<PAGE>
As filed with the Securities and Exchange Commission on April 7, 1998
Securities and Exchange Commission
Washington, D.C. 20549
RULE 13e-3 TRANSACTION STATEMENT
(Pursuant to Section 13(e) of the Securities Exchange Act of 1934)
Amendment No. 1
TERRITORIAL RESOURCES, INC.
(Name of the Issuer)
TERRITORIAL RESOURCES, INC.
(Name of Person(s) Filing Statement)
Common Stock, no par value, of TERRITORIAL RESOURCES, INC.
(Title of Class of Securities)
881469 20 9
(CUSIP Number of Class of Securities)
Michael P. Finch, Esq.
Vinson & Elkins L.L.P.
1001 Fannin, Suite 2300
Houston, Texas 77002
Telephone: (713) 758-2128
Facsimile (713) 615-5282
(Name, address, and telephone number of person authorized to receive notices
and communications on behalf of person(s) filing statement)
This statement is filed in connection with (check the appropriate box):
a. /X/ The filing of solicitation materials or an information statement
subject to Regulation 14A [17 CFR 240.14a-1 to 240.14b-1], Regulation 14C [17
CFR 240.14c-1 to 240.14c-101] or Rule 13e-3(c) [Section 240.13e-3(c)] under the
Securities Exchange Act of 1934.
b. / / The filing of a registration statement under the Securities Act of
1933.
c. / / A tender offer.
d. / / None of the above.
Check the following box if the soliciting material or information statement
referred to in checking box (a) are preliminary copies: /X/.
CALCULATION OF FILING FEE
<TABLE>
<CAPTION>
- -------------------------------------------------------------------------------
TRANSACTION VALUATION *(1) AMOUNT OF FILING FEE
- -------------------------------------------------------------------------------
<S> <C> <C>
$1,766,367 $354.00(2)
</TABLE>
/ / Check box if any part of the fee is offset as provided by Rule 0-11(a)(2)
and identify the filing with which the offsetting fee was previously paid.
Identify the previous filing by registration statement number, or the Form or
Schedule and the date of its filing.
Amount Previously Paid:
Form or Registration No.:
Filing Party:
Date Filed:
NOTES:
*(1) 1,261,691 shares of the Issuer's Common Stock, no par value, redeemed for
cash consideration of $1.40 per share.
(2) Paid with initial filing.
<PAGE>
SUMMARY - THE SPECIAL MEETING
This Rule 13e-3 Transaction Statement is being filed by TERRITORIAL
RESOURCES, INC. (the "Company") with respect to the class of equity
securities of the Company that is subject to a Rule 13e-3 transaction. The
Company is submitting to the holders of the Company's common stock, no par
value (the "Common Stock"), a proposal to approve and adopt Articles of
Amendment to its Articles of Incorporation providing for (a) a one-for-36,000
reverse stock split of the Company's Common Stock and (b) a cash payment in
the amount 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." The Reverse Stock Split is upon the terms and subject to the
conditions set forth in the Company's Proxy Statement for the Company's
Special Meeting of Shareholders scheduled to be held on ____________, 1998, a
copy of which is filed as an exhibit hereto and is incorporated herein by
reference in its entirety.
The following Cross Reference Sheet is supplied pursuant to General
Instruction F to Schedule 13E-3 and shows the location in the Preliminary
Proxy Statement filed by the Company with the Securities and Exchange
Commission on April 7, 1998 (including all annexes and schedules thereto, the
"Proxy Statement") of the information required to be included in response to
the items of this Statement. The information in the Proxy Statement, a copy
of which is attached hereto as Exhibit (d)(1), is hereby expressly
incorporated by reference and the responses to each item are qualified in
their entirety by the provisions of the Proxy Statement.
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<PAGE>
CROSS REFERENCE SHEET SHOWING LOCATION
IN PRELIMINARY PROXY STATEMENT OF INFORMATION
REQUIRED BY ITEMS IN SCHEDULE 13E-3
SCHEDULE 13E-3 ITEM LOCATION IN PROXY STATEMENT
------------------- ---------------------------
1. Issuer and Class of Security Subject
to the Transaction.
Item 1(a) Cover Page.
