stock, no par value (the "Common
Stock"), and (b) a cash payment of $1.40 per existing share of Common
Stock (the "Cash Consideration") in lieu of the issuance of any
resulting fractional shares of Common Stock to any shareholders who,
after the reverse stock split, would otherwise own a fractional share
of Common Stock. Items (a) and (b) will be considered as one proposal
and will be referred to herein as the "Reverse Stock Split," all as
described more fully in the accompanying Proxy Statement; and
2. Such other business as may properly come before the Special Meeting
and any adjournment thereof.
Holders of record of the Company's Common Stock at the close of business on
____________, 1998 (the "Record Date") are entitled to notice of, and to vote
at, the Special Meeting and any adjournment thereof.
If the Reverse Stock Split is approved and effected, the shareholders of
the Company who own less than one (1) share of Common Stock after the Reverse
Stock Split ("New Common Stock") will cease to be shareholders of the Company or
to have any equity interest in the Company. Such shareholders will receive the
Cash Consideration for each of their shares of Common Stock (as will the owners
of one or more shares of New Common Stock who would also otherwise own
fractional shares of New Common Stock), and the Company will elect to cease
filing any reports with the Securities and Exchange Commission (the
"Commission").
<PAGE>
If the Reverse Stock Split is approved and effected, a shareholder of the
Company who strictly complies with the requirements of Article 113 of the
Colorado Business Corporation Act (the "CBCA") may dissent from the Reverse
Stock Split and, in lieu of payment of the Cash Consideration, obtain payment in
cash of the "fair value" of such shareholder's shares of Common Stock as
determined under Article 113 of the CBCA. A shareholder who wishes to assert
such dissenter's rights must deliver to the Company a written notice at the
Special Meeting before the vote on the Reverse Stock Split of such shareholder's
intent to demand payment for such shareholder's shares of Common Stock if the
Reverse Stock Split is effectuated. A shareholder who wishes to assert such
dissenter's rights also may not vote any of the shareholder's shares of Common
Stock for the Reverse Stock Split. See "The Reverse Stock Split -- Dissenting
Shareholders' Rights" in the accompanying Proxy Statement for a statement of the
rights of dissenting shareholders and a description of the procedures required
to be followed to obtain the fair value of the shares of Common Stock. A copy
of Article 113 of the CBCA is attached as Annex B to the accompanying Proxy
Statement. Details of the Reverse Stock Split are set forth in the enclosed
Proxy Statement, which you are urged to read carefully.
YOUR VOTE IS IMPORTANT REGARDLESS OF THE NUMBER OF SHARES OF COMMON STOCK
YOU OWN. WHETHER OR NOT YOU PLAN TO ATTEND THE SPECIAL MEETING, PLEASE
COMPLETE, SIGN, DATE AND RETURN THE ENCLOSED PROXY CARD WITHOUT DELAY. ANY
SHAREHOLDER PRESENT AT THE SPECIAL MEETING MAY VOTE PERSONALLY ON EACH MATTER
BROUGHT BEFORE THE SPECIAL MEETING AND ANY PROXY GIVEN BY A SHAREHOLDER MAY BE
REVOKED AT ANY TIME BEFORE IT IS EXERCISED.
By the order of the Board of Directors,
Daniel A. Mercier
Chairman of the Board and Chief Executive Officer
____________, 1998
PLEASE DO NOT SEND ANY CERTIFICATES FOR YOUR SHARES AT THIS TIME.
<PAGE>
TABLE OF CONTENTS
PAGE
SUMMARY. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Time, Date and Place of Special Meeting . . . . . . . . . . . . . . . . . 3
Purpose of the Special Meeting. . . . . . . . . . . . . . . . . . . . . . 3
Record Date; Quorum . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Required Vote . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 3
Proxies . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 4
Solicitation of Proxies . . . . . . . . . . . . . . . . . . . . . . . . . 4
Certain United States Federal Income Tax Consequences . . . . . . . . . . 4
Certain Effects of the Reverse Stock Split. . . . . . . . . . . . . . . . 5
Terms of the Reverse Stock Split. . . . . . . . . . . . . . . . . . . . . 5
Dissenting Shareholders' Rights . . . . . . . . . . . . . . . . . . . . . 5
SOCO; The Merger. . . . . . . . . . . . . . . . . . . . . . . . . . . . . 6
Common Ownership; Inherent Conflicts of Interest. . . . . . . . . . . . . 6
SPECIAL FACTORS. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 7
Background and Reasons for the Reverse Stock Split and Merger . . . . . . 7
Certain Effects of the Reverse Stock Split. . . . . . . . . . . . . . . .11
Opinion of Financial Advisor. . . . . . . . . . . . . . . . . . . . . . .12
Recommendation of the Board of Directors. . . . . . . . . . . . . . . . .17
Interest of Certain Persons in the Reverse Stock Split. . . . . . . . . .18
Plans for the Company after the Reverse Stock Split . . . . . . . . . . .19
Certain United States Federal Income Tax Consequences . . . . . . . . . .19
Source and Amounts of Funds for and Expenses of the Reverse
Stock Split . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .21
PRO FORMA CONDENSED FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . .23
THE REVERSE STOCK SPLIT . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Amendment of Articles of Incorporation to Effect the Reverse
Stock Split . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Exchange of Shares and Payment in Lieu of Issuance of Fractional
Shares. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .29
Voting; Vote Required . . . . . . . . . . . . . . . . . . . . . . . . . .29
Dissenting Shareholders' Rights . . . . . . . . . . . . . . . . . . . . .30
PRICE RANGE OF COMMON STOCK; DIVIDENDS; BOOK VALUE . . . . . . . . . . . . . .32
Common Stock Information. . . . . . . . . . . . . . . . . . . . . . . . .32
Dividends . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
Book Value. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .32
DIRECTORS AND EXECUTIVE OFFICERS . . . . . . . . . . . . . . . . . . . . . . .33
Directors and Executive Officers. . . . . . . . . . . . . . . . . . . . .33
Principal Occupation and Business Experience. . . . . . . . . . . . . . .34
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<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
OWNERS AND MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . .36
INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . . . . .38
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . . . . .38
INDEX TO FINANCIAL STATEMENTS. . . . . . . . . . . . . . . . . . . . . . . . F-1
-ii-
<PAGE>
PROXY STATEMENT
OF
TERRITORIAL RESOURCES, INC.
FOR
SPECIAL MEETING OF SHAREHOLDERS
TO BE HELD ON _________, 1998
This Proxy Statement is being furnished to the holders as of the Record
Date (as defined below) of common stock, no par value (the "Common Stock"), of
Territorial Resources, Inc., a Colorado corporation (the "Company"), in
connection with the solicitation of proxies by the Company's Board of Directors
(the "Board" or the "Board of Directors"), for use at a Special Meeting of
Shareholders of the Company (the "Special Meeting") to be held on _______, 1998
at 10:00 a.m. Calgary time at the Company's offices, located at 734 7th Avenue
S.W., Calgary, Alberta, Canada. This Proxy Statement and the accompanying Proxy
are first being mailed to shareholders of the Company on or about _______, 1998.
At the Special Meeting, the holders of the Company's Common Stock will be
asked to consider and vote upon a proposal to approve and adopt an amendment to
the Company's Articles of Incorporation ("the Amendment"), substantially in the
form attached as Annex A hereto, providing for (a) a one-for-36,000 reverse
stock split of the Company's Common Stock and (b) a cash payment of $1.40 per
existing share of Common Stock (the "Cash Consideration") in lieu of the
issuance of any resulting fractional shares of Common Stock to any shareholders
who, after the reverse stock split, would otherwise own a fractional share of
Common Stock. Items (a) and (b) will be considered as one proposal and are
referred to herein as the "Reverse Stock Split."
Pursuant to the Colorado Business Corporation Act (the "CBCA"), the
affirmative vote of the holders of a majority of the outstanding shares of
Common Stock is required to approve the Reverse Stock Split. Seven directors
and officers of the Company and two former directors of the Company have agreed
to vote their shares, representing a total of approximately 65% of the
outstanding shares of Common Stock, in favor of the Reverse Stock Split.
Accordingly, the approval of the Reverse Stock Split is assured.
If the Reverse Stock Split is approved, the shareholders of the Company who
would own less than one (1) share of Common Stock after the Reverse Stock Split
("New Common Stock") will cease to be shareholders of the Company or to have any
equity interest in the Company. Such shareholders will receive the Cash
Consideration for each of their shares of Common Stock (as will the owners of
one or more shares of New Common Stock who would also otherwise own fractional
shares of New Common Stock), and the Company will elect to cease filing any
reports with the Securities and Exchange Commission (the "Commission").
The Company has entered into a Reorganization Agreement and Plan of Merger
dated January 28, 1998 (the "Merger Agreement"), with SOCO International plc, a
public limited company organized in England and Wales ("SOCO"), and SOCO
Resources (Colorado), Inc., a new Colorado corporation and wholly-owned
subsidiary of SOCO ("Newco"), pursuant to which, the Company has agreed to merge
with Newco (the "Merger") after effectuation of the Reverse Stock Split and
<PAGE>
deregistration of the Common Stock under the Securities Exchange Act of 1934, as
amended (the "Exchange Act"). Approximately 90 days after effectuation of the
Reverse Stock Split, a special meeting of the remaining shareholders of the
Company will be called to approve the Merger. The terms of the Merger provide
that each of the outstanding shares of New Common Stock will be exchanged for a
number of SOCO ordinary shares of 20 pence each ("SOCO Shares") having a value
equal to $50,400 (which is $1.40 multiplied by 36,000), based on the approximate
market value of the SOCO Shares on the London Stock Exchange at the time of
consummation of the Merger. The Cash Consideration will be substantially
equivalent to the value of the SOCO Shares to be issued with respect to a share
of Common Stock in the Merger. Accordingly, all shareholders of the Company
will receive either cash (pursuant to the Reverse Stock Split) or SOCO Shares of
substantially equal value (pursuant to the Merger) in exchange for their shares
of Common Stock.
SHAREHOLDERS ARE ENCOURAGED TO READ AND REVIEW CAREFULLY THIS PROXY
STATEMENT AND THE FINANCIAL INFORMATION AND ANNEXES INCLUDED HEREWITH.
NO PERSONS HAVE BEEN AUTHORIZED TO GIVE ANY INFORMATION OR TO MAKE ANY
REPRESENTATIONS OTHER THAN THOSE CONTAINED IN THIS PROXY STATEMENT IN CONNECTION
WITH THE SOLICITATION OF PROXIES MADE HEREBY, AND, IF GIVEN OR MADE, SUCH
INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING BEEN AUTHORIZED
BY THE COMPANY OR ANY OTHER PERSON.
-----------------
The date of this Proxy Statement is __________, 1998.
-2-
<PAGE>
SUMMARY
The following is a brief summary of certain information contained elsewhere
in this Proxy Statement. This summary is not intended to be a complete
description of the matters covered in this Proxy Statement and is subject to and
qualified in its entirety by reference to the more detailed information
contained elsewhere in this Proxy Statement, including the Annexes hereto.
TIME, DATE AND PLACE OF SPECIAL MEETING
The Special Meeting will be held on _________, 1998 at 10:00 a.m. Calgary
time, at the Company's offices, located at 734 7th Avenue S.W., Calgary,
Alberta, Canada.
PURPOSE OF THE SPECIAL MEETING
At the Special Meeting, the holders of the Company's Common Stock will be
asked to consider and vote upon a proposal to approve and adopt the Amendment in
order to effectuate the Reverse Stock Split. The shareholders are not being
asked to approve the Merger at the Special Meeting. The Board of Directors
unanimously recommends that the shareholders vote FOR approval of the Reverse
Stock Split.
RECORD DATE; QUORUM
The close of business on ________, 1998 (the "Record Date") has been fixed
as the record date for determining holders of shares of Common Stock entitled to
notice of and to vote at the Special Meeting. Each share of Common Stock
outstanding on such date is entitled to one vote at the Special Meeting. As of
the Record Date, 10,370,824 shares of Common Stock were outstanding and held of
record by [2,651] holders. The presence, in person or by proxy, of the holders
of a majority of the outstanding shares of Common Stock entitled to vote at the
Special Meeting is necessary to constitute a quorum for the transaction of
business at the Special Meeting. Abstentions and broker non-votes are counted
for purposes of determining whether a quorum exists for the transaction of
business at the Special Meeting but are not counted for purposes of determining
whether the holders of a majority of the shares of Common Stock present in
person or by proxy at the Special Meeting voted in favor of the Reverse Stock
Split.
REQUIRED VOTE
Pursuant to the CBCA, the affirmative vote of the holders of a majority of
the outstanding shares of Common Stock is required to approve the Reverse Stock
Split. The Reverse Stock Split is not structured to require the approval of at
least a majority of the shareholders who will not remain shareholders of the
Company after the Reverse Stock Split is effected. Seven directors and officers
of the Company and two former directors of the Company, who beneficially own a
total of approximately 65% of the outstanding shares of Common Stock, have
agreed with SOCO to vote their shares of Common Stock in favor of the Reverse
Stock Split. All directors and officers of the Company intend to vote all of
their shares of Common Stock in favor of the Reverse Stock Split.
-3-
<PAGE>
PROXIES
Shares of Common Stock represented by properly executed proxies received at
or prior to the Special Meeting and which have not been revoked will be voted in
accordance with the instructions indicated thereon. If no instructions are
indicated on a properly executed proxy, such proxy will be voted FOR the Reverse
Stock Split. A shareholder who has given a proxy may revoke such proxy at any
time prior to its exercise at the Special Meeting by (i) giving written notice
of revocation to the Secretary of the Company, (ii) properly submitting to the
Company a duly executed proxy bearing a later date, or (iii) attending the
Special Meeting and voting in person. Attendance at the Special Meeting will
not in and of itself revoke a proxy. All written notices of revocation and
other communications with respect to revocation of proxies should be addressed
as follows: Corporate Secretary, 734 7th Avenue S.W., Calgary, Alberta, Canada
T2P 3P8.
If the Special Meeting is adjourned or postponed for any purpose, at any
subsequent reconvening of the Special Meeting, all proxies will be voted in the
same manner as such proxies would have been voted at the original convening of
the meeting (except for any proxies which have theretofore effectively been
revoked or withdrawn), notwithstanding that they may have been effectively voted
on the same or any other matter at a previous meeting.
SHAREHOLDERS SHOULD NOT SEND ANY STOCK CERTIFICATES WITH THEIR PROXY CARDS.
IF THE REVERSE STOCK SPLIT IS CONSUMMATED, THE PROCEDURE FOR THE EXCHANGE OF
CERTIFICATES REPRESENTING SHARES OF COMMON STOCK WILL BE AS SET FORTH IN THIS
PROXY STATEMENT. SEE "THE REVERSE STOCK SPLIT -- EXCHANGE OF SHARES AND PAYMENT
IN LIEU OF ISSUANCE OF FRACTIONAL SHARES."
SOLICITATION OF PROXIES
The cost of solicitation of the shareholders of the Company will be paid by
the Company. Such cost will include the reimbursement of banks, brokerage
firms, nominees, fiduciaries and custodians for the expenses of forwarding
solicitation material to beneficial owners of shares. In addition to the
solicitation of proxies by use of mail, the directors, officers and employees of
the Company may solicit proxies personally or by telephone, telegraph or
facsimile transmission. Such directors, officers and employees will not be
additionally compensated for such solicitation but may be reimbursed for
out-of-pocket expenses incurred in connection therewith.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
The receipt by a shareholder of the Company of the Cash Consideration in
lieu of fractional shares of New Common Stock pursuant to the Reverse Stock
Split will be a taxable transaction for United States federal income tax
purposes. See "Special Factors--Certain United States Federal Income Tax
Consequences."
-4-
<PAGE>
CERTAIN EFFECTS OF THE REVERSE STOCK SPLIT
Upon the effectiveness of the Reverse Stock Split, the shareholders of the
Company, other than the 23 remaining shareholders, each of whom prior to
effectiveness of the Reverse Stock Split own 36,000 or more shares of Common
Stock, will no longer have any continuing interest as shareholders of the
Company, and the Company will elect to suspend the filing of reports under, and
will apply for termination of the registration of its shares of Common Stock
pursuant to, the Exchange Act. See "Special Factors -- Certain Effects of the
Reverse Stock Split."
TERMS OF THE REVERSE STOCK SPLIT
The proposed Amendment provides for (a) a one-for-36,000 Reverse Stock
Split of the Company's Common Stock and (b) a cash payment of the Cash
Consideration for the currently outstanding Common Stock in lieu of the issuance
of any resulting fractional shares of the New Common Stock to any shareholders
who, after the Reverse Stock Split, would otherwise own a fractional share of
New Common Stock. The Amendment does not modify any of the rights or privileges
of the Common Stock. Immediately upon the filing of Articles of Amendment with
the Secretary of State of the State of Colorado with respect to the Amendment
(the "Articles of Amendment"), every 36,000 shares of the Company's Common Stock
issued on the date of the filing of the Articles of Amendment will be
automatically converted into one share of New Common Stock. All shares which
would otherwise be converted into a fractional share of New Common Stock will
instead be converted into the right to receive the Cash Consideration. The
Company will pay for such fractional shares upon the physical surrender by the
fractional shareholders of their share certificates pursuant to the transmittal
instructions to be mailed by the Company to the holders of fractional shares.
See "The Reverse Stock Split -- Amendment of Articles of Incorporation to Effect
the Reverse Stock Split" and "The Reverse Stock Split -- Exchange of Shares and
Payment in Lieu of Issuance of Fractional Shares."
DISSENTING SHAREHOLDERS' RIGHTS
If the Reverse Stock Split is approved, a shareholder who strictly complies
with the requirements of Article 113 of the CBCA may dissent from the Reverse
Stock Split and, in lieu of the payment of the Cash Consideration, obtain
payment in cash of the "fair value" of such shareholder's shares of Common Stock
as determined under Article 113 of the CBCA. A shareholder who wishes to assert
such dissenter's rights must deliver to the Company a written notice, before the
vote on the Reverse Stock Split at the Special Meeting, of such shareholder's
intent to demand payment for such shareholder's shares of Common Stock if the
Reverse Stock Split is effectuated. A shareholder who wishes to assert such
dissenter's rights also may not vote any of the shareholder's shares of Common
Stock for the Reverse Stock Split. See "The Reverse Stock Split -- Dissenting
Shareholders' Rights" for a statement of the rights of dissenting shareholders
and a description of the procedures required to be followed to obtain the fair
value of the shares of Common Stock. A copy of Article 113 of the CBCA is
attached as Annex B hereto.
-5-
<PAGE>
SOCO; THE MERGER
SOCO is a public limited company, organized in England and Wales, whose
shares are traded on the London Stock Exchange. SOCO is an independent oil and
gas exploration and production company which is headquartered in London and owns
interests in Mongolia, Russia, the United Kingdom, Yemen, Thailand and Tunisia.
As of June 30, 1997, SOCO had net assets of approximately $130 million and
approximately 49.3 million SOCO Shares were outstanding.
Approximately 90 days following completion of the Reverse Stock Split, at
which time the registration of the shares of Common Stock under the Exchange Act
will have been terminated, the Company will call a meeting of its 23 remaining
shareholders to approve the Merger. Pursuant to the Merger, each remaining
shareholder will receive in exchange for each of his shares of New Common Stock
a number of SOCO Shares having a value of $50,400 (which is $1.40 multiplied by
36,000), based on the approximate market value of the SOCO Shares on the London
Stock Exchange at the time of consummation of the Merger. The SOCO Shares will
be issued in a private offering exempt from registration under the Securities
Act.
COMMON OWNERSHIP; INHERENT CONFLICTS OF INTEREST
The Company owns 600,000 (approximately 1.2% of the outstanding) shares of
SOCO. The Company also owns interests in certain oil and gas properties in
Mongolia and in the Gulf of Thailand in which SOCO also owns interests. The
Company and SOCO each own shares of SOCO Tamtsag Mongolia Inc. ("SOTAMO"), which
holds title to certain oil and gas properties in Mongolia. The Company owns
47 (5% of the outstanding) shares of SOTAMO's capital stock and SOCO owns 469
(50% of the outstanding) shares of SOTAMO's capital stock. SOCO's President and
Chief Executive Officer, Edward T. Story, Jr., serves as the Managing Director
of SOTAMO. SOCO is the operator of the Company's oil and gas interests in
Mongolia and, through U.S. and Thai subsidiaries, is also the concessionaire and
operator of the Company's Thailand interests. See "Special Factors - Background
and Reasons for the Reverse Stock Split and Merger."
Following the Merger, Daniel A. Mercier, Chairman and Chief Executive
Officer of the Company, expects to become an officer of SOCO; however, no formal
offer of employment has been extended by SOCO, and no specific terms of any such
employment, including salary, have been determined. William C. Penttila,
President of the Company, and Dennis M. Buck, Vice President, Exploration of the
Company, are officers of Exploration Associates Inc., an exploration consulting
company that has provided consulting services to both the Company and SOCO in
the past. Exploration Associates Inc. expects to continue providing consulting
services to SOCO following the Merger on substantially the same terms as those
being currently provided; however, SOCO has not made any commitment with respect
to such services. Edward T. Story, Jr. is President and Chief Executive Officer
and a Director of SOCO and was, until December 26, 1996, a Director of the
Company. Jimmy McCarroll, a Director of the Company, has assisted SOCO in
certain of its farmout endeavors during the past four years. See "Special
Factors - Interests of Certain Persons in the Reverse Stock Split."
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The following is a table showing the beneficial ownership of Common Stock
and SOCO Shares as of March 31, 1998 and SOCO Shares after the Merger for all
officers and directors of the Company or SOCO who have ownership interests in
both companies:
<TABLE>
<CAPTION>
BENEFICIAL OWNERSHIP OF BENEFICIAL OWNERSHIP OF
BENEFICIAL OWNERSHIP OF SOCO SHARES SOCO SHARES
COMMON STOCK BEFORE MERGER AFTER MERGER
-------------------------- ----------------------- -----------------------
NAME SHARES PERCENTAGE SHARES PERCENTAGE SHARES PERCENTAGE
- ---------------------- ------------- ---------- ----------- ---------- ----------- ----------
<S> <C> <C> <C> <C> <C> <C>
Daniel A. Mercier 2,528,667(1) 24.3% 6,000 * 627,000(2) 1.3%
William C. Penttila 689,921 6.7% 62,812 * 233,812 *
Dennis M. Buck 689,921 6.7% 42,812 * 213,812 *
Edward T. Story 471,061 4.5% 2,843,116 5.8% 2,960,116 6.0%
Douglas N. Baker 2,428,390(1) 23.4% 4,500 * 594,000(2) 1.2%
</TABLE>
- -----------------
* Represents less than one percent.
(1) 2,406,167 of these shares are owned by Asia Energy Ltd., in which Messrs.
Mercier and Baker have approximately 11.8% and 1.7% pecuniary interests,
respectively. See "Security Ownership of Certain Beneficial Owners and
Management."
(2) 594,000 of these SOCO Shares will be owned by Asia Energy Ltd.
The 18 Territorial shareholders who are not shown in the above table and
who will receive SOCO Shares in the Merger will each own less than 1% of the
outstanding SOCO Shares after the Merger and in the aggregate will own
approximately 2.4% of the outstanding SOCO Shares after the Merger.
SPECIAL FACTORS
BACKGROUND AND REASONS FOR THE REVERSE STOCK SPLIT AND MERGER
The Company was formed upon the merger of Target Oil & Gas Incorporated
with Egret Energy Corporation on December 31, 1984, with the name of the
resulting corporation being changed to Territorial Resources, Inc. in 1988.
Prior to 1995, the Company was engaged in oil and gas exploration and production
in the continental United States. Since March 1995, the Company has primarily
pursued international exploration and production opportunities and has disposed
of substantially all of its continental United States interests.
The assets of the Company consist primarily of: (i) shares of SOTAMO, a
Delaware close corporation whose primary business is exploration and development
of oil and gas interests in a 50,000 square kilometer area known as the Tamtsag
basin of northeastern Mongolia; (ii) a direct 15% interest in one of the four
contract blocks in the same area; (iii) a direct 50% interest in a recently
awarded contract block known as Contract Area XI (Galba) in southern Mongolia;
(iv) a 7.5% working interest in a 9,500 square kilometer oil and gas concession
in the Gulf of Thailand; and (v) 600,000 SOCO Shares (which were acquired from
SOCO in exchange for part of the Company's interest in SOTAMO). SOCO, whose
President and Chief Executive Officer (Edward T. Story, Jr.) serves as the
Managing Director of SOTAMO, is the operator of the Company's interests in
Mongolia. SOCO, through U.S. and Thai subsidiaries, is also the concessionaire
and operator of the Company's Thailand interests.
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<PAGE>
The Company had, for more than a year before being approached by SOCO, been
seeking all reasonable means of securing capital to fund its operations. During
1996 and 1997, management of the Company made presentations to more than 40
potential purchasers, underwriters and private investors in the USA, Canada,
Europe and Asia (none of whom expressed any interest in buying the Company)
to secure funding to meet the capital requirements of the Company. As a
result of these efforts, on March 12, 1997, the Company entered into an
underwriting agreement with McDermid St. Lawrence Securities Ltd.
("McDermid") to raise approximately $1,500,000 (Cdn) through a public
offering of its shares in Canada at a price of $1.00 (Cdn) per share
(approximately $0.70 (US) per share). The Company also applied for listing
of its shares on the Alberta Stock Exchange and filed a preliminary
prospectus with the Alberta Securities Commission on April 27, 1997. Most of
the comments received from the Alberta Securities Commission relating to the
preliminary prospectus had been addressed prior to the Company's being
approached by SOCO; however, the Company suspended its work on this offering
following the commencement of its negotiations with SOCO.
In late July 1997, Daniel A. Mercier, Chairman of the Board and Chief
Executive Officer of the Company, was contacted by Roger D. Cagle, Vice
President and Chief Financial Officer and a Director of SOCO, for the purpose of
discussing a possible acquisition of the Company by SOCO in exchange for SOCO
Shares. SOCO had completed an initial public offering of SOCO Shares on the
London Stock Exchange in May 1997, and desired to use its publicly traded SOCO
Shares to acquire additional interests in SOTAMO and its other Mongolian
properties in which the Company owned an interest. SOCO was also interested in
hiring Mr. Mercier to oversee SOCO's operations in Mongolia and SOCO's other
areas of interest in the Far East as they are developed. In addition,
William C. Penttila, a Director and President of the Company, and Dennis M.
Buck, Vice President of Exploration of the Company, are principals in
Exploration Associates, Inc., an international oil and gas exploration
consulting firm which provides services to both the Company and SOCO. SOCO
believed that a consolidation of the Company with SOCO would increase the
efficiency of work performed by Exploration Associates, Inc. and eliminate any
potential conflicts of interests in connection with the providing of their
services.
Mr. Cagle initially expressed to Mr. Mercier a verbal offer of $13 million
(primarily in the form of SOCO Shares) for all of the outstanding shares of
Common Stock; however, Mr. Cagle expressed SOCO's lack of interest in making a
public offering of SOCO Shares in the United States because of the expense
involved in connection with a registered offering under the Securities Act of
1933, as amended (the "Securities Act") and the ongoing expense thereafter of
preparing and filing reports under the Exchange Act. Mr. Mercier rejected the
$13 million offer as being too low since it was SOCO's first offer, and after
further discussions over a period of several weeks, Messrs. Mercier and Cagle
finally agreed to present to the directors of the Company and the directors of
SOCO a proposed merger based upon a relative valuation of one SOCO Share for
every four shares of Common Stock. At that time, the approximate market value
of the SOCO Shares on the London Stock Exchange was $5.80 (based on the U.S.
Dollar-to-Pound Sterling Exchange Rate at that time), which would result in a
total value for the Company of approximately $15 million, or $1.45 per share of
Common Stock. Mr. Mercier believed that this was the best offer he would
receive from SOCO, because (i) this offer represented a value per share of
more than twice the value of $.70 per share proposed by McDermid in the
aborted Canadian public offering described above, and (ii) Mr. Cagle
indicated that SOCO's management was not willing to increase its offer any
more.
-8-
<PAGE>
Approximately 90% of the outstanding shares of Common Stock is held by 23
shareholders (the "Majority Shareholders"), each of whom is believed by the
Company to be an "accredited investor" within the meaning of Regulation D under
the Securities Act ("Regulation D"), and the remaining 10% is held by
approximately 2,600 shareholders (the "Minority Shareholders"). Because of this
high concentration of shares in the hands of a relatively few Majority
Shareholders, Messrs. Mercier and Cagle decided to explore with counsel the
possibility of structuring an acquisition of the Company by SOCO such that the
Majority Shareholders could exchange their shares of Common Stock for SOCO
Shares in a private transaction exempt from registration under the Securities
Act pursuant to Regulation D and the Minority Shareholders could receive an
equivalent value per share of Common Stock in the form of cash. Mr. Cagle also
expressed SOCO's desire to obtain commitments from seven directors and officers
of the Company and two former directors of the Company, Brian A. Lingard and
Edward T. Story, Jr. (collectively, the "Control Shareholders"), who
beneficially own in the aggregate a total of approximately 65% of the
outstanding shares of Common Stock, to vote their shares in favor of the Reverse
Stock Split and the Merger, in order to ensure the requisite shareholder
approval of SOCO's acquisition of the Company. The Company's Board of Directors
met on September 24, 1997, to discuss the status of the negotiations with SOCO,
and authorized Mr. Mercier to continue such negotiations and his discussions
with Company counsel and SOCO on the structure of the proposed transaction under
the parameters described in the two preceding sentences.
Following extensive discussions between the Company and its counsel and
SOCO and SOCO's U.S. counsel and English counsel, the parties decided upon the
structure set forth in the Merger Agreement, consisting of a Reverse Stock Split
followed by the Merger involving only the Majority Shareholders. At a meeting
held on November 25, 1997, the Company's Board of Directors authorized Mr.
Mercier to continue discussions with SOCO based on such structure. At such
meeting, Mr. Mercier was also authorized to engage Sayer Securities Limited of
Calgary, Alberta, Canada ("Sayer Securities") to render a fairness opinion from
a financial point of view on the consideration to be received by the Company's
shareholders pursuant to the Reverse Stock Split and the Merger.
An unaffiliated representative was not retained to act solely on behalf of
the Minority Shareholders for the purpose of negotiating the terms of the
Reverse Stock Split and the Merger or for the purpose of preparing a report with
respect to the fairness of the Reverse Stock Split and the Merger because the
Board of Directors determined that the cost and expense to retain such
representative or to prepare such report were not warranted in light of (i) the
fact that the opinion delivered by Sayer Securities examined the fairness of the
Cash Consideration and the value of the SOCO Shares to be received by the
Company's shareholders in the Merger, (ii) the fact that the Majority
Shareholders and the Minority Shareholders will receive substantially the same
dollar value for their shares of Common Stock, (iii) the Cash Consideration to
be paid to the Minority Shareholders pursuant to the Reverse Stock Split will be
available for payment at least 90 days prior to the issuance of SOCO Shares
pursuant to the Merger and the Minority Shareholders will not bear any risk that
the Merger might not close because of the occurrence of an unforeseen event
during such 90 day period (which risk will be borne solely by the Majority
Shareholders) and (iv) the right of each of the Minority Shareholders to dissent
from the Reverse Stock Split under the CBCA. See "--Opinion of Financial
Advisor" and "--Recommendation of the Board of Directors."
-9-
<PAGE>
The terms of the Merger Agreement were negotiated during December 1997 and
January 1998, and in connection with such negotiations, the parties agreed to
fix the dollar value of the consideration to be received by all of the Company's
shareholders (whether in cash or in SOCO Shares) at the approximate market value
of 0.25 of a SOCO Share on the London Stock Exchange at the time of execution of
the Merger Agreement, based on the U.S. Dollar-to-Pound Sterling Exchange Rate
at that time. The final version of the Merger Agreement was presented to and
unanimously approved by the Company's Board of Directors at a meeting held on
January 28, 1998. The Merger Agreement obligates the Company to first
effectuate the Reverse Stock Split, under which all shareholders will be paid
the Cash Consideration of $1.40 per share of Common Stock for all shares which
would otherwise be converted into a fractional share of New Common Stock, and as
soon as practicable thereafter to terminate the Company's reporting obligations
under the Exchange Act and remove the shares of Common Stock from registration
under the Exchange Act. The price of $1.40 per share of Common Stock is
acknowledged by the Company and SOCO to be approximately equivalent to the value
of 0.25 of a SOCO Share, based on the approximate market price of SOCO Shares
and the U.S. Dollar-to-Pound Sterling Exchange Rate as of January 28, 1998.
Pursuant to the Merger Agreement, following completion of the
deregistration process (estimated to be 90 days following effectuation of the
Reverse Stock Split), the Company will call a meeting (the "Second Meeting") of
its 23 remaining shareholders (I.E., the Majority Shareholders) to approve the
Merger, and SOCO will provide a confidential offering document for the private
placement of the SOCO Shares to be included with the notice of such meeting.
The Merger will then be effectuated pursuant to Colorado law, and the Majority
Shareholders will receive SOCO Shares having a value of $1.40 for each of their
shares of Common Stock which were converted into whole shares of New Common
Stock. For purposes of the Merger, (a) the SOCO Shares will be valued at the
higher of (i) the average mid-market price per share of the SOCO Shares on the
ten trading days ending on the trading day last preceding the closing of the
Merger or (ii) 90% of the mid-market price on the trading day last preceding
such closing, and (b) the U.S. Dollar-to-Pound Sterling Exchange Rate as of the
close of business on the day preceding the effective date of the Merger will be
used.