Item 1(b) Cover Page, "Summary - The
Special Meeting - Record Date;
Quorum."
Item 1(c) "Price Range of Common Stock;
Dividends; Book Value - Common
Stock Information."
Item 1(d) "Price Range of Common Stock;
Dividends; Book Value -
Dividends."
Item 1(e) Not applicable.
Item 1(f) Not applicable.
2. Identity and Background.
Items 2(a)-(d) and (g) "Directors and Executive
Officers" and "Security Ownership
of Certain Beneficial Owners and
Management."
Items (e) and (f) Not applicable.
3. Past Contracts, Transactions or
Negotiations.
Item 3(a)(1) Not applicable.
Item 3(a)(2) Not applicable.
Item 3(b) "Special Factors - Background and
Reasons for the Reverse Stock
Split and Merger."
4. Terms of the Transaction.
Items 4(a) - (b) "The Reverse Stock Split -
Amendment of the Articles of
Incorporation to Effect the
Reverse Stock Split", "The
Reverse Stock Split - Exchange of
Shares and Payment in Lieu of
Issuance of Fractional Shares"
and "Special Factors - Background
and Reasons for the Reverse Stock
Split and Merger."
5. Plans or Proposals of the Issuer or
Affiliate.
Items 5(a) - (g) "Special Factors - Background and
Reasons for the Reverse Stock
Split and Merger," "Special
Factors -Plans for the Company
after the Reverse Stock Split"
and "Special Factors - Certain
Effects of the Reverse Stock
Split."
-3-
<PAGE>
6. Source and Amounts of Funds or Other
Consideration.
Items 6(a) - (c) "Special Factors - Source and
Amounts of Funds for and Expenses
of the Reverse Stock Split."
Item 6(d) Not applicable.
7. Purpose(s), Alternatives, Reasons and
Effects.
Item 7(a) "Special Factors - Background and
Reasons for the Reverse Stock
Split and Merger."
Item 7(b) "Special Factors - Background and
Reasons for the Reverse Stock
Split and Merger."
Item 7(c) "Special Factors - Background and
Reasons for the Reverse Stock
Split and Merger."
Item 7(d) "Special Factors - Certain
Effects of the Reverse Stock
Split," "Special Factors -
Certain United States Federal
Income Tax Consequences" and
"Special Factors - Opinion of
Financial Advisor."
8. Fairness of the Transaction.
Item 8(a) "Special Factors - Background and
Reasons for the Reverse Stock
Split and Merger," "Special
Factors -Recommendation of the
Board of Directors" and "Special
Factors -Opinion of Financial
Advisor."
Item 8(b) "Special Factors - Opinion of
Financial Advisor."
Item 8(c) "Summary - The Special Meeting
-Required Vote" and "The Reverse
Stock Split - Voting; Vote
Required."
Item 8(d) "Special Factors - Recommendation of
the Board of Directors."
Item 8(e) "Special Factors - Background and
Reasons for the Reverse Stock
Split and Merger" and "Special
Factors -Recommendation of the
Board of Directors."
Item 8(f) Not applicable.
9. Reports, Opinions, Appraisals and
Certain Negotiations.
Item 9(a) - (c) "Special Factors - Background and
Reasons for the Reverse Stock
Split and Merger" and "Special
Factors -Opinion of Financial
Advisor."
10. Interest in Securities of the Issuer.
Item 10(a) "Security Ownership of Certain
Beneficial Owners and Management."
Item 10(b) "Security Ownership of Certain
Beneficial Owners and Management."
-4-
<PAGE>
11. Contracts, Arrangements or "Special Factors - Background and
Understandings with Respect to the Reasons for the Reverse Stock
Issuer's Securities. Split and Merger," "Summary - The
Special Meeting - Required Vote" and
"The Reverse Stock Split - Voting;
Vote Required."
12. Present Intention and Recommendation
of Certain Persons with Regard to the
Transaction.
Item 12(a) "Special Factors - Background and
Reasons for the Reverse Stock
Split and Merger," "Summary - The
Special Meeting - Required Vote"
and "The Reverse Stock Split -
Voting; Vote Required."
Item 12(b) "Summary - The Special Meeting -
Purpose of the Special Meeting" and
"Special Factors - Recommendation of
the Board of Directors."
13. Other Provisions of the Transaction.
Item 13(a) "The Reverse Stock Split -
Dissenting Shareholders' Rights,"
"Annex B" to Proxy Statement
Items 13(b) and (c) Not applicable.
-5-
<PAGE>
14. Financial Information.
Item 14(a) "Index to Financial Statements;"
"Price Range of Common Stock;
Dividends; Book Value."
Item 14(b) "Pro Forma Condensed Financial
Statements."
15. Persons and Assets Employed, Retained
or Utilized.
Item 15(a) "Summary - The Special Meeting -
Solicitation of Proxies.
Item 15(b) "Summary - The Special Meeting
- Solicitation of Proxies" and
"Special Factors - Opinion of
Financial Advisor."
16. Additional Information. Proxy Statement in its entirety.
17. Material to be Filed as Exhibits. Separately included herewith.
Item 1. Issuer and Class of Security Subject to the Transaction.
(a) The name of the issuer is TERRITORIAL RESOURCES, INC., a
Colorado corporation, and the address of its executive offices is 734 7th
Avenue S.W., Suite 1345, Calgary, Alberta, Canada T2P 3P8.
(b) The exact title of the class of equity securities to which
this statement relates is Common Stock, no par value. The information set
forth under the caption "Summary - The Special Meeting - Record Date; Quorum
" of the Proxy Statement is incorporated herein by reference.
(c) The information set forth under the caption "Price Range of
Common Stock; Dividends; Book Value - Common Stock Information" of the Proxy
Statement is incorporated herein by reference.
(d) The information set forth under the caption "Price Range of
Common Stock; Dividends; Book Value - Dividends" of the Proxy Statement is
incorporated herein by reference.
(e) Not applicable.
(f) Not applicable.
Item 2. Identity and Background.
(a) - (d) and (g) This Statement is filed by TERRITORIAL RESOURCES,
INC., a Colorado corporation, with its executive offices at 734 7th Avenue
S.W., Suite 1345, Calgary, Alberta, Canada T2P 3P8. The information set
forth under the captions "Directors and Executive Officers" and "Security
Ownership of Certain Beneficial Owners and Management" of the Proxy Statement
is incorporated herein by reference.
(e) and (f) To the best of the Company's knowledge, during the last
five years no person described under the captions "Directors and Executive
Officers" and "Security Ownership of Certain Beneficial Owners and
Management" of the Proxy Statement has been convicted in a criminal
proceeding (excluding traffic violations or similar misdemeanors), and during
the last five years no such person was a party to a civil proceeding of a
judicial or administrative body of competent jurisdiction as a result of
which he was or is subject to a judgment, decree, or final order enjoining
future violations of, or prohibiting activities subject to, federal or state
securities law or finding any violation of such laws.
Item 3. Past Contracts, Transactions or Negotiations.
(a)(1) Not applicable.
(a)(2) Not applicable.
-6-
<PAGE>
(b) The information set forth under the caption "Special Factors -
Background and Reasons for the Reverse Stock Split and Merger" of the Proxy
Statement is incorporated herein by reference.
Item 4. Terms of the Transaction.
(a)-(b) The information set forth under the captions "The Reverse
Stock Split - Amendment of the Articles of Incorporation to Effect the Reverse
Stock Split," "The Reverse Stock Split - Exchange of Shares and Payment in
Lieu of Issuance of Fractional Shares" and "Special Factors - Background and
Reasons for the Reverse Stock Split and Merger" of the Proxy Statement is
incorporated herein by reference.
Item 5. Plans or Proposals of the Issuer or Affiliate.
(a)-(g) The information set forth under the captions "Special Factors
- -Background and Reasons for the Reverse Stock Split and Merger," "Special
Factors - Plans for the Company after the Reverse Stock Split" and "Special
Factors - Certain Effects of the Reverse Stock Split" of the Proxy Statement
is incorporated herein by reference.
Item 6. Source and Amounts of Funds and Other Consideration.
(a)-(c) The information set forth under the caption "Special Factors -
Source and Amounts of Funds for and Expenses of the Reverse Stock Split" of
the Proxy Statement is incorporated herein by reference.