The Merger Agreement was also executed by each of the Control Shareholders,
pursuant to which they agreed to vote all shares of Common Stock controlled by
them in favor of the Reverse Stock Split at the Special Meeting and in favor of
the Merger at the Second Meeting. Although Mr. Mercier anticipates being hired
by SOCO as an officer with the responsibility of overseeing SOCO's operations in
the Far East following the Merger, SOCO has not made a formal offer of
employment to Mr. Mercier and no specific terms of any such employment,
including salary, have been determined. Although Messrs. Penttila and Buck
expect to continue performing consulting services for SOCO following the Merger,
no arrangements have been discussed which are different from their current
arrangements with SOCO.
The Company expects that its share of the Mongolia and Thailand program
costs during 1998 would exceed $2.5 million if the Merger does not occur. The
failure by the Company to pay its share of any program cost on the due date
thereof will result in forfeiture by the Company of part of its interest in the
subject properties. Given the Company's small size and attendant difficulty in
raising new capital, the uncertainty of being able to secure such capital on a
timely basis and the risk that future costs could exceed the current estimates,
the Board of Directors believes that a sale of the
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<PAGE>
Company to a significantly larger company which has common property
interests, such as SOCO, at a fair price to the Company's shareholders, is in
the best interests of the Company and its shareholders at this time because
the combined organization will be better able to secure financing and will be
better able to control the pace and direction of future capital expenditures.
In addition, because of SOCO's knowledge of and common interests in the
Company's properties, SOCO is better equipped to evaluate the properties than
any other potential buyer and is capable of realizing operational
efficiencies through the acquisition of such properties that other oil and
gas companies could not achieve. The Company believes that these factors
have resulted in a fair and reasonable offer from SOCO with respect to the
Reverse Stock Split and the Merger. Because SOCO is willing to acquire the
Company now for a fair price and because of the significant risks described
above for the Company to continue as an independent entity, the Board of
Directors believes that this is the appropriate time to sell the Company
pursuant to the Reverse Stock Split and the Merger. The Board of Directors
has also used as a basis for its decision and recommendation the opinion of
Sayer Securities, acting as an independent financial advisor to the Company,
to the effect that the Cash Consideration and the value of the SOCO Shares to
be received by the shareholders of the Company is fair from a financial point
of view. See "--Opinion of Financial Advisor."
The Board of Directors believes that the Reverse Stock Split and the Merger
will enable all shareholders of the Company to receive the same fair value for
their Common Stock either in the form of cash, if pursuant to the Reverse Stock
Split, or in the form of SOCO Shares, if pursuant to the Merger. In particular,
the Reverse Stock Split affords the Minority Shareholders an opportunity to
receive a fair cash price for their shares (which provides a significant premium
over recent quoted sales prices in the over-the-counter market) without
incurring the attendant costs of sale (which would otherwise be disproportionate
considering the small amounts of cash proceeds involved for each Minority
Shareholder). Accordingly, the Board of Directors has unanimously approved the
Reverse Stock Split and recommends that the shareholders vote FOR approval of
the Reverse Stock Split.
CERTAIN EFFECTS OF THE REVERSE STOCK SPLIT
GENERAL EFFECTS
If the Reverse Stock Split is approved by the vote of a majority of the
outstanding shares of Common Stock, all shares of Common Stock which would
upon conversion otherwise represent a fractional share of New Common Stock
will be automatically converted into the right to receive from the Company,
in lieu of fractional shares of New Common Stock, cash in the amount of $1.40
for each such share of Common Stock. All shareholders will receive some cash
because no shareholder holds a number of shares which is an exact multiple of
36,000. Those shareholders owning less than one share of New Common Stock
after the Reverse Stock Split (i.e., less than 36,000 shares of Common Stock
prior to the Reverse Stock Split) will cease to be shareholders or to have
any equity interest in the Company and, therefore, will not share in its
future earnings and growth, if any, and will not have any right to vote on
any corporate matter, including the Merger. The 23 shareholders owning more
than 36,000 shares of Common Stock (which includes all affiliates of the
Company except for Douglas N. Baker) will continue to be shareholders of the
Company following the Reverse Stock Split and will have the right to vote
upon the Merger when it is presented to the Company's shareholders for
approval.
TERMINATION OF EXCHANGE ACT REGISTRATION
This paragraph explains certain effects of the Reverse Stock Split
applicable to the Company and to the remaining 23 shareholders of the Company
following the Reverse Stock Split. The shares of Common Stock are currently
registered under Section 12(g) of the Exchange Act. Such registration may be
terminated upon application of the Company to the Commission if the Company
has fewer than 300 record holders of shares or fewer than 500 shareholders
and less than $10,000,000 in assets as of the end of three consecutive fiscal
years. The Company currently intends to apply for termination of
registration of the shares of Common Stock as promptly as possible after
filing the Articles of Amendment with the Secretary of State of Colorado.
Termination
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<PAGE>
of registration of the shares of Common Stock under the Exchange Act would
substantially reduce the information required to be furnished by the Company to
its shareholders and to the Commission and would make certain provisions of the
Exchange Act, such as the short-swing profit recovery provisions of Section
16(b) of the Exchange Act, the requirement of furnishing a proxy or information
statement in connection with shareholder meetings pursuant to Section 14(a) of
the Exchange Act, and the requirements of Rule 13e-3 promulgated by the
Commission under the Exchange Act with respect to "going private" transactions,
no longer applicable to the Company. Termination of registration of the shares
of Common Stock would also deprive "affiliates" of the Company and persons
holding "restricted securities" of the Company of the ability to dispose of such
securities pursuant to Rule 144 promulgated under the Securities Act. Such
termination of registration shall eliminate the public market for the shares
of Common Stock and shall cause all shares of Common Stock to be restricted.
EFFECT ON FINANCIAL CONDITION OF THE COMPANY
If the Reverse Stock Split is approved, the Company will incur bank debt
and expenses totaling approximately $2,020,000, and shareholders' equity will
decrease from approximately $6,669,000 to approximately $4,649,000 million.
See "Pro Forma Condensed Financial Statements."
OPINION OF FINANCIAL ADVISOR
Sayer Securities has acted as financial advisor to the Company in
connection with the Reverse Stock Split and the Merger and was chosen because of
its reputation, because it is located in Calgary (where Mr. Mercier's office is
located) and because of Mr. Mercier's previous experience in dealing with Sayer
Securities while he was President and Chief Executive Officer of Canadian
Conquest Exploration Inc. Sayer Securities delivered its oral opinion to the
Company's Board of Directors at its January 28, 1998 meeting (subsequently
confirmed in writing on February 5, 1998), to the effect that the consideration
to be received by the holders of Common Stock as a result of the Reverse Stock
Split and the Merger is fair to such shareholders from a financial point of
view. A copy of the fairness opinion is attached hereto as Annex C. The report
accompanying the fairness opinion will be available for inspection and copying
at the Company's offices during regular business hours by any shareholder of the
Company, or his representative who has been so designated in writing. In
addition, a copy of the report will be sent by the Company to any shareholder of
the Company, or his representative who has been so designated in writing, upon
written request and at the expense of the requesting shareholder.
In connection with the opinion, Sayer Securities reviewed, among other
things, the Merger Agreement; drafts of this Proxy Statement; certain publicly
available information concerning the Company, including annual reports on Form
10-KSB of the Company for the years ended March 31, 1995, 1996, and 1997 and
quarterly reports on Form 10-QSB for the Company for the quarters ended June 30,
1997 and September 30, 1997; certain information on the market price and
trading of the Company's and SOCO's shares, as well as the trading of companies
of a comparable nature to the Company and SOCO; certain publicly available
information concerning SOCO, including the listing particulars of SOCO dated May
23, 1997; the interim report of SOCO for the period ended June 30, 1997; and
certain internal financial analyses and forecasts for the Company and SOCO
prepared by their respective managements. Sayer Securities also held
discussions with members of the senior management of the Company and SOCO
regarding the strategic rationale for, and potential benefits
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<PAGE>
of, the Reverse Stock Split and the Merger and the past and current business
operations, financial condition and future prospects of their respective
companies. Sayer Securities reviewed certain information provided by the
Company relating to the oil and gas reserves of the Company and SOCO (the
"Reserve Information"), including but not limited to, (i) a December 31, 1996
reserve report for the Mongolian interests prepared by independent petroleum
engineers; (ii) a December 31, 1996 reserve report for the Thailand interests
prepared by independent petroleum engineers and (iii) reserve information for
SOCO as of December 31, 1996 and January 1, 1997 including forecasted production
rates, revenues, cash flow and capital expenditure as estimated and reviewed by
independent petroleum engineers. In addition, Sayer Securities discussed the
Reserve Information with the respective managements of the Company and SOCO.
THE FULL TEXT OF SAYER SECURITIES' OPINION, WHICH SETS FORTH, AMONG OTHER
THINGS, ASSUMPTIONS MADE, PROCEDURES FOLLOWED, MATTERS CONSIDERED AND
LIMITATIONS ON THE REVIEW UNDERTAKEN, IS ATTACHED AS ANNEX C TO THIS PROXY
STATEMENT. THE COMPANY'S SHAREHOLDERS ARE URGED TO AND SHOULD READ THE SAYER
SECURITIES OPINION CAREFULLY AND IN ITS ENTIRETY. SAYER SECURITIES' OPINION IS
DIRECTED ONLY TO THE FAIRNESS OF CASH CONSIDERATION AND THE VALUE OF THE SOCO
SHARES TO BE RECEIVED FROM A FINANCIAL POINT OF VIEW TO THE HOLDERS OF THE
COMPANY'S COMMON STOCK AND DOES NOT ADDRESS ANY OTHER ASPECT OF THE REVERSE
STOCK SPLIT OR THE MERGER AND DOES NOT CONSTITUTE A RECOMMENDATION TO ANY HOLDER
OF THE COMPANY'S COMMON STOCK AS TO HOW TO VOTE AT THE COMPANY'S SPECIAL
MEETING. THE SUMMARY OF THE MATERIAL ELEMENTS OF SAYER SECURITIES' OPINION SET
FORTH HEREIN IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO THE FULL TEXT OF SUCH
OPINION.
Sayer Securities has assumed and relied upon the accuracy and completeness
of all of the financial and other information provided to it or publicly
available and has neither attempted independently to verify nor assumed
responsibility for verifying any of such information. Sayer Securities has not
conducted an independent evaluation of any of the properties, assets or
facilities of the Company or SOCO, nor has it made or obtained or assumed any
responsibility for making or obtaining any independent evaluations or appraisals
of any of such properties, assets or facilities. With respect to projections,
it has assumed that they have been reasonably prepared on bases reflecting the
best currently available estimates and judgments of the managements of the
Company and SOCO as to the respective future financial performance of the
Company and SOCO as well as the synergistic values and operating cost savings
expected to be achieved through the combination of the operations of the Company
and SOCO. Sayer Securities expresses no view with respect to such projections
or the assumptions on which they were based. Sayer Securities further has
assumed that each of the Merger Agreement and the other agreements which are
attached as exhibits to the Merger Agreement, when executed and delivered, will
not differ materially from the drafts which they have reviewed and that the
Reverse Stock Split and the Merger will be carried out as contemplated in the
Merger Agreement and this Proxy Statement.
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<PAGE>
In preparing the opinion, Sayer Securities assumed that all conditions
necessary to implement the Reverse Stock Split and Merger would be satisfied and
that the Reverse Stock Split and Merger would be implemented in the manner and
within the time frame contemplated in this Proxy Statement. The proposed
Reverse Stock Split and Merger were assumed to be legal under all applicable
laws and Sayer Securities assumed that all steps necessary to effect the Reverse
Stock Split and Merger would be carried out as necessary. The opinion is
submitted in the context of securities markets and economic, financial and
general business conditions as they existed on the date thereof and the
prospects, financial and otherwise, of the Company and SOCO as they were
reflected in the information and documents reviewed by Sayer Securities and as
they were represented to Sayer Securities in discussions with management of and
advisors to the Company and SOCO.
The following is a summary of certain financial analyses used by Sayer
Securities in connection with providing its written opinion to the Board on
February 5, 1998:
(i) HISTORICAL STOCK TRADING ANALYSIS: Sayer Securities reviewed
historical share trading prices and volumes for the Company and SOCO. The
average closing price per share of the Common Stock has been $0.625,
$0.625, $0.667 and $0.648 for the past 30 days, 60 days, 90 days and since
the date of the Company's one-for-three reverse stock split in May 1997,
respectively. The cash value of the Reverse Stock Split consideration of
$1.40 represents a premium of 124%, 124%, 109% and 116% over the above
mentioned prices, respectively. The last trade of Common Stock prior to
the announcement of the Reverse Stock Split and the Merger occurred at a
price of $0.625. The last trade of Common Stock prior to the issuance of
the fairness opinion was also $0.625. The Cash Consideration of $1.40
represents a premium of 124% over that price.
(ii) SELECTED COMPANY ANALYSIS. Sayer Securities compared publicly
available financial, operating and stock market data of the Company
to similar data on a number of other publicly traded companies with
international oil and gas assets, including Bow Valley Energy Inc.,
Epic Energy Inc., NTI Resources Limited and Can Baikal Resources Inc.
Sayer Securities calculated the enterprise value per barrel of
reserves multiple which relates the value of a company's stock to
its reserves, for each selected company based on that company's closing
stock price as of January 27, 1998. The values calculated by this
analysis ranged from $0.88 to $7.35 per barrel of oil equivalent. The
corresponding enterprise value per barrel of oil equivalent implied
for the Company by the proposed Cash Consideration is $6.62 per
barrel of oil equivalent. Since this value is at the high end of hte
range of values calculated from similar compnaies, this analysis
supports the fairness, from a financial point of view, of the
consideration to be received under the Reverse Stock Split. Sayer
Securities emphasized the
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difficulty of identifying truly comparable companies which are at the same
stage of exploration with similar resource or reserve development and the
difficulty in placing values on early exploration properties such as those
owned by the Company.
(iii) NET ASSET VALUES. Sayer Securities prepared estimates of
the Company's net asset value at a variety of discount rates using the
Reserve Information, recent financial information and information on the
Company's other assets. Estimates of the net asset values of the Company's
reserves included an analysis of the discounted cash flows of such
reserves. The net asset value per share was in the range of $1.23 to
$0.98, or $1.15 to $0.92 on a fully diluted basis, at discount rates of 10
to 15 percent before income tax.
(iv) SELECTED TRANSACTION ANALYSIS. Sayer Securities has
reviewed publicly available information and analyses of a number of
acquisitions of international oil and gas assets and companies. The
values per barrel of oil equivalent in the selected transactions ranged
from $0.30 to $12.40. Sayer Securities noted the significant range in
values among the various transactions. Of particular note was a recent
transaction involving oil reserve assets in Mongolia which ascribed a
value of $2.38 per barrel. The per barrel value ascribed to the Reverse
Stock Split is $6.62, which is within the range of the values calculated
from similar transactions. Because the reasons for and circumstances
surrounding each of the comparable transactions analyzed were diverse
and because of the inherent differences between the operations of the
Company and the companies engaged in the selected transactions, Sayer
Securities also considered varous qualitative factors concerning
differences between the characteristics of these transactions and the
Reverse Stock Split. These factors and the per barrel value of $6.62
both support the fairness, from a financial point of view, of the
consideration to be received under the Reverse Stock Split.
Based upon each of the foregoing analyses, and subject to the
limitations set forth below in the full text of the fairness opinion,
Sayers Securities believes that the cash consideration to be received in
the Reverse Stock Split is fair, from a financial point of view, to the
shareholders of the Company.
The preparation of a fairness opinion is a complex process and is not
necessarily susceptible to partial analysis or summary description. Selecting
portions of the analyses or of the summary set forth above, without considering
Sayer Securities' analyses as a whole, could create an incomplete view of the
processes underlying Sayer Securities' opinion. In arriving at its fairness
determination, Sayer Securities considered the results of all such analyses and
did not assign relative weights to any of the analyses. No company or
transaction used in the above analyses as a comparison is identical to the
Company or SOCO or the contemplated Reverse Stock Split or the Merger. The
analyses were prepared solely for purposes of Sayer Securities providing its
opinion to the Board as to the fairness of the Cash Consideration and the Merger
and the consideration to be paid by SOCO and do not purport to be appraisals or
necessarily reflect the prices at which the Company or its securities might
-15-
<PAGE>
actually be sold. Analyses based upon forecasts of future results are not
necessarily indicative of actual future results, which may be significantly more
or less favorable than suggested by such analyses. Because such analyses are
inherently subject to uncertainty, being based upon numerous factors or events
beyond the control of the parties or their respective advisors, none of SOCO,
the Company, Sayer Securities or any other person assumes responsibility if
future results are different from those forecast. As described above, Sayer
Securities' opinion to the Board was one of many factors taken into
consideration by the Board in making its determination to approve the Merger
Agreement and the Reverse Stock Split and the Merger. The foregoing summary
does not purport to be a complete description of the analysis performed by Sayer
Securities and is qualified in its entirety by reference to the written opinion
of Sayer Securities set forth in Annex C hereto.
Sayer Securities' opinion necessarily is based upon economic, market and
other conditions as they exist and can be evaluated on the date hereof and it
assumes no responsibility to update or revise its opinion based upon
circumstances or events occurring after the date hereof. Sayer Securities'
opinion does not constitute an opinion or imply any conclusions as to the likely
trading range for the SOCO Shares following consummation of the Merger, nor does
its opinion address the potential tax consequences of any shareholder's receipt
of the Cash Consideration or the SOCO Shares. In addition, Sayer Securities'
opinion does not address the Company's underlying decision to effect the Merger
or related transactions, and it expresses no view on the effect on the Company
of the Merger and related transactions.
Further, Sayer Securities was not requested to and did not provide advice
concerning the structure, the specific amount of the consideration, or any other
aspects of the Reverse Stock Split and the Merger, or to provide services other
than the delivery of this opinion. Sayer Securities was not authorized to and
did not solicit any expressions of interest from any other parties with respect
to the sale of all or any part of the Company or any other alternative
transaction. Sayer Securities did not participate in negotiations with respect
to the terms of the Reverse Stock Split and the Merger and related transactions.
Consequently, it has assumed that such terms are the most beneficial terms from
the Company's perspective that could under the circumstances be negotiated among
the parties to such transactions, and no opinion is expressed whether any
alternative transaction might produce consideration for the Company's
shareholders in an amount in excess of that contemplated pursuant to the Reverse
Stock Split and the Merger.
Sayer Securities is a specialized financial services company providing
capital market and advisory services for oil and gas companies, governments and
financial institutions across Canada and for foreign entities. These services
include merger and acquisition advice, independent research, financings,
valuations, and fairness opinions for clients.
Sayer Securities is not an insider, associate or affiliate of the Company
or SOCO, and prior to this engagement Sayer Securities has never been engaged by
the Company or SOCO to provide advisory services or to act as agent or
underwriter. Sayer Securities does not have interests in any of the securities
of the Company or SOCO. Sayer Securities has no financial interest, outside the
ordinary course of its business as an oil and gas financial services and
investment company, in any future business involving the Company or SOCO. There
are no understandings, agreements or commitments between Sayer Securities and
the Company or SOCO with respect to future business
-16-
<PAGE>
dealings with them. Sayer Securities may, in the normal course of business,
provide advisory services to the Company or SOCO or their successors in the
future.
Pursuant to an engagement contract dated as of January 27, 1998, a fee of
$50,000 (Cdn) will be payable to Sayer Securities upon delivery of the fairness
opinion for its services as financial advisor to the Company in connection with
the Reverse Stock Split and the Merger. The Company has also agreed to
reimburse Sayer Securities for its reasonable out-of-pocket expenses, including
the fees of its legal counsel, and to indemnify Sayer Securities against
liabilities, including liabilities under the federal securities laws.
RECOMMENDATION OF THE BOARD OF DIRECTORS
The Board of Directors, at a meeting held on January 28, 1998, considered
the fairness of the proposed one-for-36,000 Reverse Stock Split of the Company's
Common Stock. The Board evaluated the Cash Consideration to be received by the
Minority Shareholders in light of the Common Stock's current market price, its
historical market price and the Company's net book value. The last trade of
Common Stock prior to the announcement of the Reverse Stock Split and the Merger
occurred at a price of $0.625. The Cash Consideration of $1.40 represents a
premium of 124% over that price. The average closing price per share of the
Common Stock had been $0.625, $0.625, $0.667 and $0.648 for the past 30 days, 60
days, 90 days and since the date of the Company's one-for-three reverse stock
split in May 1997, respectively. The Cash Consideration of $1.40 represents a
premium of 124%, 124%, 109% and 116% over the above mentioned prices,
respectively. The book value per share of Common Stock was $0.51 at
December 31, 1997 and $0.25 at March 31, 1997. The Cash Consideration of $1.40
represents a premium of 175% and 460%, respectively, over those values.
Based upon the foregoing evaluation of the effects of the Reverse Stock
Split and the Merger on the Company and its shareholders and the opinion of
Sayer Securities described above, the Board of Directors unanimously concluded
that the Reverse Stock Split, from a financial point of view, is fair to, and in
the best interests of, both the Company and its shareholders, including the
Minority Shareholders. The Board of Directors has therefore unanimously
approved the Reverse Stock Split and the Merger and unanimously recommends that
the shareholders vote FOR approval of the Reverse Stock Split.
The Board of Directors of the Company did not retain an unaffiliated
representative to act solely on behalf of the Minority Shareholders for the
purpose of negotiating the terms of the Reverse Stock Split and the Merger or
for the purpose of preparing a report with respect to the fairness of the
Reverse Stock Split and the Merger. The Board of Directors determined that the
cost and expense to retain such representative or to prepare such report were
not warranted in light of (i) the fact that the opinion delivered by Sayer
Securities examined the fairness of the Cash Consideration and the value of the
SOCO Shares to be received by the Company's shareholders in the Merger, (ii) the
fact that the Majority Shareholders and the Minority Shareholders will receive
substantially the same dollar value for their shares of Common Stock, (iii) the
Cash Consideration to be paid to the Minority Shareholders pursuant to the
Reverse Stock Split will be available for payment at least 90 days prior to the
issuance of SOCO Shares pursuant to the Merger and the Minority Shareholders
will not bear any risk that the Merger might not close because of the occurrence
of an unforeseen
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<PAGE>
event during such 90 day period (which risk will be borne solely by the Majority
Shareholders) and (iv) the right of each of the Minority Shareholders to dissent
from the Reverse Stock Split under the CBCA. The Board of Directors also did
not appoint an independent committee of the Board of Directors to review the
fairness of the Reverse Stock Split and the Merger for the foregoing reasons.
See "-Opinion of Financial Advisor." In addition, the Reverse Stock Split is
not structured to require the approval of the holders of a majority of the
shares of Common Stock held by the Minority Shareholders and actually voted
on the transaction. For the foregoing reasons, the Reverse Stock Split does
not provide the Minority Shareholders the procedural protections of many
going-private transactions.
INTEREST OF CERTAIN PERSONS IN THE REVERSE STOCK SPLIT
It is anticipated that the following persons, all of whom are currently
officers or directors of the Company, except for Edward T. Story, Jr. who, until
December 26, 1996, was a Director of the Company, will have ongoing roles as
employees, officers, directors or contractors to SOCO:
1) Edward T. Story, Jr., the owner of 471,061 shares of Common Stock and a
director of the Company prior to December 26, 1996, is presently the
President and Chief Executive Officer and a Director of SOCO. He owns
869,162 SOCO Shares and will own an additional 117,000 SOCO Shares as a
result of the Merger. In addition, on April 25, 1997 Mr. Story was granted
an option to acquire an additional 1,973,954 SOCO Shares at the initial
public offering price of L2.60 per share. Mr. Story will continue to act
as President and Chief Executive Officer and a Director of SOCO after the
Merger.
2) Daniel A. Mercier, Chairman and Chief Executive Officer and a Director of
the Company and beneficial owner of 2,528,667 shares of Common Stock,
expects to be appointed as an officer of SOCO upon the closing of the
Merger. Mr. Mercier owns 6,000 SOCO Shares and will beneficially own an
additional 621,000 SOCO Shares as a result of the Merger. In addition to
the shares beneficially owned by Mr. Mercier, Mr. Mercier's siblings
beneficially own an additional 6,000 SOCO Shares.
3) William C. Penttila, President and a Director of the Company, beneficially
owns 689,921 shares of Common Stock. He is also the beneficial owner of
62,812 SOCO Shares and will be the beneficial owner of an additional
171,000 SOCO Shares as a result of the Merger. Mr. Penttila is a Vice
President of Exploration Associates, Inc., an international oil and gas
exploration consulting company, which provides exploration consulting
services to the Company and to SOCO on a fee for service basis.
Exploration Associates, Inc. expects to continue providing such services to
SOCO after the Merger.
4) Dennis M. Buck, Vice President of Exploration of the Company, is the
beneficial owner of 689,921 shares of Common Stock. He is also the
beneficial owner of 42,812 SOCO Shares and will be the beneficial owner of
an additional 171,000 SOCO Shares as a result of the Merger. Mr. Buck is
President of Exploration Associates, Inc.
Mr. Story and all directors and officers of the Company who own SOCO Shares
purchased all of their SOCO Shares in SOCO's initial public offering on the
London Stock Exchange on May 29, 1997 in exchange for either (i) the initial
public offering price of L2.60 per share or (ii) oil and
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<PAGE>
gas properties having a value determined by SOCO to be equivalent to the number
of SOCO Shares (valued at L2.60 per share) purchased in exchange for such
properties.
PLANS FOR THE COMPANY AFTER THE REVERSE STOCK SPLIT
Following the Reverse Stock Split, the Company will have 23 remaining
shareholders and will apply for deregistration with the Commission. Upon
completion of the deregistration process, expected to occur approximately 90
days after the Special Meeting, the Company will call a meeting of the remaining
shareholders to approve the Merger. If the Merger is approved at such meeting,
the remaining shareholders will exchange their shares of Common Stock of the
Company for SOCO Shares pursuant to the Merger Agreement.
CERTAIN UNITED STATES FEDERAL INCOME TAX CONSEQUENCES
For federal income tax purposes the Reverse Stock Split will be treated as
a recapitalization with the result that:
(i) No gain or loss will be recognized by holders of Old Common
Stock who receive solely shares of New Common Stock pursuant to the Reverse
Stock Split.
(ii) The aggregate basis of shares of New Common Stock received
in the Reverse Stock Split (including any fractional share deemed received
and exchanged for Cash Consideration) will be the same as the aggregate
basis of the shares of Old Common Stock exchanged therefor.
(iii) The holding period of shares of New Common Stock received in
the Reverse Stock Split (including any fractional share deemed received and
exchanged for Cash Consideration) will be the same as the holding period of
the shares of Old Common Stock exchanged therefor.
(iv) A holder of Old Common Stock that receives cash in lieu of a
fractional share of New Common Stock, will be treated as receiving the
payment in connection with the redemption of the fractional share with the
tax consequences of the redemption determined under Section 302 of the
Internal Revenue Code of 1986, as amended (the "Code").
Under Section 302 of the Code, a holder of a fractional share of New Common
Stock will be treated as either (i) having sold the fractional share for the
Cash Consideration in a taxable transaction in which gain or loss is recognized
or (ii) receiving a cash distribution from the Company taxable under Section 301
of the Code. The holder of a fractional share of New Common Stock will
recognize gain or loss on the sale or exchange of such fractional share if under
Section 302(b) of the Code (i) the Reverse Stock Split results in a "complete
redemption" of all of the fractional shareholder's shares of Common Stock, (ii)
the receipt of cash is "substantially disproportionate" with respect to the
fractional shareholder, or (iii) the receipt of cash is "not essentially
equivalent to a dividend" with respect to the fractional shareholder. These
three tests are applied by taking into account not only shares that a fractional
shareholder actually owns, but also shares that a fractional shareholder
constructively owns pursuant to Section 318 of the Code, described below.
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<PAGE>
If any one of these three tests is satisfied, the holder of a fractional
share of New Common Stock will recognize gain or loss equal to the difference
between the Cash Consideration received and the holder's basis in such
fractional share (determined as described above). Provided that the shares of
Common Stock constitute a capital asset in the hands of the fractional
shareholder, this gain or loss will be long-term capital gain or loss if the
shares of Common Stock are held for more than one year and will be short-term
capital gain or loss if the shares of Common Stock are held for one year or
less.
Pursuant to the constructive ownership rules of Section 318 of the Code, a
shareholder is deemed to constructively own shares owned by certain related
individuals and entities in addition to shares actually owned by the
shareholder. For instance, an individual shareholder is considered to own
shares owned by or for his or her spouse and his or her children, grandchildren
and parents ("family attribution"). A shareholder is also considered to own a
proportionate number of shares owned by estates or certain trusts in which the
shareholder has a beneficial interest, by partnerships in which the shareholder
is a partner and by corporations in which 50 percent or more of the value of the
stock is owned directly or indirectly by or for such shareholder. Similarly,
shares directly or indirectly owned by beneficiaries of estates or certain
trusts, by partners of partnerships and, under certain circumstances, by
shareholders of corporations may be considered owned by these entities ("entity
attribution"). A shareholder is also deemed to own shares which the shareholder
has the right to acquire by exercise of an option.
The receipt of the Cash Consideration by a holder of a fractional share of
New Common Stock pursuant to the Reverse Stock Split will result in a "complete
redemption" of all of the fractional shareholder's shares of Common Stock, so
long as the fractional shareholder does not receive, nor constructively own, any
shares of New Common Stock after the Reverse Stock Split is effected. However,
a fractional shareholder who does not receive any shares of New Common Stock as
a result of the Reverse Stock Split may qualify for gain or loss treatment under
the "complete redemption" test even though such fractional shareholder
constructively owns shares of New Common Stock provided that (i) the fractional
shareholder constructively owns shares of New Common Stock as a result of the
family attribution rules (or, in some cases, as a result of a combination of the
family and entity attribution rules) and (ii) the fractional shareholder
qualifies for a waiver of the family attribution rules (such waiver being
subject to several conditions, one of which is that the fractional shareholder
has no interest in the Company immediately after the Reverse Stock Split
(including as an officer, director, or employee), other than an interest as a
creditor).
It is anticipated that fractional shareholders who do not receive any
shares of New Common Stock as a result of the Reverse Stock Split will qualify
for capital gain or loss treatment as a result of satisfying the "complete
redemption" requirements. However, if the constructive ownership rules prevent
compliance with these requirements, a fractional shareholder may nevertheless
qualify for capital gain or loss treatment by satisfying either the
"substantially disproportionate" or the "not essentially equivalent to a
dividend" requirements. In general, the receipt of cash pursuant to the Reverse
Stock Split will be "substantially disproportionate" with respect to the
fractional shareholder if the percentage of shares of Common Stock
constructively owned by the fractional shareholder immediately after the Reverse
Stock Split is less than 80 percent of the percentage of existing shares of
Common Stock actually and constructively owned by the fractional shareholder
immediately before the Reverse Stock Split. Alternatively, the receipt of cash
pursuant to the Reverse Stock Split
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<PAGE>
will, in general, be "not essentially equivalent to a dividend" if the Reverse
Stock Split results in a "meaningful reduction" in the fractional shareholder's
proportionate interest in the Company.
If none of the three tests described above is satisfied, a holder of a
fractional share of New Common Sock who receives the Cash Consideration in
exchange therefor will be treated under the distribution rules of Section 301 of
the Code. Generally, pursuant to Section 301 of the Code, a distribution of
cash by a corporation to its shareholders is considered a taxable dividend to
the extent of the earnings and profits, both current and accumulated, of such
corporation. Distributions not treated as a dividend shall be applied against
and reduce the shareholder's basis of the stock and thereafter will be treated
as gain from the sale of the stock. The Company does not anticipate that it
will have any current or accumulated earnings and profits.
THE FOREGOING IS ONLY A GENERAL DESCRIPTION OF CERTAIN OF THE FEDERAL
INCOME TAX CONSEQUENCES OF THE REVERSE STOCK SPLIT TO THE SHAREHOLDERS WITHOUT
REFERENCE TO THE PARTICULAR FACTS AND CIRCUMSTANCES OF ANY PARTICULAR
SHAREHOLDER. EACH SHAREHOLDER IS URGED TO CONSULT HIS OR HER OWN TAX ADVISOR TO
DETERMINE THE PARTICULAR TAX CONSEQUENCES TO SUCH SHAREHOLDER OF THE REVERSE
STOCK SPLIT (INCLUDING THE APPLICATION AND EFFECT OF STATE AND LOCAL INCOME AND
OTHER TAX LAWS).
SOURCE AND AMOUNTS OF FUNDS FOR AND EXPENSES OF THE REVERSE STOCK SPLIT
Estimated fees and expenses incurred or to be incurred by the Company in
connection with the Reverse Stock Split are approximately as follows:
<TABLE>
<CAPTION>
Approximate
Item Amount
---------------------------------------------
<S> <C>
Payment of Cash Consideration $1,766,367
Legal Fees 150,000
Financial Advisory Fees 50,000
Accounting Fees 10,000
Commission Filing Fees 354
Printing and Mailing Expenses 25,000
Loan Commitment Fee 5,000
Miscellaneous Expenses 13,279
----------
Total $2,020,000
----------
----------
</TABLE>
The Company has paid or will be responsible for paying all of such
expenses. It will pay such expenses (including the Cash Consideration payments)
from working capital and borrowings of up to $1,800,000 under a short term
advances facility (the "Loan Facility") to be entered into between the Company
and Societe Generale, London Branch (the "Bank"). The 600,000 SOCO Shares owned
by the Company, having an approximate market value of $3.4 million, will be
pledged to secure the indebtedness outstanding under the Loan Facility.
Interest accrues on the amounts borrowed under the Loan Facility at the rate per
annum equal to LIBOR plus 0.6%. Interest is payable at maturity of the Loan
Facility, which is the earlier of (i) the effective date of the Merger or
(ii) July 31, 1998. Pursuant to an agreement to be entered into among SOCO, the
Company and
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<PAGE>
the Bank, SOCO will assume the Company's indebtedness under the Loan Facility
upon the effective date of the Merger.