(d) Not applicable.
Item 7. Purpose(s), Alternatives, Reasons and Effects.
(a) The information set forth under the caption "Special Factors -
Background and Reasons for the Reverse Stock Split and Merger" of the Proxy
Statement is incorporated herein by reference.
(b) The information set forth under the caption "Special Factors -
Background and Reasons for the Reverse Stock Split and Merger" of the Proxy
Statement is incorporated herein by reference.
(c) The information set forth under the caption "Special Factors -
Background and Reasons for the Reverse Stock Split and Merger" of the Proxy
Statement is incorporated herein by reference.
(d) The information set forth under the captions "Special Factors
- - Certain Effects of the Reverse Stock Split," "Special Factors - Certain
United States Federal Income Tax Consequences" and "Special Factors - Opinion
of Financial Advisor" of the Proxy Statement is incorporated herein by
reference.
Item 8. Fairness of the Transaction.
(a) The information set forth under the caption "Special Factors -
Background and Reasons for the Reverse Stock Split and Merger," "Special
Factors - Recommendation of the Board of Directors" and "Special Factors -
Opinion of Financial Advisor" of the Proxy Statement is incorporated herein
by reference.
(b) The information set forth under the caption "Special Factors -
Opinion of Financial Advisor" of the Proxy Statement is incorporated herein
by reference.
(c) The information set forth under the captions "Summary - The
Special Meeting - Required Vote" and "The Reverse Stock Split - Voting; Vote
Required" of the Proxy Statement is incorporated herein by reference.
(d) The information set forth under the caption "Special Factors
- - Recommendation of the Board of Directors" of the Proxy Statement is
incorporated herein by reference.
(e) The information set forth under the captions "Special Factors
- - Background and Reasons for Reverse Stock Split and Merger" and "Special
Factors - Recommendation of the Board of Directors" of the Proxy Statement is
incorporated herein by reference.
(f) Not applicable.
-7-
<PAGE>
Item 9. Reports, Opinions, Appraisals and Certain Negotiations.
(a)-(c) The information set forth under the captions "Special Factors
- - Background and Reasons for the Reverse Stock Split and Merger" and "Special
Factors - Opinion of Financial Advisor" of the Proxy Statement is
incorporated herein by reference.
Item 10. Interest in Securities of the Issuer.
(a) The information with respect to the ownership of and
transactions in Common Stock set forth under the caption "Security Ownership
of Certain Beneficial Owners and Management" of the Proxy Statement is
incorporated herein by reference.
(b) The information with respect to the ownership of and
transactions in Common Stock set forth under the caption "Security Ownership
of Certain Beneficial Owners and Management" of the Proxy Statement is
incorporated herein by reference.
Item 11. Contracts, Arrangements, or Understandings with Respect to the
Issuer's Securities.
The information set forth under the captions "Special Factors -
Background and Reasons for the Reverse Stock Split and Merger," "Summary
- The Special Meeting - Required Vote" and "The Reverse Stock Split -
Voting; Vote Required" of the Proxy Statement is incorporated herein by
reference.
Item 12. Present Intention and Recommendation of Certain Persons with
Regard to the Transaction.
(a) The information set forth under the captions "Special Factors
- - Background and Reasons for the Reverse Stock Split and Merger," "Summary -
The Special Meeting - Required Vote" and "The Reverse Stock Split - Voting;
Vote Required" of the Proxy Statement is incorporated herein by reference.
(b) The information set forth under the captions "Summary - The
Special Meeting - Purpose of the Special Meeting" and "Special Factors -
Recommendation of the Board of Directors" of the Proxy Statement is
incorporated herein by reference.
Item 13. Other Provisions of the Transaction.
(a) The information set forth under the caption "The Reverse Stock
Split - Dissenting Shareholders' Rights" and "Annex B" of the Proxy Statement
is incorporated herein by reference.
(b)-(c) Not applicable.
Item 14. Financial Information.
(a)(1) The audited financial statements and supplemental information
listed under the caption "Index to Financial Statements" of the Proxy
Statement is incorporated herein by reference.