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<PAGE>
PRO FORMA CONDENSED FINANCIAL STATEMENTS
The following unaudited pro forma condensed balance sheets reflect the
one-for-36,000 Reverse Stock Split as if it had occurred as of the respective
dates of such balance sheets. The unaudited pro forma condensed statements of
operations reflect the one-for-36,000 Reverse Stock Split as if it had occurred
at the beginning of the respective periods covered by such statements.
TERRITORIAL RESOURCES, INC.
PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
DECEMBER 31, 1997
($1,000)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
------------- --------------- ------------
<S> <C> <C> <C>
Cash $ 25 $ 25
Accounts receivable 6 6
Prepaids 5 5
------- ---------
Current assets 36 36
Note receivable 9 9
Investment in SOTAMO 1,740 1,740
Investment in SOCO 3,601 3,601
Property and equipment 1,568 1,568
------- -------
Total assets $6,954 6,954
------- -------
-------
Accounts payable 261 254(A) 515
Bank loan 24 1,766(A) 1,790
------- -------
Current liabilities 285 2,305
Deferred income taxes 1,362 1,362
Stockholders' equity 7,444 (2,020)(A) 5,424
Accumulated deficit (2,137) (2,137)
-------- -------
Total liabilities and stockholders'
equity $6,954 $ 6,954
-------- ----------
-------- ----------
Book value per share (dollars) $0.54 $12,992.09
-------- ----------
-------- ----------
</TABLE>
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<PAGE>
- 24 -
<PAGE>
TERRITORIAL RESOURCES, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE YEAR ENDED MARCH 31, 1997
($1,000 except per share information)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------------------------------------------------
<S> <C> <C> <C>
Oil and gas revenue $ 21 $ 21
Interest and other income 1 1
--------- ------------
Total revenue 22 22
--------- ------------
Oil and gas production 1 1
Depreciation, depletion and amortization 5 5
Foreign exchange loss 3 3
General and administrative 206 206
Interest 5 120(B) 125
--------- ------------
Total costs and expenses 220 340
--------- ------------
Net income (loss) $ (198) $ (318)
--------- ------------
--------- ------------
Net income (loss) per share $ (0.021) $ (1,432.43)
--------- ------------
--------- ------------
Weighted average shares 9,255,000 222
--------- ------------
--------- ------------
</TABLE>
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<PAGE>
TERRITORIAL RESOURCES, INC.
PRO FORMA CONDENSED STATEMENT OF OPERATIONS (UNAUDITED)
FOR THE NINE MONTHS ENDED DECEMBER 31, 1997
($1,000 except per share information)
<TABLE>
<CAPTION>
PRO FORMA
HISTORICAL ADJUSTMENTS PRO FORMA
---------------------------------------------------
<S> <C> <C> <C>
Oil and gas revenue $ 3 $ 3
Gain on sale of SOTAMO shares 2,949 2,949
Gain on sale of SOCO shares 464 464
-------- --------
Total revenue 3,416 3,416
General and administrative 460 460
Interest 6 83(B) 89
-------- --------
Total costs and expenses 466 549
-------- --------
Net income before income taxes 2,950 2,867
Income tax provision 1,362 (30(C) 1,332
-------- --------
Net income $ 1,588 $ 1,535
---------- --------
---------- --------
Net income per share $ 0.162 $ 6.067
---------- --------
---------- --------
Weighted average shares 9,811,000 253
---------- --------
---------- --------
</TABLE>
- 26 -
<PAGE>
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<PAGE>
TERRITORIAL RESOURCES, INC.
NOTES TO PRO FORMA CONDENSED FINANCIAL STATEMENTS
A. Pursuant to the terms of the Reverse Stock Split, shareholders who own less
than a full share after the consolidation will receive a cash payment
equivalent to $1.40 for each pre-consolidation share of Company Common
Stock that they owned. A bank loan for the estimated payment of $1,766,000
has been recorded, and transaction costs estimated at $254,000 have been
accrued as accounts payable.
B. Reflects increased interest expense for the period based upon interest
payable under the proposed loan facility.
C. Reflects a decrease in income tax expense as a result of interest payable
under the proposed loan facility.
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<PAGE>
THE REVERSE STOCK SPLIT
AMENDMENT OF ARTICLES OF INCORPORATION TO EFFECT THE REVERSE STOCK SPLIT
Pursuant to the terms of the Amendment, (i) each 36,000 shares of Common
Stock then issued and outstanding will be automatically converted into one share
of New Common Stock upon filing the Articles of Amendment with the Secretary of
State of Colorado, and (ii) a payment of the Cash Consideration per share for
the currently outstanding Common Stock will be made in lieu of the issuance of
any resulting fractional shares of New Common Stock to any shareholders who,
after the Reverse Stock Split, would otherwise own a fractional share of New
Common Stock. The fractional shareholders owning less than one share of New
Common Stock will cease to be shareholders or to have any equity interest in the
Company and, therefore, will not share in its future earnings and growth, if
any, and will not have any right to vote on any corporate matter. The form of
the Amendment is attached as Annex A to this Proxy Statement. If the Reverse
Stock Split is approved at the Special Meeting by the holders of a majority of
the currently issued and outstanding Common Stock, the Company expects to file
the Articles of Amendment with the Secretary of State of the State of Colorado
immediately following the Special Meeting, or as soon as practicable thereafter
(the "Effective Date").
EXCHANGE OF SHARES AND PAYMENT IN LIEU OF ISSUANCE OF FRACTIONAL SHARES
Within 10 days after the Effective Date, the Company will mail to the
fractional shareholders a notice of the filing of the Articles of Amendment (the
"Notice of Filing") and a letter of transmittal (the "Letter of Transmittal")
containing instructions with respect to the submission of shares of Common Stock
to the Company. Fractional shareholders will be entitled to receive, and the
Company will be obligated to make payment of, the Cash Consideration in lieu of
fractional shares of New Common Stock only by transmitting stock certificate(s)
for shares of Common Stock to the Company, together with the properly executed
and completed Letter of Transmittal and such evidence of ownership of such
shares as the Company may require.
VOTING; VOTE REQUIRED
The Reverse Stock Split must be approved by a vote of not less than a
majority of the shares of Common Stock. The Reverse Stock Split is not
structured to require the approval of the holders of a majority of the shares of
Common Stock held by the Minority Shareholders. Each share of Common Stock is
entitled to one vote on each matter submitted to a vote at the Special Meeting.
The Control Shareholders, who beneficially own an aggregate of 65% of the
outstanding shares of Common Stock, have agreed with SOCO to vote their shares
in favor of the Reverse Stock Split. All directors and officers of the Company
intend to vote their shares of Common Stock in favor of the Reverse Stock Split.
THE NOTICE OF FILING AND THE LETTER OF TRANSMITTAL WILL BE TRANSMITTED BY
THE COMPANY TO SHAREHOLDERS AT A DATE SUBSEQUENT TO THE EFFECTIVE DATE.
SHAREHOLDERS SHOULD NOT SEND IN THEIR CERTIFICATES UNTIL THE NOTICE OF FILING
AND LETTER OF TRANSMITTAL ARE RECEIVED AND
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<PAGE>
SHOULD SURRENDER THEIR CERTIFICATES ONLY WITH SUCH LETTER OF TRANSMITTAL.
There will be no service charges payable by the fractional shareholders in
connection with the payment of the Cash Consideration in lieu of the issuance of
fractional shares of New Common Stock. These costs will be borne by the
Company.
DISSENTING SHAREHOLDERS' RIGHTS
Shareholders who do not vote in favor of the Reverse Stock Split have the
right, in lieu of the payment of the Cash Consideration, to seek payment in cash
of the fair value of their shares of Common Stock by strictly complying with the
requirements of Article 113 of the CBCA. Failure of a shareholder to strictly
adhere to the requirements of Article 113 of the CBCA may result in the loss of
such shareholder's dissenter's rights.
If a holder of Common Stock elects to exercise his rights under Article
113, he must satisfy each of the following conditions:
(i) he must cause the Company to receive, before the vote with respect to
the Reverse Stock Split is taken, written notice of his intention to
demand payment for his shares if the Reverse Stock Split is
effectuated; and
(ii) he must not vote in favor of the Reverse Stock Split (a failure to
vote or an abstention will satisfy this condition, but delivering a
proxy in favor of or voting in favor of the Reverse Stock Split will
constitute a waiver of such shareholder's right of appraisal and will
nullify any previously filed written demand for appraisal).
A holder of Common Stock who does not satisfy conditions (i) and (ii) above
is not entitled to demand payment for his shares under Article 113.
All written demands for appraisal should be directed to Daniel A. Mercier,
Chairman of the Board, 734 7th Avenue S.W., Suite 1345, Calgary, Alberta, Canada
T2P 3P8, and should be executed by, or on behalf of, the holder of record. To
be effective, the demand must be made by or for the registered shareholder,
fully and correctly, in such shareholder's name as it appears on his stock
certificates. A beneficial shareholder may assert dissenter's rights as to the
shares held on the beneficial shareholder's behalf only if the beneficial
shareholder causes the Company to receive the record shareholder's written
consent to the dissent not later than the time the beneficial shareholder
asserts dissenter's rights and the beneficial shareholder dissents with respect
to all shares beneficially owned by the beneficial shareholder.
If Common Stock is owned of record in a fiduciary capacity, such as by a
trustee, guardian or custodian, execution of a demand for appraisal should be
made in such capacity, and if the stock is owned of record by more than one
person, as in a joint tenancy or tenancy in common, such demand should be
executed by or for all joint owners. An authorized agent, including one or more
joint owners, may execute the demand for appraisal for a shareholder of record;
however, the agent must identify the record owner or owners and expressly
disclose the fact that, in executing the
-30-
<PAGE>
demand, it is acting as agent for the record owner. A record shareholder, such
as a broker, who holds Common Stock as a nominee for others, may exercise his
right of appraisal with respect to the shares held for one or more beneficial
owners, while not exercising such right for other beneficial owners, but only if
the record shareholder dissents with respect to all shares beneficially owned by
any one person and causes the Company to receive written notice which states
such dissent and the name, address and federal taxpayer identification number,
if any, of each person on whose behalf the record shareholder asserts
dissenters' rights.
If the Reverse Stock Split is approved, no later than ten days after the
effective date of the Reverse Stock Split, the Company will notify each
shareholder who has complied with the foregoing provisions of the date the
Reverse Stock Split has become effective and also the date (which shall be not
less than 30 days from the date of the notice) by which the Company must receive
the shareholder's payment demand. This notice also will include a form for
making the demand. Thereafter, the dissenting shareholder must
(i) make the payment demand to the Company and (ii) deposit his stock
certificates with the Company.
If a payment demand remains unresolved, the Company may, within 60 days
after receiving the payment demand, commence a proceeding and petition the court
to determine the fair value of the shares and accrued interest. If the Company
does not commence the proceeding within the 60 day period, the Company shall be
required to pay each dissenter whose demand remains unresolved the amount
demanded.
After any hearing on the Company's petition, the court shall enter a
judgment for the dissenter in an amount, if any, by which the court finds the
fair value of the dissenter's Common Stock, plus interest, exceeds the amount
paid by the Company to the dissenter. "Fair value" is defined as the value of
the shares immediately before the Effective Date of the Reverse Stock Split
excluding any appreciation or depreciation in anticipation of the Reverse Stock
Split except to the extent that exclusion would be inequitable. Therefore, the
court should not consider the occurrence of the Reverse Stock Split or the
Merger in its determination of the "fair value" of the dissenting shares, and it
is therefore possible for the court to determine the "fair value" to be less
than the Cash Consideration.
The costs of the proceeding may be determined by the court, including the
reasonable compensation and expenses of the appraisers appointed by the court.
The court shall assess the costs against the Company; except the court may
assess costs against all or some of the dissenters in amounts the court finds
equitable, to the extent the court finds the dissenters acted arbitrarily,
vexatiously, or not in good faith in demanding payment.
The foregoing does not purport to be a complete statement of the provisions
of Article 113 of the CBCA and is qualified in its entirety be reference to such
sections, which are reproduced in full as Annex B to this Proxy Statement.
THE PROVISIONS OF ARTICLE 113 OF THE CBCA ARE COMPLEX AND TECHNICAL IN
NATURE. SHAREHOLDERS DESIRING TO EXERCISE DISSENTERS' RIGHTS MAY WISH TO
CONSULT COUNSEL, SINCE THE FAILURE TO COMPLY STRICTLY WITH THESE PROVISIONS WILL
RESULT IN THE LOSS OF THEIR DISSENTERS' RIGHTS.
-31-
<PAGE>
PRICE RANGE OF COMMON STOCK; DIVIDENDS; BOOK VALUE
COMMON STOCK INFORMATION
The shares of the Company are traded in the over-the-counter market on the
National Association of Securities Dealers ("NASD") Electronic Bulletin Board
and are quoted in the "pink sheets" under the symbol "TERX." The following
table sets forth the range of high and low bid prices of the Common Stock for
the three 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. All share prices prior
to May 12, 1997 have been restated to reflect the one-for-three reverse stock
split which became effective on that date. The source of the prices quoted
below is Trading and Market Services of The NASDAQ Stock Market, Inc.
<TABLE>
<CAPTION>
HIGH LOW
------ -------
<S> <C> <C>
FISCAL 1996
First Quarter $0.75 $0.1875
Second Quarter 0.51 0.1875
Third Quarter 3.325 0.1875
Fourth Quarter (March 31, 1996) 9.00 0.1875
FISCAL 1997
First Quarter 3.375 0.375
Second Quarter 2.25 0.5625
Third Quarter 0.5625 0.1875
Fourth Quarter (March 31, 1997) 0.375 0.28125
FISCAL 1998
First Quarter 1.75 0.50
Second Quarter 0.6875 0.625
Third Quarter 1.125 0.625
Fourth Quarter (through January 28, 1998) 0.625 0.625
</TABLE>
On January 28, 1998, the last trading day before the public announcement of
the Merger, the closing sales price of the Common Stock was $0.625.
Upon consummation of the Merger, the Company intends to apply for
termination of registration of its shares of Common Stock under the Exchange
Act.
DIVIDENDS
The Company has never paid any dividends on its shares and does not intend
to do so in the future.
BOOK VALUE
The book value per share of Common Stock was $0.51 at December 31, 1997 and
$0.25 at March 31, 1997.
-32-
<PAGE>
DIRECTORS AND EXECUTIVE OFFICERS
DIRECTORS AND EXECUTIVE OFFICERS
The names, addresses, ages and positions of all directors and executive
officers of the Company are as follows:
<TABLE>
<CAPTION>
NAME AGE POSITION
- ----------------------------------------- ---------- -----------------------------------------------------------
<S> <C> <C>
Daniel A. Mercier 43 Chairman of the Board and Chief Executive Officer
Territorial Resources, Inc.
734 7th Avenue S.W.
Calgary, Alberta
Canada T2P 3P8
William Penttila 64 President, Chief Operating Officer and Director
Exploration Associates, Inc.
450 N. Sam Houston Parkway, Suite 140
Houston, Texas 77060
Douglas N. Baker 44 Vice President Finance, Treasurer, Chief Financial Officer,
Territorial Resources, Inc. Secretary and Director
734 7th Avenue S.W.
Calgary, Alberta
Canada T2P 3P8
Richard A.N. Bonnycastle 63 Director
Cavendish Investing Ltd.
400 3rd Avenue S.W.
Calgary, Alberta T2P 3P8
Jimmy M. McCarroll 55 Director
1030 Townplace
Houston, Texas 77057-1942
Donald L. Oliver 54 Director
Forest Oil Company
1600 Broadway, Suite 2200
Denver, Colorado 80202
Lamont C. Tolley 61 Director
Starvest Exploration Ltd.
635 8th Avenue S.W.
Calgary, Alberta T2P 3P8
Dennis M. Buck 51 Vice President, Exploration
Exploration Associates, Inc.
450 N. Sam Houston Parkway, Suite 140
Houston, Texas 77060
</TABLE>
-33-
<PAGE>
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 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 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. Mr. Mercier is a citizen of Canada.
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 the Company
and Mr. Penttila recognizes that the possibility exists that his role as an
officer and director of the Company 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 the Company and,
if appropriate, will resign either as Technical Advisor or as an officer and
director of the Company. Mr. Penttila receives no compensation in his role as
Technical Advisor to the Petroleum Authority of Mongolia. Mr. Penttila is a
citizen of the United States.
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. During 1997, Mr. Baker organized and became President
and Chief Financial Officer of Forte Energy Ltd., a Canadian oil and gas
exploration and production company. 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. Mr.
Baker is a citizen of Canada.
-34-
<PAGE>
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. Mr. Bonnycastle
is a citizen of Canada.
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 in certain of its farmout endeavors during the past four years. Mr.
McCarroll also serves as a Director of Pan Ocean Explorations Inc., a
corporation based in Vancouver, Canada, whose shares are traded on the Vancouver
Stock Exchange. Mr. McCarroll is a citizen of the United States.
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. Mr. Oliver is a
citizen of the United States.
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. Mr. Tolley is a citizen of Canada.
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. Mr. Buck is a citizen of the United States.