(a)(2) The unaudited financial statements listed under the caption
"Index to Financial Statements" of the Proxy Statement is incorporated herein
by reference.
(a)(3) Not applicable because the Registrant is a Small Business issuer.
(a)(4) The information set forth under the caption "Price Range of
Common Stock; Dividends; Book Value - Book Value" is incorporated herein by
reference.
(b) The information set forth under the caption "Pro Forma
Condensed Financial Statements" is incorporated herein by reference.
Item 15. Persons and Assets Employed, Retained or Utilized.
(a) The information set forth under the caption "Summary - The
Special Meeting - Solicitation of Proxies" of the Proxy Statement is
incorporated herein by reference.
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<PAGE>
(b) The information set forth under the caption "Summary - The
Special Meeting - Solicitation of Proxies" and "Special Factors - Opinion of
Financial Advisor" of the Proxy Statement is incorporated herein by reference.
Item 16. Additional Information.
All of the information set forth in the Proxy Statement is
incorporated herein by reference.
Item 17. Material to be Filed as Exhibits.
*(a) Form of Loan Facility to be entered into between Territorial
Resources, Inc. and Societe Generale, London Branch.
*(b)(1) Report of Sayer Securities Limited.
(b)(2) Opinion of Sayer Securities Limited (incorporated by reference
to Annex C to the Proxy Statement filed as Exhibit (d)(1) hereto).
(c) Reorganization Agreement and Plan of Merger dated January 28,
1998 by and among SOCO International plc, SOCO Resources (Colorado), Inc. and
Territorial Resources, Inc. (incorporated by reference to Exhibit 99.2 to
Form 8-K Current Report of Territorial Resources, Inc. dated January 28,
1998).
(d)(1) Proxy Statement of Territorial Resources, Inc. for the Special
Meeting of Shareholders to be held on ___________, 1998.
*(d)(2) Proxy Card.
(e) Statement of appraisal rights (incorporated by reference to
Annex B to the Proxy Statement filed as Exhibit (d)(1) hereto).
- --------------
* Previously filed
After due inquiry and to the best of my knowledge and belief, I certify
that the information set forth in this statement is true, complete and
correct.
TERRITORIAL RESOURCES, INC.
Dated: April 6, 1998 /s/ DOUGLAS N. BAKER
---------------------------------------
Name: Douglas N. Baker
Title: Vice President, Finance and
Treasurer
-9-
<PAGE>
EXHIBIT INDEX
EXHIBIT DESCRIPTION PAGE
- ------- ----------- ----
*(a) Form of Loan Facility to be entered into between
Territorial Resources, Inc. and Societe Generale,
London Branch.
*(b)(1) Report of Sayer Securities Limited.
(b)(2) Opinion of Sayer Securities Limited (incorporated by
reference to Annex C to the Proxy Statement filed as
Exhibit (d)(1) hereto).
(c) Reorganization Agreement and Plan of Merger dated
January 28, 1998 by and among SOCO International plc,
SOCO Resources (Colorado), Inc. and Territorial
Resources, Inc. (incorporated by reference to
Exhibit 99.2 to Form 8-K Current Report of Territorial
Resources, Inc. dated January 28, 1998).
(d)(1) Proxy Statement of Territorial Resources, Inc. for the
Special Meeting of Shareholders to be held on
_______________, 1998.
(d)(2) Proxy Card.
(e) Statement of appraisal rights (incorporated by reference
to Annex B to the Proxy Statement filed as Exhibit (d)(1)
hereto).
- ------------------
*Previously Filed.
<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 deregistration 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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SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND
MANAGEMENT . . . . . . . . . . . . . . . . . . . . . . . . . . . . . 36
INDEPENDENT PUBLIC ACCOUNTANTS . . . . . . . . . . . . . . . . . . . . 38
ADDITIONAL INFORMATION . . . . . . . . . . . . . . . . . . . . . . . . 38
INDEX TO FINANCIAL STATEMENTS . . . . . . . . . . . . . . . . . . . . . F-1
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<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 deregistration of the Common Stock under the Securities
Exchange Act of 1934, as amended (the
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<PAGE>
"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.
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<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.
<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."
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<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.