-35-
<PAGE>
SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS
AND MANAGEMENT
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the Record Date by certain
beneficial owners:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE
OF PERCENT
BENEFICIAL OF
NAME AND ADDRESS OF BENEFICIAL OWNER OWNERSHIP CLASS(1)
------------------------------------ ---------- --------
<S> <C> <C> <C>
Andrew Davis 660,852 (2) 6.4%
Alan Davis Media Limited
Level 10
35 York Street
Sidney, NSW 2000
Australia
Brian A. Lingard 1,289,740 (3)(4) 12.4%
401 Louisiana
Suite 206
Houston, Texas 77002
Dennis M. Buck 689,921 (4) 6.7%
William C. Penttila 689,921 (4) 6.7%
450 N. Sam Houston Parkway E., Suite 140
Houston, Texas 77060
Michael C. Nemec 614,116 5.9%
The Phoenix Resource Companies
6525 N. Meridian Ave.
Oklahoma City, Oklahoma 77116
Asia Energy Ltd. 2,406,167 (4)(5) 23.2%
734 7th Avenue S.W., Suite 1345
Calgary, Alberta
Canada T2P 3B8
Jimmy M. McCarroll 550,000 (4) 5.3%
</TABLE>
- ------------------
(1) Based upon 10,370,824 shares outstanding as of the Record Date.
(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. Also includes 105,000 shares owned by one company and two trusts
controlled by Mr. Lingard. Mr. Lingard is a former officer and director of
the Company. Mr. Lingard purchased 129,000 of his shares from his parents
at a price of $1.40 per share during the past 60 days.
(4) The holders of these shares, as Control Shareholders, have agreed in the
Merger Agreement to vote these shares in favor of approval of the Reverse
Stock Split.
(5) All shares reported are owned by AEL. See footnotes 4, 5 and 6 to table
below.
-36-
<PAGE>
The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of the Record Date by each director
of the Company and the directors and executive officers as a group:
<TABLE>
<CAPTION>
AMOUNT AND
NATURE OF PERCENT
BENEFICIAL OF
NAME OF BENEFICIAL OWNER OWNERSHIP (1) CLASS(2)
----------------------------------- ------------- --------
<S> <C> <C>
Daniel A. Mercier 2,528,667 (3)(4) 24.3%
William C. Penttila 689,921 (3) 6.7%
Douglas N. Baker 2,428,390 (3)(6) 23.4%
Richard A.N. Bonnycastle 2,447,834 (5) 23.6%
Jimmy M. McCarroll 550,000 5.3%
Donald L. Oliver 366,613 3.5%
Lamont C. Tolley 83,334 0.8%
Dennis M. Buck 689,921 (3) 6.7%
Directors and Officers as a Group 4,972,346 (7) 47.9%
</TABLE>
- ---------------
(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 10,370,824 shares outstanding as of the Record Date.
(3) Messrs. Penttila, Buck, Mercier and Baker exercised options during the last
60 days for 60,000, 60,000, 60,000 and 22,223 shares, respectively, at a
price of $.90 per share, which options had been granted by the Company's
Board of Directors in June 1996.
(4) Includes 114,000 shares owned directly by Mr. Mercier and 8,500 shares
owned by Mr. Mercier's wife. All other shares reported are owned by AEL.
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 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 Common Stock
owned by AEL.
(6) Includes 22,223 shares owned directly by Mr. Baker. 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 Common Stock
owned by AEL.
(7) Includes 4,938,123 shares, the beneficial owners of which (as Control
Shareholders) have agreed in the Merger Agreement to vote in favor of
approval of the Reverse Stock Split. Mr. Baker, as owner of the remaining
22,223 shares, also intends to vote such shares in favor of the Reverse
Stock Split.
-37-
<PAGE>
INDEPENDENT PUBLIC ACCOUNTANTS
The consolidated balance sheet of the Company as at March 31, 1997 and the
consolidated statements of operations, changes in stockholders' equity and cash
flows for the year then ended have been audited by Price Waterhouse, chartered
accountants, as stated in their report appearing herein.
The consolidated statements of operations, changes in stockholders' equity
and cash flows of the Company for the year ended March 31, 1996 have been
audited by Hein + Associates LLP, independent public accountants, as indicated
in their report appearing herein.
ADDITIONAL INFORMATION
The Company is subject to the informational requirements of the Exchange
Act and in accordance therewith files reports, proxy statements, and other
information with the Commission. Such reports, proxy statements, and other
information can be inspected and copied at the public reference facilities of
the Commission at Room 1024, 450 Fifth Street, N.W., Judiciary Plaza,
Washington, D.C. 20549 and at the regional offices of the Commission located at
7 World Trade Center, 13th Floor, Suite 1300, New York, New York 10048 and Suite
1400, Citicorp Center, 14th Floor, 500 West Madison Street, Chicago, Illinois
60661. Copies of such materials can also be obtained at prescribed rates by
writing to the Public Reference Section of the Commission at 450 Fifth Street,
N.W., Judiciary Plaza, Washington, D.C. 20549.
This Proxy Statement includes information required by the Commission to be
disclosed pursuant to Rule 13e-3 under the Exchange Act, which governs so-called
"going private" transactions by certain issuers or their affiliates. In
accordance with that rule, the Company has filed with the Commission, under the
Exchange Act, a Rule 13e-3 Transaction Statement with respect to the Reverse
Stock Split. This Proxy Statement does not contain all of the information set
forth in the Rule 13e-3 Transaction Statement parts of which are omitted in
accordance with the regulations of the Commission. The Rule 13e-3 Transaction
Statement, and any amendments thereto, including exhibits filed as a part
thereof, will be available for inspection and copying at the offices of the
Commission as set forth above.
-38-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
PAGE
<S> <C>
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 Statements 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 Statements of Cash Flows
for the Years Ended March 31, 1997 and 1996 F-8
Notes to Consolidated Financial Statements F-9
Supplemental Information -- Disclosures of Oil and
Gas Producing Activities (Unaudited) F-15
Consolidated Balance Sheet dated December 31, 1997 (Unaudited) F-18
Consolidated Statements of Operations for the nine months ended
December 31, 1997 and 1996 (Unaudited) F-20
Consolidated Statements of Cash Flows
for the nine months ended December 31, 1997 and 1996 (Unaudited) F-21
Notes to Unaudited Financial Statements F-22
</TABLE>
F-1
<PAGE>
Price Waterhouse
Chartered Accountants
1200 425 1st Street S.W.
Calgary, Alberta T2P 3V7
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.
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.
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).
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)
<TABLE>
<CAPTION>
MARCH 31,
1997
---------
<S> <C>
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, 7 and 11):
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
------
------
</TABLE>
See accompanying notes to consolidated financial statements.
F-5
<PAGE>
TERRITORIAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands of US dollars, except per share amounts)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------
1997 1996
--------------------
<S> <C> <C>
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 $(.021) $(.009)
------ ------
------ ------
WEIGHTED AVERAGE SHARES
OUTSTANDING (thousands) 9,255 6,863
------ ------
------ ------
</TABLE>
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 3,930,371 12 2,928,333 9 3,853 (3,471) (17)
----------- -------- ---------- ------- -------- ----------- --------
----------- -------- ---------- ------- -------- ----------- --------
Stock issued for
stock subscriptions 2,928,333 9 (2,928,333) (9) - - -
Debt Shares issued
to acquire TRI
Mongolia 1,816,667 5 - - 1,545 - -
Shares issued
as compensation to
officer, director and
other third parties 14,333 - - - 3 - -
Shares cancelled
as proceeds for
Account Receivable (1,000) - - - - - -
Net loss - - - - - (56) -
----------- -------- ---------- ------- -------- ----------- --------
Balance at
March 31, 1996 8,688,704 26 - - 5,399 (3,527) (17)
----------- -------- ---------- ------- -------- ----------- --------
----------- -------- ---------- ------- -------- ----------- --------
Shares issued for
cash and shares
of SOTAMO 639,583 2 - - 513 - -
Shares issued
for cash 47,500 - - - 43 - -
Shares issued for
termination of
warrants 33,333 - - - - - -
Shares issued for
exercise of
warrants 8,333 - - - 2 - -
Adjustment (3) - - - - - -
Net loss - - - - (198) -
----------- -------- ---------- ------- ----------- --------
Balance at
March 31, 1997 9,417,450 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 STATEMENTS OF CASH FLOWS
(in thousands of US dollars)
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31
--------------------
1997 1996
---------- -------
<S> <C> <C>
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 SOCO Tamtsag
Mongolia, Inc. stock - 20
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
------- -------
------- -------
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
------- -------
------- -------
</TABLE>
F-8
<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.
Capitalized costs which are based on cash calls from SOTAMO have been
reduced by $20,000 for the proceeds of and option payment received from AEL
(see Note 7). 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. The fair value of the
SOTAMO investment at March 31, 1997 is $7.5 million.
<TABLE>
<CAPTION>
CASH CALL RECEIVABLES AT
MARCH 31
-------------------------
1997 1996
----------- ----------
<S> <C> <C>
Balance, beginning of year $1,744,000 $ 128,000
Sale of shares of SOTAMO (250,000) ---
Shares of SOTAMO acquired for common stock 250,000 1,550,000
Share of expenditures incurred by SOTAMO 1,076,000 66,000
---------- ----------
$2,820,000 $1,744,000
----------- ----------
----------- ----------
</TABLE>
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
F-9
<PAGE>
circumstances. Net oil and gas properties were $17,000 at March 31, 1997,
consisting of office equipment and exploration expenditures in Mongolia.
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.
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.
F-10
<PAGE>
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.
6. REVENUES - SIGNIFICANT CUSTOMERS
Customers that have accounted for more than 10% of the Corporation's oil
and gas sales during the past three years are as follows:
<TABLE>
<CAPTION>
March 31
--------------------
1997 1996
-------- --------
<S> <C> <C>
Norcen Energy Resources $ 3,000 $ 14,000
Snyder Oil Corporation $ 5,000 $ 6,000
Merit Energy Company $ 3,000
AFG Energy, Inc. $ 6,000
</TABLE>
7. STOCKHOLDERS' EQUITY
AUTHORIZED
1,437,500 preferred shares, non-voting, non-cumulative, convertible, $0.10
per value
200,000,000 common shares, no par value, $.001 stated value
All share issuances, repurchases and balances have been adjusted for the
one-for-three share consolidation which occurred on April 30, 1997 (see
Note 11).
<TABLE>
<CAPTION>
ISSUED
<S> <C>
9,417,450 common shares
(1,819) treasury stock
---------
9,415,631
---------
---------
112,500 preferred stock
---------
---------
</TABLE>
On March 29, 1996, the Corporation acquired an additional 12% interest in
SOTAMO in exchange for the issuance of 1,816,667 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, 325,000 of the
warrants were
F-11
<PAGE>
cancelled. At March 31, 1996, warrants to acquire 341,667 shares of common
stock remain 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 $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.
During fiscal 1996, the Corporation compensated its corporate secretary, a
director and two professionals for services rendered to the Corporation by
the issuance of 14,333 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 1,000
shares, which were valued at $187.
On July 19, 1996, the Corporation issued to Asia Energy Ltd. (an
affiliate) 639,583 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, 33,333 shares of the common stock of the Corporation were
issued in exchange for the termination of 333,333 of the warrants.
On November 18, 1996, the Corporation issued 8,333 shares upon the exercise
of 8,333 warrants. Following this transaction no warrants remain
outstanding.
In October 1996, the Corporation issued 47,500 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
187,500 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:
<TABLE>
<S> <C>
William C. Penttila 90,000
Dennis M. Buck 90,000
Daniel A. Mercier 90,000
Douglas N. Baker 33,333
Lois S. Milard 10,000
D. Allinson 10,000
Stephen L. Gray 10,000
-------
333,333
-------
-------
</TABLE>
F-12
<PAGE>
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
$0.90 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 equaled 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.
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 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.
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.
F-13
<PAGE>
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 judgment.
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.
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.
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 Cdn. 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 Cdn. per share for a
period of 12 months following the anticipated closing. The Agents will be
paid a commission of $0.08 Cdn. 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. The 873,250 SOCO plc shares represent 1.8% of the outstanding SOCO
plc shares and the Corporation will account for the investment on the cost
basis. The exchange
F-14
<PAGE>
was accounted for as a disposition whereby the weighted average cost of the
SOTAMO shares was deducted from the total proceeds of $4.6 million,
resulting in a gain on sale of $2,949,000.
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 for $391,000, consisting of $210,000
cash and the issuance of 550,000 common shares of the Corporation, of which
300,000 shares held in escrow to be released in increments of 100,000
shares upon the occurrence of certain conditions pertaining to the progress
and results of operations of the Thailand concessions. No value was
ascribed to the escrow shares. These shares will be recorded at their fair
market value if and when issued.
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.
The 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%.
SUPPLEMENTAL INFORMATION - DISCLOSURES OF OIL AND GAS
PRODUCING ACTIVITIES - UNAUDITED
COSTS INCURRED IN OIL AND GAS PRODUCING ACTIVITIES
<TABLE>
<CAPTION>
YEARS ENDED MARCH 31,
----------------------------
1997 1996 1995
-------- -------- --------
<S> <C> <C>
Acquisition of proved properties. . . . . . . $ -- $ $100,000
Acquisition of unproved properties. . . . . . -- -- --
Exploration costs . . . . . . . . . . . . . . 13,044 -- --
Development costs . . . . . . . . . . . . . . -- 8,978 4,918
-------- -------- --------
$13,044 $8,978 $104,918
-------- -------- --------
-------- -------- --------
</TABLE>
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
F-15
<PAGE>
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.
<TABLE>
<CAPTION>
OIL (BBLS) GAS (MCFS)
---------- ----------
<S> <C> <C>
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 . . . . . . . . . . . . . -- --
-------- --------
-------- --------
</TABLE>
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:
<TABLE>
<CAPTION>
YEARS ENDED
MARCH 31, *
--------------------
1996 1995
--------- ---------
<S> <C> <C>
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
--------- ---------
--------- ---------
</TABLE>
- --------------------
* The Company had no material quantities of proved reserves at March 31,
1997.
F-16
<PAGE>
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:
<TABLE>
<CAPTION>
Years Ended March 31,
----------------------------------------
1997 1996 1995
----------------------------------------
<S> <C> <C> <C>
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 change 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
---------- ---------- ----------
---------- ---------- ----------
</TABLE>
F-17
<PAGE>
TERRITORIAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
Assets
($1,000)
<TABLE>
<CAPTION>
Unaudited
December 31, March 31,
1997 1997
------------ ---------
CURRENT ASSETS:
<S> <C> <C>
Cash $ 25 $ 6
Accounts Receivable:
Oil and gas -- 7
Other 6 2
Prepaids 5 32
-------- --------
Total Current Assets 36 47
-------- --------
NOTE RECEIVABLE 9 9
-------- --------
INVESTMENT IN SOCO TAMTSAG
MONGOLIA, INC. ("SOTAMO") 1,740 2,820
-------- --------
INVESTMENT IN SOCO INTERNATIONAL PLC
("SOCO") 3,601 -
-------- --------
PROPERTY AND EQUIPMENT, AT COST:
Oil and Gas (full cost accounting) 9,365 7,814
Less: Accumulated depreciation,
depletion & amortization (7,797) (7,797)
-------- --------
Total Property and Equipment 1,568 17
-------- --------
TOTAL ASSETS $ 6,954 $ 2,893
-------- --------
-------- --------
</TABLE>
See notes to condensed financial statements.
F-18
<PAGE>
TERRITORIAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS (continued)
Liabilities and Stockholders' Equity
($1,000)
<TABLE>
<CAPTION>
Unaudited
December 31, March 31,
1997 1997
------------ ---------
CURRENT LIABILITIES:
<S> <C> <C>
Accounts payable $ 261 $ 92
Bank loan 24 166
Due to affiliated party - 224
-------- --------
Total Current Liabilities 285 482
-------- --------
DEFERRED INCOME TAXES 1,362 -
-------- --------
STOCKHOLDERS' EQUITY:
Common stock, no par value, $.001
stated value; 200,000,000 shares
authorized; 9,957,266 shares issued
at September 30, 1997 and 9,604,951
at March 31, 1997 28 28
Additional paid in capital 6,378 6,125
Unrealized gain on securities held for sale 1,055 -
Accumulated deficit, $5,121 deficit
eliminated in quasi-reorganization
effective March 31, 1986 (2,137) (3,725)
Treasury stock, 1,819 shares, at cost (17) (17)
-------- --------
Total Stockholders' Equity 5,307 2,411
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY $ 6,954 $ 2,893
-------- --------
-------- --------
</TABLE>
See notes to condensed financial statements.
F-19
<PAGE>
TERRITORIAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS - UNAUDITED
December 31, 1997 and 1996
($1,000)
<TABLE>
<CAPTION>
Nine Months Ended
December 31,
-----------------------
1997 1996
-------- --------
REVENUES:
<S> <C> <C>
Oil & gas and other $ 3 $ 18
Gain on sale of SOTAMO shares 2,949 -
Gain of sale of SOCO shares 464 -
-------- --------
Total Revenues 3,416 18
-------- --------
COSTS AND EXPENSES:
Production costs - 1
Depreciation, depletion, and amortization - 3
General and administrative 460 113
Interest 6 -
-------- --------
Total Costs and Expenses 466 117
-------- --------
NET INCOME (LOSS) BEFORE 2,950 (99)
INCOME TAXES
Income Tax Provision 1,362 -
-------- --------
NET INCOME (LOSS) $ 1,588 $ (99)
-------- --------
-------- --------
NET INCOME (LOSS) PER SHARE $ .162 $ (.011)
-------- --------
-------- --------
Average Common Shares Outstanding 9,811 9,079
-------- --------
-------- --------
</TABLE>
See notes to condensed financial statements.
F-20
<PAGE>
TERRITORIAL RESOURCES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS- UNAUDITED
December 31, 1997 and 1996
($1,000)
<TABLE>
<CAPTION>
NINE MONTHS ENDED
DECEMBER 31,
1997 1996
-------- --------
CASH FLOWS FROM OPERATING
<S> <C> <C>
ACTIVITIES:
Net Income (loss) $ 1,588 $ (99)
Adjustments to reconcile net income to
cash provided (used) by operations:
Depreciation, depletion and amortization - 3
Gain on sale of SOTAMO shares (2,949) -
Gain of sale of SOCO shares (464) -
Deferred income taxes 1,362 -
Changes in operating assets and liabilities:
Accounts receivable 3 (70)
Prepaid expenses 27 (7)
Accounts payable 169 185
Accrued liabilities - (49)
-------- --------
Cash provided by (used in) operations (264) (37)
-------- --------
CASH FLOW FROM INVESTMENT ACTIVITIES:
Additional investment in SOTAMO (604) (956)
Additions to property and equipment (1,298) -
Proceeds from sale of SOTAMO shares 926 -
Proceeds from sale of SOCO shares 1,625 -
Proceeds from sale of oil and gas property - 135
-------- --------
Cash provided (used in) from investment activities 649 (821)
-------- --------
CASH FLOW FROM FINANCING ACTIVITIES:
Issue of preferred stock - 164
Issue of common stock - 541
Debt incurred (repaid) (142) -
Advances from stockholders and affiliates (224) 135
Notes receivable - 1
-------- --------
Cash provided by (used in) financing activities (366) 841
-------- --------
CHANGE IN CASH BALANCE 19 (17)
CASH BALANCE - BEGINNING 6 39
-------- --------
CASH BALANCE - ENDING $ 25 $ 22
-------- --------
-------- --------
</TABLE>
See notes to condensed financial statements.
F-21
<PAGE>
TERRITORIAL RESOURCES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
December 31, 1997 (Unaudited)
1. The information presented herein is condensed from what would appear
in annual financial statements. Accordingly, the financial statements
included herein should be read in conjunction with the consolidated
financial statements and notes thereto for the fiscal year ended March
31, 1997. The financial statements included herein include all
adjustments that in the opinion of management are necessary in order
to make the financial statements not misleading. Except as otherwise
described in the financial statements, all amounts stated in dollars
or ($) represent United States dollars and all references to shares of
common stock, no par value ("Common Stock"), of the Company have been
adjusted to reflect a one-for three reverse stock split effected in
May 1997.
2. The results for the interim period are not necessarily indicative of
results to be expected of the Company for the fiscal year ended March
31, 1998, due to seasonal or other factors. The Company believes that
the interim period reports filed on Form 10-QSB are representative of
its financial position, changes in financial position and results of
operations for the periods covered thereby.
3. The number of shares of Common Stock reflected as issued on the
unaudited Balance Sheet as of December 31, 1997 does not include
200,000 shares of Common Stock held in escrow. As previously
described, the Company acquired a 2.5% interest in two offshore
exploration blocks in the Gulf of Thailand on June 30, 1997, and in
connection therewith, paid $210,000 in cash to Jimmy M. McCarroll, a
director of the Company, and issued to him an aggregate of 550,000
shares of Common Stock, of which 300,000 shares were held in escrow 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. As a result of the
fulfillment of one of the escrow conditions, 100,000 of such shares
were released from escrow on September 19, 1997.
4. On January 28, 1998, the Company entered into a Reorganization
Agreement and Plan of Merger with SOCO International plc and its
wholly-owned subsidiary, SOCO Resources (Colorado), Inc. ("Newco"),
pursuant to which and subject to the conditions set forth therein the
Company agreed to effect a one-for-36,000 reverse stock split and
merge with Newco, as described elsewhere herein.
5. On July 22, 1997, Territorial sold 73,250 shares of SOCO for cash
proceeds of $418,000. On September 9, 1997, Territorial sold a
further 100,000 shares of SOCO and received cash proceeds of $583,000.
On October 29, 1997, the Company sold a further 100,000 SOCO shares
for cash proceeds of $624,000. As a result of these sales the Company
held approximately 600,000 ordinary shares of SOCO at December 31,
1997.
6. The fair value of the Company's investment in SOTAMO at December
31, 1997 is $3.0 million.
7. The shares of SOCO owned by the Company are carred at their fair
value at the balance sheet date of December 31, 1997 based on the
quoted price for the shares at the close of business on that data.
Unrealized gains and losses are reported as a net amount in a
separate component of shareholders' equity
F-22
<PAGE>
ANNEX A
PROPOSED AMENDMENT TO THE ARTICLES OF INCORPORATION OF
TERRITORIAL RESOURCES, INC. TO EFFECT A ONE-FOR-36,000
REVERSE STOCK SPLIT
The following provision shall be added to Article IV of the Articles of
Incorporation of the corporation:
Simultaneously with the effective date of this amendment (the "Effective
Date"), each share of the corporation's Common Stock, no par value each, issued
and outstanding immediately prior to the Effective Date (the "Old Common Stock")
shall automatically and without any action on the part of the holder thereof be
reclassified as and changed, pursuant to a reverse stock split, into
one-thirty-six thousandth (1/36,000th) of a share of the corporation's
outstanding Common Stock, no par value each (the "New Common Stock"), subject to
the treatment of fractional share interests as described below. Each holder of
a certificate or certificates which immediately prior to the Effective Date
represented outstanding shares of Old Common Stock (the "Old Certificates,"
whether one or more) shall be entitled to receive upon surrender of such Old
Certificates to the corporation's transfer agent for cancellation, a certificate
or certificates (the "New Certificates," whether one or more) representing the
number of whole shares of the New Common Stock into which and for which the
shares of the Old Common Stock formerly represented by such Old Certificates so
surrendered, are reclassified under the terms hereof. Form and after the
Effective Date, Old Certificates shall represent only the right to receive New
Certificates pursuant to the provisions hereof. No certificates or scrip
representing fractional share interests in New Common Stock will be issued, and
no such factional share interest will entitle the holder thereof to vote, or to
any rights of a shareholder of the corporation. In lieu of the issuance of any
such fractional share interest, the corporation shall pay to each holder of Old
Common Stock, who would otherwise be entitled to receive a fractional share of
New Common Stock an amount of cash equal to $1.40 multiplied by the number of
shares of Old Common Stock held by such holder which would otherwise be
converted into a fractional share of New Common Stock. If more than one Old
Certificate shall be surrendered at one time for the account of the same
Shareholder, the number of full shares of New Common Stock for which New
Certificates shall be issued shall be computed on the basis of the aggregate
number of shares represented by the Old Certificates so surrendered. In the
event that the corporation's transfer agent determines that a holder of Old
Certificates has not tendered all his or her certificates for exchange, the
transfer agent shall carry forward any fractional share until all certificates
of that holder have been presented for exchange such that payment for fractional
shares to any one person shall not exceed the value of one share of New Common
Stock. If any New Certificate is to be issued in a name other than that in
which the Old Certificates surrendered for exchange are issued, the Old
Certificates so surrendered shall be properly endorsed and otherwise in proper
form for transfer. From and after the Effective Date the amount of capital
represented by the shares of the New Common Stock into which and for which the
shares of the Old Common Stock are reclassified under the terms hereof shall be
the same as the amount of capital represented by the shares of Old Common Stock
so reclassified minus the total amount of cash paid by the corporation in lieu
of the issuance of fractional shares of New Common Stock, until thereafter
reduced or increased in accordance with applicable law.
<PAGE>
ANNEX B
ARTICLE 113
OF THE COLORADO BUSINESS CORPORATION ACT
DISSENTERS' RIGHTS
PART 1
RIGHT OF DISSENT -
PAYMENT FOR SHARES
7-113-101. DEFINITIONS. For purposes of this article:
(1) "Beneficial shareholder" means the beneficial owner of shares
held in a voting trust or by a nominee as the record shareholder.
(2) "Corporation" means the issuer of the shares held by a dissenter
before the corporate action, or the surviving or acquiring domestic or foreign
corporation, by merger or share exchange of that issuer.
(3) "Dissenter" means a shareholder who is entitled to dissent from
corporate action under section 7-113-102 and who exercises that right at the
time and in the manner required by part 2 of this article.
(4) "Fair value," with respect to a dissenter's shares, means the
value of the shares immediately before the effective date of the corporate
action to which the dissenter objects, excluding any appreciation or
depreciation in anticipation of the corporate action except to the extent that
exclusion would be inequitable.
(5) "Interest" means interest from the effective date of the
corporate action until the date of payment, at the average rate currently paid
by the corporation on its principal bank loans or, if none, at the legal rate as
specified in section 5-12-101, C.R.S.
(6) "Record shareholder" means the person in whose name shares are
registered in the records of a corporation or the beneficial owner of shares
that are registered in the name of a nominee to the extent such owner is
recognized by the corporation as the shareholder as provided in section
7-107-204.
(7) "Shareholder" means either a record shareholder or a beneficial
shareholder.
7-113-102. RIGHT TO DISSENT. (1) A shareholder, whether or not entitled
to vote, is entitled to dissent and obtain payment of the fair value of the
shareholder's shares in the event of any of the following corporate actions:
(a) Consummation of a plan of merger to which the corporation is a
party if:
<PAGE>
(I) Approval by the shareholders of that corporation is required
for the merger by section 7-111-103 or 7-111-104 or by the articles of
incorporation; or
(II) The corporation is a subsidiary that is merged with its
parent corporation under section 7-111-104;
(b) Consummation of a plan of share exchange to which the corporation
is a party as the corporation whose shares will be acquired;
(c) Consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of the corporation for which a
shareholder vote is required under section 7-112-102(1); and
(d) Consummation of a sale, lease, exchange, or other disposition of
all, or substantially all, of the property of an entity controlled by the
corporation if the shareholders of the corporation were entitled to vote upon
the consent of the corporation to the disposition pursuant to section
7-112-102(2).
(1.3) A shareholder is not entitled to dissent and obtain payment, under
subsection (1) of this section, of the fair value of the shares of any class or
series of shares which either were listed on a national securities exchange
registered under the federal "Securities Exchange Act of 1934," as amended, or
on the national market system of the national association of securities dealers
automated quotation system, or were held of record by more than two thousand
shareholders, at the time of:
(a) The record date fixed under section 7-107-107 to determine the
shareholders entitled to receive notice of the shareholders' meeting at which
the corporate action is submitted to a vote;
(b) The record date fixed under section 7-107-104 to determine
shareholders entitled to sign writings consenting to the corporate action; or
(c) The effective date of the corporate action if the corporate action
is authorized other than by a vote of shareholders.
(1.8) The limitation set forth in subsection (1.3) of this section shall
not apply if the shareholder will receive for the shareholder's shares, pursuant
to the corporate action, anything except:
(a) Shares of the corporation surviving the consummation of the plan of
merger or share exchange;
(b) Shares of any other corporation which at the effective date of the
plan of merger or share exchange either will be listed on a national securities
exchange registered under the federal "Securities Exchange Act of 1934," as
amended, or on the national market system of the national association of
securities dealers automated quotation system, or will be held of record by more
than two thousand shareholders;
(c) Cash in lieu of fractional shares; or
B-2
<PAGE>
(d) Any combination of the foregoing described shares or cash in lieu
of fractional shares.
(2) (Deleted by amendment, L. 96, p. 1321, Section 30, effective June
1, 1996.)
(2.5) A shareholder, whether or not entitled to vote, is entitled to
dissent and obtain payment of the fair value of the shareholder's shares in the
event of a reverse split that reduces the number of shares owned by the
shareholder to a fraction of a share or to scrip if the fractional share or
scrip so created is to be acquired for cash or the scrip is to be voided under
section 7-106-104.
(3) A shareholder is entitled to dissent and obtain payment of the fair
value of the shareholder's shares in the event of any corporate action to the
extent provided by the bylaws or a resolution of the board of directors.
(4) A shareholder entitled to dissent and obtain payment for the
shareholder's shares under this article may not challenge the corporate action
creating such entitlement unless the action is unlawful or fraudulent with
respect to the shareholder or the corporation.
7-113-103. DISSENT BY NOMINEES AND BENEFICIAL OWNERS. (1) A record
shareholder may assert dissenters' rights as to fewer than all the shares
registered in the record shareholder's name only if the record shareholder
dissents with respect to all shares beneficially owned by any one person and
causes the corporation to receive written notice which states such dissent and
the name, address, and federal taxpayer identification number, if any, of each
person on whose behalf the record shareholder asserts dissenters' rights. The
rights of a record shareholder under this subsection (1) are determined as if
the shares as to which the record shareholder dissents and the other shares of
the record shareholder were registered in the names of different shareholders.
(2) A beneficial shareholder may assert dissenters' rights as to the
shares held on the beneficial shareholder's behalf only if:
(a) The beneficial shareholder causes the corporation to receive the
record shareholder's written consent to the dissent not later than the time the
beneficial shareholder asserts dissenters' rights; and
(b) The beneficial shareholder dissents with respect to all shares
beneficially owned by the beneficial shareholder.
(3) The corporation may require that, when a record shareholder
dissents with respect to the shares held by any one or more beneficial
shareholders, each such beneficial shareholder must certify to the corporation
that the beneficial shareholder and the record shareholder or record
shareholders of all shares owned beneficially by the beneficial shareholder have
asserted, or will timely assert, dissenters' rights as to all such shares as to
which there is no limitation on the ability to exercise dissenters' rights. Any
such requirement shall be stated in the dissenters' notice given pursuant to
section 7-113-203.
B-3
<PAGE>
PART 2
PROCEDURE FOR EXERCISE
OF DISSENTERS' RIGHTS
7-113-201. NOTICE OF DISSENTERS' RIGHTS. (1) If a proposed corporate
action creating dissenters' rights under section 7-113-102 is submitted to a
vote at a shareholders' meeting, the notice of the meeting shall be given to all
shareholders, whether or not entitled to vote. The notice shall state that
shareholders are or may be entitled to assert dissenters' rights under this
article and shall be accompanied by a copy of this article and the materials, if
any, that, under articles 101 to 117 of this title, are required to be given to
shareholders entitled to vote on the proposed action at the meeting. Failure to
give notice as provided by this subsection (1) shall not affect any action taken
at the shareholders' meeting for which the notice was to have been given, but
any shareholder who was entitled to dissent but who was not given such notice
shall not be precluded from demanding payment for the shareholder's shares under
this article by reason of the shareholder's failure to comply with the
provisions of section 7-113-202(1).
(2) If a proposed corporate action creating dissenter's rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104, any written or oral solicitation of a shareholder to execute
a writing consenting to such action contemplated in section 7-107-104 shall be
accompanied or preceded by a written notice stating that shareholders are or may
be entitled to assert dissenters' rights under this article, by a copy of this
article, and by the materials, if any, that, under articles 101 to 117 of this
title, would have been required to be given to shareholders entitled to vote on
the proposed action if the proposed action were submitted to a vote at a
shareholders' meeting. Failure to give notice as provided by this subsection
(2) shall not affect any action taken pursuant to section 7-107-104 for which
the notice was to have been given, but any shareholder who was entitled to
dissent but who was not given such notice shall not be precluded from demanding
payment for the shareholder's shares under this article by reason of the
shareholder's failure to comply with the provisions of section 7-113-202(2).
7-113-202. NOTICE OF INTENT TO DEMAND PAYMENT. (1) If a proposed
corporate action creating dissenters' rights under section 7-113-102 is
submitted to a vote at a shareholders' meeting and if notice of dissenters'
rights has been given to such shareholder in connection with the action pursuant
to section 7-113-201 (1), a shareholder who wishes to assert dissenters' rights
shall:
(a) Cause the corporation to receive, before the vote is taken, written
notice of the shareholder's intention to demand payment for the shareholder's
shares if the proposed corporate action is effectuated; and
(b) Not vote the shares in favor of the proposed corporate action.
(2) If a proposed corporate action creating dissenters' rights under
section 7-113-102 is authorized without a meeting of shareholders pursuant to
section 7-107-104 and if notice of dissenters' rights has been given to such
shareholder in connection with the action pursuant to section 7-113-201(2), a
shareholder who wishes to assert dissenters' rights shall not execute a writing
consenting to the proposed corporate action.
B-4
<PAGE>
(3) A shareholder who does not satisfy the requirements of subsection
(1) or (2) of this section is not entitled to demand payment for the
shareholder's shares under this article.