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<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 0.1% 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 owns shares of SOCO Tamtsag Mongolia Inc.
("SOTAMO"), which holds title to certain oil and gas properties in Mongolia.
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 Reserve 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."
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>
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 percert.
(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
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<PAGE>
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.
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 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. 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.
Mr. Mercier believed that this was the best offer he would receive from SOCO.
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
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<PAGE>
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 Saver 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
occurence 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."
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
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<PAGE>
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
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 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. 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. Those shareholders owning less than one
share of New Common Stock after 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.
TERMINATION OF EXCHANGE ACT REGISTRATION
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 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 ot Rule 144 promulgated under the Securities Act. Such
termination of registration shall cause all shares of Common Stock to be
restricted.
EFFECT ON MARKET FOR SHARES
If the Reverse Stock Split is approved and, as contemplated, the shares
of Common Stock are deregistered under the Exchange Act, there will not be
any public market for the Company's shares of Common Stock.
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<PAGE>
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 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
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<PAGE>
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.
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 viewed 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.
In assessing the value of the SOCO Shares being offered to the
majority of shareholders in the Merger, Sayer Securities relied on the
market trading value approach. Since each holder of Common Stock will
receive a minority interest in SOCO and will not be able to effect a sale
of 100% of SOCO, Sayer Securities concluded it was appropriate not to rely
on methodologies that are based on the assumption of a change of control
transaction. Sayer Securities believes that the market price of the SOCO
Shares is an appropriate indicator of the value being offered to the
Company shareholders under the Reverse Stock Split and Merger.
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<PAGE>
(ii) SELECTED COMPANY ANALYSIS. Sayer Securities reviewed publicly
available financial, operating and stock market data of the Company and
SOCO and similar information on a number of publicly traded companies with
international assets. The companies reviewed included 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 based on the companies closing prices of January 27, 1998. The
range of values was $0.88 to $7.35 per barrel of oil equivalent. The
corresponding value implied for the Company by the proposed Cash
Consideration and Merger was $6.62. The values implied by this analysis
and the comparison to value implied by the analysis of similar companies
support the fairness, from a financial point of view, of the consideration
to be received under the Reverse Stock Split and Merger. Sayer Securities
emphasized the difficulty in 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 range of values per
barrel was $0.30 to $12.40. Sayer Securities noted the significant
difference among the various transactions. Of particular note was a
recent transaction in Mongolia which ascribed a value of $2.38 per barrel.
The per barrel value ascribed to the Reverse Stock Split and the Merger
was $6.62. The values implied by this analysis and the comparison to
values implied by the analysis of similar transactions, including a recent
transaction in Mongolia, support the fairness, from a financial point of
view, of the consideration to be received under the Reverse Stock Split
and Merger. 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, SOCO and the
companies engaged in the selected transactions, Sayer Securities believed
that a purely quantitative comparable transaction analysis would not be
particularly meaningful in the context of the Reverse Stock Split and
Merger. Sayer Securities believed that an appropriate use of a comparable
transaction analysis in this instance would involve qualitative judgments
concerning differences between the characteristics of these transactions
and the Reverse Stock Split and Merger.
(v) CONTRIBUTION ANALYSIS. Sayer Securities reviewed the
contribution of assets and reserves to the ongoing entity. On a pro-forma
basis, assuming the exchange of all of the shares of Common Stock for SOCO
Shares, the Company's shareholders would contribute approximately 3% to 4%
of the net asset value of the ongoing merged corporation and receive
approximately 5% of the equity of the ongoing company. On a reserves
basis, the Company will contribute 1.5 to 3.3 percent of the reserves.
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
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<PAGE>
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 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.
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<PAGE>
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 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% adn 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 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
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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. 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 683,921 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 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.
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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 factional 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 on 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").
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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.
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).
-15-
<PAGE>
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 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 Stock 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.
-16-
<PAGE>
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 the Bank, SOCO will assume the
Company's indebtedness under the Loan Facility upon the effective date of the
Merger.
<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>
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>
<PAGE>
TERRITORIAL RESOURCES, INC.
PRO FORMA CONDENSED BALANCE SHEET (UNAUDITED)
MARCH 31, 1997
($1,000)
<TABLE>
Pro Forma
Historical Adjustments Pro Forma
---------- ----------- ----------
<S> <C> <C> <C>
Cash $ 6 $ 6
Accounts receivable 9 9
Prepaids 32 32
------- ---------
Current assets 47 47
------- ---------
Note receivable 9 9
Investment in SOTAMO 2,820 2,820
Property and equipment 17 17
------- ---------
Total assets $ 2,893 $ 2,893
------- ---------
------- ---------
Accounts payable 92 254(A) 346
Bank loan 166 1,766(A) 1,932
Due to affiliated party 224 224
------- ---------
Current liabilities 482 2,502
------- ---------
Stockholders' equity 6,136 (2,020)(A) 4,116
Accumulated deficit (3,725) (3,725)
------- ---------
Total liabilities and
stockholders' equity $ 2,893 $ 2,893
------- ---------
------- ---------
Book value per share (dollars) $ 0.26 $1,761.26
------- ---------
------- ---------
</TABLE>
<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>
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>
<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>
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>
<PAGE>
TERRITORIAL RESOURCES, INC.
PRO FORMA BALANCE SHEET
DECEMBER 31, 1997
($1,000)
<TABLE>
Unaudited Pro Forma Pro Forma
12/31/97 Adjustments 12/31/97
--------- ----------- ---------
<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 261 255(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>
<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.
<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
-17-
<PAGE>
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 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.
-18-
<PAGE>
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 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.
-19-
<PAGE>
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. 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.
-20-
<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 1.875 0.1875
Third Quarter 3.75 0.1875
Fourth Quarter (March 31, 1996) 0.375 0.375
FISCAL 1997
First Quarter 2.0637 0.375
Second Quarter 0.5625 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.
-21-
<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:
NAME AGE POSITION
- ------------------------------------- --- ---------------------------------
Daniel A. Mercier 43 Chairman of the Board and Chief
Territorial Resources, Inc. Executive Officer
734 7th Avenue S.W.
Calgary, Alberta
Canada T2P 3P8
William Penttila 64 President, Chief Operating
Exploration Associates, Inc. Officer and Director
450 N. Sam Houston Parkway, Suite 140
Houston, Texas 77060
Douglas N. Baker 44 Vice President Finance,
Territorial Resources, Inc. Treasurer, Chief Financial
734 7th Avenue S.W. Officer, Secretary and Director
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
-22-
<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.
-23-
<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.
-24-
<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 two companies and one trust
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.
-25-
<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.
-26-
<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.
-27-
<PAGE>
INDEX TO FINANCIAL STATEMENTS
PAGE
Auditor's Report (Price Waterhouse) F-2
Auditor's Report (Hein + Associates, LLP) F-3
Consolidated Balance Sheet dated March 31, 1997 F-4
Consolidated 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
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 3,390,371 12 2,928,333 9 3,853 (3,471) (17)
---------- ----------- --------- --------- --------- --------- -----------
---------- ----------- --------- --------- --------- --------- -----------
Stock issued for
stock subscriptions 2,298,333 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>
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 circumstances. Net
oil and gas properties were $17,000 at March 31, 1997, consisting of
office equipment and exploration expenditures in Mongolia.
F-9
<PAGE>
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 cancelled. At March 31, 1996, warrants to acquire 341,667
shares of common stock remain outstanding.
F-11
<PAGE>
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>
<CAPTION>
<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.
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.
F-13
<PAGE>
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 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.
F-14
<PAGE>
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> <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 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.
F-15
<PAGE>
<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.
<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>
<PAGE>
TERRITORIAL RESOURCES, INC.
CONSOLIDATED BALANCE SHEETS
Assets
($1,000)
<TABLE>
<CAPTION>
UNAUDITED
DECEMBER 31, MARCH 31,
1997 1997
------------ -----------
<S> <C> <C>
CURRENT ASSETS:
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
------- -------
<S> <C> <C>
CURRENT LIABILITIES:
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
------- -------
<S> <C> <C>
REVENUES:
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
------- -------
<S> <C> <C>
CASH FLOWS FROM OPERATING
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.
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.
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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.
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(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.
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<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.
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<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.
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<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:
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(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.
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<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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