7-113-203. DISSENTERS' NOTICE. (1) If a proposed corporate action
creating dissenters' rights under section 7-113-102 is authorized, the
corporation shall give a written dissenters' notice to all shareholders who are
entitled to demand payment for their shares under this article.
(2) The dissenters' notice required by subsection (1) of this section
shall be given no later than ten days after the effective date of the corporate
action creating dissenters' rights under section 7-113-102 and shall:
(a) State that the corporate action was authorized and state the
effective date or proposed effective date of the corporate action;
(b) State an address at which the corporation will receive payment
demands and the address of a place where certificates for certificated shares
must be deposited;
(c) Inform holders of uncertificated shares to what extent transfer of
the shares will be restricted after the payment demand is received;
(d) Supply a form for demanding payment, which form shall request a
dissenter to state an address to which payment is to be made;
(e) Set the date by which the corporation must receive the payment
demand and certificates for certificated shares, which date shall not be less
than thirty days after the date the notice required for subsection (1) of this
section is given;
(f) State the requirement contemplated in section 7-113-103(3), if such
requirement is imposed; and
(g) Be accompanied by a copy of this article.
7-113-204. PROCEDURE TO DEMAND PAYMENT. (1) A shareholder who is given a
dissenters' notice pursuant to section 7-113-203 and who wishes to assert
dissenters' rights shall, in accordance with the terms of the dissenters'
notice:
(a) Cause the corporation to receive a payment demand, which may be the
payment demand form contemplated in section 7-113-203(2)(d), duly completed, or
may be stated in another writing; and
(b) Deposit the shareholder's certificates for certificated shares.
(2) A shareholder who demands payment in accordance with subsection (1)
of this section retains all rights of a shareholder, except the right to
transfer the shares, until the effective date of the proposed corporate action
giving rise to the shareholder's exercise of dissenters' rights and has only the
right to receive payment for the shares after the effective date of such
corporate action.
B-5
<PAGE>
(3) Except as provided in section 7-113-207 or 7-113-209(1)(b), the
demand for payment and deposit of certificates are irrevocable.
(4) A shareholder who does not demand payment and deposit the
shareholder's share certificate as required by the date or dates set in the
dissenters' notice is not entitled to payment for the shares under this article.
7-113-205. UNCERTIFICATED SHARES. (1) Upon receipt of a demand for
payment under section 7-113-204 from a shareholder holding uncertificated
shares, and in lieu of the deposit of certificates representing the shares, the
corporation may restrict the transfer thereof.
(2) In all other respects, the provisions of section 7-113-204 shall be
applicable to shareholders who own uncertificated shares.
7-113-206. PAYMENT. (1) Except as provided in section 7-113-208, upon
the effective date of the corporate action creating dissenters' rights under
section 7-113-102 or upon receipt of a payment demand pursuant to section
7-113-204, whichever is later, the corporation shall pay each dissenter who
complied with section 7-113-204, at the address stated in the payment demand, or
if no such address is stated in the payment demand, at the address shown on the
corporation's current record of shareholders for the record shareholder holding
the dissenter's shares, the amount the corporation estimates to be the fair
value of the dissenter's shares, plus accrued interest.
(2) The payment made pursuant to subsection (1) of this section shall
be accompanied by:
(a) The corporation's balance sheet as of the end of its most recent
fiscal year or, if that is not available, the corporation's balance sheet as of
the end of a fiscal year ending not more than sixteen months before the date of
payment, an income statement for that year, and, if the corporation customarily
provides such statements to shareholders, a statement of changes in
shareholders' equity for that year and a statement of cash flow for that year,
which balance sheet and statements shall have been audited if the corporation
customarily provides audited financial statements to shareholders, as well as
the latest available financial statements, if any, for the interim or full-year
period, which financial statements need not be audited;
(b) A statement of the corporation's estimate of the fair value of the
shares;
(c) An explanation of how the interest was calculated;
(d) A statement of the dissenter's right to demand payment under
section 7-113-209; and
(e) A copy of this article.
7-113-207. FAILURE TO TAKE ACTION. (1) If the effective date of the
corporate action creating dissenters' rights under section 7-113-102 does not
occur within sixty days after the date set by the corporation by which the
corporation must receive the payment demand as provided in section 7-113-203,
the corporation shall return the deposited certificates and release the transfer
restrictions imposed on uncertificated shares.
B-6
<PAGE>
(2) If the effective date of the corporate action creating dissenters'
rights under section 7-113-102 occurs more than sixty days after the date set by
the corporation by which the corporation must receive the payment demand as
provided in section 7-113-203, then the corporation shall send a new dissenters'
notice, as provided in section 7-113-203, and the provisions of sections
7-113-204 to 7-113-209 shall again be applicable.
7-113-208. SPECIAL PROVISIONS RELATING TO SHARES ACQUIRED AFTER
ANNOUNCEMENT OF PROPOSED CORPORATE ACTION. (1) The corporation may, in or with
the dissenters' notice given pursuant to section 7-113-203, state the date of
the first announcement to news media or to shareholders of the terms of the
proposed corporate action creating dissenters' rights under section 7-113-102
and state that the dissenter shall certify in writing, in or with the
dissenter's payment demand under section 7-113-204, whether or not the dissenter
(or the person on whose behalf dissenters' rights are asserted) acquired
beneficial ownership of the shares before that date. With respect to any
dissenter who does not so certify in writing, in or with the payment demand,
that the dissenter or the person on whose behalf the dissenter asserts
dissenters' rights acquired beneficial ownership of the shares before such date,
the corporation may, in lieu of making the payment provided in section
7-113-206, offer to make such payment if the dissenter agrees to accept it in
full satisfaction of the demand.
(2) An offer to make payment under subsection (1) of this section shall
include or be accompanied by the information required by section 7-113-206(2).
7-113-209. PROCEDURE IF DISSENTER IS DISSATISFIED WITH PAYMENT OR OFFER.
(1) A dissenter may give notice to the corporation in writing of the
dissenter's estimate of the fair value of the dissenter's shares and of the
amount of interest due and may demand payment of such estimate, less any payment
made under section 7-113-206, or reject the corporation's offer under section
7-113-208 and demand payment of the fair value of the shares and interest due,
if:
(a) The dissenter believes that the amount paid under section 7-113-206
or offered under section 7-113-208 is less than the fair value of the shares or
that the interest due was incorrectly calculated;
(b) The corporation fails to make payment under section 7-113-206
within sixty days after the date set by the corporation by which the corporation
must receive the payment demand; or
(c) The corporation does not return the deposited certificates or
release the transfer restrictions imposed on uncertificated shares as required
by section 7-113-207(1).
(2) A dissenter waives the right to demand payment under this section
unless the dissenter causes the corporation to receive the notice required by
subsection (1) of this section within thirty days after the corporation made or
offered payment for the dissenter's shares.
B-7
<PAGE>
PART 3
JUDICIAL APPRAISAL OF SHARES
7-113-301. COURT ACTION. (1) If a demand for payment under section
7-113-209 remains unresolved, the corporation may, within sixty days after
receiving the payment demand, commence a proceeding and petition the court to
determine the fair value of the shares and accrued interest. If the corporation
does not commence the proceeding within the sixty-day period, it shall pay to
each dissenter whose demand remains unresolved the amount demanded.
(2) The corporation shall commence the proceeding described in
subsection (1) of this section in the district court of the county in this state
where the corporation's principal office is located or, if the corporation has
no principal office in this state, in the district court of the county in which
its registered office is located. If the corporation is a foreign corporation
without a registered office, it shall commence the proceeding in the county
where the registered office of the domestic corporation merged into, or whose
shares were acquired by, the foreign corporation was located.
(3) The corporation shall make all dissenters, whether or not residents
of this state, whose demands remain unresolved parties to the proceeding
commenced under subsection (2) of this section as in an action against their
shares, and all parties shall be served with a copy of the petition. Service on
each dissenter shall be by registered or certified mail, to the address stated
in such dissenter's payment demand, or if no such address is stated in the
payment demand, at the address shown on the corporation's current record of
shareholders for the record shareholder holding the dissenter's shares, or as
provided by law.
(4) The jurisdiction of the court in which the proceeding is commenced
under subsection (2) of this section is plenary and exclusive. The court may
appoint one or more persons as appraisers to receive evidence and recommend a
decision on the question of fair value. The appraisers have the power described
in the order appointing them, or in any amendment to such order. The parties to
the proceeding are entitled to the same discovery rights as parties in other
civil proceedings.
(5) Each dissenter made a party to the proceeding commenced under
subsection (2) of this section is entitled to judgment for the amount, if any,
by which the court finds the fair value of the dissenter's shares, plus
interest, exceeds the amount paid by the corporation, or for the fair value,
plus interest, of the dissenter's shares for which the corporation elected to
withhold payment under section 7-113-208.
7-113-302. COURT COSTS AND COUNSEL FEES. (1) The court in an appraisal
proceeding commenced under section 7-113-301 shall determine all costs of the
proceeding, including the reasonable compensation and expenses of appraisers
appointed by the court. The court shall assess the costs against the
corporation; except that the court may assess costs against all or some of the
dissenters, in amounts the court finds equitable, to the extent the court finds
the dissenters acted arbitrarily, vexatiously, or not in good faith in demanding
payment under section 7-113-209.
(2) The court may also assess the fees and expenses of counsel and
experts for the respective parties, in amounts the court finds equitable:
B-8
<PAGE>
(a) Against the corporation and in favor of any dissenters if the court
finds the corporation did not substantially comply with the requirements of part
2 of this article; or
(b) Against either the corporation or one or more dissenters, in favor
of any other party, if the court finds that the party against whom the fees and
expenses are assessed acted arbitrarily, vexatiously, or not in good faith with
respect to the rights provided by this article.
(3) If the court finds that the services of counsel for any dissenter
were of substantial benefit to other dissenters similarly situated, and that the
fees for those services should not be assessed against the corporation, the
court may award to said counsel reasonable fees to be paid out of the amounts
awarded to the dissenters who were benefitted.
B-9
<PAGE>
ANNEX C
SAYER SECURITIES LIMITED
SUITE 1620, AQUITAINE TOWER
540 FIFTH AVENUE S.W.
CALGARY, ALBERTA
CANADA T2P 0M2
February 5, 1998
The Board of Directors
Territorial Resources, Inc.
Suite 1345, 734 - 7th Avenue SW
Calgary, Alberta T2P 3P8
Dear Sirs:
We understand Territorial Resources, Inc., ("Territorial" or the "Company")
and SOCO International plc ("SOCO") may carry out a transaction (the
"Transaction") whereby, amongst other things, the Company will carry out a
36,000-to-one reverse stock split of the Company's stock (the "Reverse Split")
and then merge with a newly-formed subsidiary of SOCO (the "Merger"). As
consideration for the Transaction, the current Territorial shareholders will
receive (i) prior to the Merger, a cash payment for Territorial's currently
outstanding common stock in lieu of the issuance of any resulting fractional
shares of the common stock to any shareholders who, after the Reverse Split, own
a fractional share of common stock and (ii) following the Merger, each
post-Reverse Split share will be converted into the right to receive the number
of SOCO ordinary shares equal to the product of 36,000 multplied by the quotient
of $1.40 USD (expressed in Pounds Sterling at the then prevailing United States
Dollar to Pounds Sterling exchange rate) divided by the SOCO market price, as
defined in the Reorganization Agreement and Plan of Merger (items (i) and (ii)
being collectively referred to herein as the "Transaction Consideration").
Territorial and SOCO are collectively referred to herein as the "Companies".
You have requested our opinion (the "Fairness Opinion") as to the fairness, from
a financial point of view, of the Transaction Consideration to the common
shareholders of Territorial.
In connection with the opinion, we have reviewed, among other things, the
Reorganization Agreement and Plan of Merger dated January 28,1998 (the
"Agreement"); drafts of the proxy statement of the Company regarding the
Transaction (the "Proxy Statement"); certain publicly available information
concerning the Company, including annual reports on Form 10-KSB of the Company
for the years ended March 31, 1995, 1996, and 1997 and quarterly reports on Form
10-QSB for the Company for the quarters ended June 30, 1997 and September 30,
1997; certain information on the market price and trading of the Company's and
SOCO's shares, as well as the trading of companies of a comparable nature to
Territorial and SOCO; certain publicly available information concerning SOCO,
including the listing particulars of SOCO dated May 23, 1997; the interim
report of SOCO for the period ended June 30, 1997; and certain internal
financial analyses
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and forecasts for the Company and SOCO prepared by their respective managements.
We have also held discussions with members of the senior management of the
Company and SOCO regarding the strategic rationale for, and potential benefits
of, the Transaction and the past and current business operations, financial
condition and future prospects of their respective companies. We have reviewed
certain information provided by Territorial relating to the oil and gas reserves
of the Company and SOCO, (the "Reserve Information"), including but not limited
to, (i) a December 31, 1996 reserve report for the Mongolian interests prepared
by independent petroleum engineers; (ii) a December 31, 1996 reserve report for
the Thailand interests prepared by independent petroleum engineers and (iii)
reserve information for SOCO as of December 31, 1996 and January 1, 1997
including forecasted production rates, revenues, cash flow and capital
expenditure as estimated and reviewed by independent petroleum engineers. In
addition, we have discussed the Reserve Information with the respective
managements of the Company and SOCO.
In our review and analysis and in arriving at our opinion, we have assumed
and relied upon the accuracy and completeness of all of the financial and other
information provided to us or publicly available and have neither attempted
independently to verify nor assumed responsibility for verifying any of such
information. We have not conducted an independent evaluation of any of the
properties, assets or facilities of the Company or SOCO, nor have we made or
obtained or assumed any responsibility for making or obtaining any independent
evaluations or appraisals of any of such properties, assets or facilities. With
respect to projections, we have assumed that they have been reasonably prepared
on bases reflecting the best currently available estimates and judgements of the
managements of the Company and SOCO as to the respective future financial
performance of the Company and SOCO as well as the synergistic values and
operating cost savings expected to be achieved through the combination of the
operations of the Company and SOCO. We express no view with respect to such
projections or the assumptions on which they were based. We further have
assumed that each of the Agreement and the other agreements which are attached
as exhibits to the Agreement, when executed and delivered, will not differ
materially from the drafts which we have reviewed and that the Transaction will
be carried out as contemplated in the Agreement and Proxy Statement.
In conducting our analysis and arriving at our opinion as expressed herein,
we have considered such financial and other factors as we have deemed
appropriate under the circumstances including, among others, the following (i)
the historical and current financial position and results of operations of the
Company and SOCO; (ii) the business prospects of the Company and SOCO; (iii) the
historical and current market for the Company's common shares, the SOCO common
stock and the equity securities of certain other companies that we believe to be
comparable to the Company and SOCO; and (iv) the nature and terms of certain
other transactions that we believe to be relevant. We have also taken into
account our assessment of general economic, market and financial conditions and
our knowledge of the oil and gas industry as well as our experience in
connection with similar transactions and securities valuation generally. Our
opinion necessarily is based upon economic, market and other conditions as they
exist and can be evaluated on the date hereof and we assume no responsibility to
update or revise our opinion based upon circumstances or events occurring after
the date hereof. Our opinion as expressed below does not constitute an opinion
or imply any conclusions as to the likely trading range for the SOCO ordinary
shares following consummation of the Transaction. In addition, our opinion does
not address the Company's underlying decision to effect the Merger or related
transactions and we express no view on the effect
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on the Company of the Merger and related transactions. Additionally, our
analysis did not address the potential tax consequences of any shareholder's
receipt of the Transaction Consideration; consequently, our opinion is limited
to the fairness of the Transaction Consideration before such tax consequences.
Our opinion is directed only to the fairness, from a financial point of view, of
the Transaction Consideration, to holders of company common shares and does not
constitute a recommendation to any holder of Company common shares as to how
such holder should vote with respect to the Transaction.
Further, we were not requested to and did not provide advice concerning the
structure, the specific amount of the consideration, or any other aspects of the
Transaction, or to provide services other than the delivery of this opinion. We
were not authorized to and did not solicit any expressions of interest from any
other parties with respect to the sale of all or any part of the Company or any
other alternative transaction. We did not participate in negotiations with
respect to the terms of the Transaction and related transactions. Consequently,
we have assumed that such terms are the most beneficial terms from the Company's
perspective that could under the circumstances be negotiated among the parties
to such transactions, and no opinion is expressed whether any alternative
transaction might produce consideration for the Company's stockholders in an
amount in excess of that contemplated in the Transaction.
Based upon and subject to the foregoing and based upon such other matters
as we considered relevant, it is our opinion that as of the date hereof the
Transaction Consideration is fair, from a financial point of view, to the common
shareholders of the Company.
This letter is provided to the Board of Directors of the Company in
connection with and for the purposes of its evaluation of the Transaction
Consideration. This opinion may not be disclosed, referred to, or communicated
(in whole or in part) to any third party for any purpose whatsoever except with
our prior written consent in each instance. This opinion may be reproduced in
full in any proxy or information statement mailed to stockholders of the Company
but may not otherwise be disclosed publicly in any manner without our prior
written approval and must be treated as confidential.
Your truly,
SAYER SECURITIES LIMITED
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